multiple choice questions

Question 1

Maximization of shareholder wealth is a concept in which:
Select one:
a. increased dividends are of primary importance.
b. increased cash flows are of primary importance.
c. increased earnings are of primary importance.
d. increased share price is of primary importance.

Answer 1

d. increased share price is of primary importance.

Question 2

A conservative financing plan involves:
Select one: 
a. heavy reliance on equity. 
b. high degree of combined leverage.
c. heavy reliance on debt.
d. high degree of financial leverage.

Answer 2

A conservative financing plan involves:
Select one:
a. heavy reliance on equity.

Question 3

A firm would be indifferent between financing plans when:
Select one:
a. return on assets equals return on equity.
b. the cost of borrowed funds equals the return on assets.
c. debt is equal to equity.
d. the cost of borrowed funds equals the return on equity.

Answer 3

b. the cost of borrowed funds equals the return on assets.

Question 4

Money markets would include which of the following securities?
Select one:
a. Common stock and corporate bonds
b. Treasury bills and commercial paper
c. Certificates of deposit and preferred stock
d. Government bonds.

Answer 4

b. Treasury bills and commercial paper

Question 5

Which of the following is true about the concept of leverage?
Select one:
a. At the break-even point, operating leverage is equal to zero.
b. Financial leverage measures the impact of fixed costs on earnings.
c. Combined leverage measures the impact of operating and financial leverage on EBIT.
d. Combined leverage measures the impact of operating and financial leverage on EPS.

Answer 5

d. Combined leverage measures the impact of operating and financial leverage on EPS.

Question 6

When a corporation uses the financial markets to raise new funds, the sale of securities is made in the:
Select one:
a. primary market. 
b. third market.
c. on-line market.
d. secondary market.

Answer 6

a. primary market.

Question 7

A limited partnership limits the profits partners may receive.
Select one:
True
False

Answer 7

False

Question 8

If EBIT equals $140,000 and interest equals $21,000, with a tax rate of 31%, what is the degree of financial leverage?
Select one:
a. 6.67x
b. 1.18x 
c. 3.91x
d. 5.67x

Answer 8

b. 1.18x

Question 9

A high DOL means:
Select one:
a. there is a large amount of equity.
b. there are high labour costs.
c. there is high debt.
d. there are high fixed costs.

Answer 9

d. there are high fixed costs.

Question 10

Financial markets allocate capital based on:
Select one:
a. the pricing mechanism.
b. intervention by the Bank of Canada.
c. the efforts of financial intermediaries.
d. the number of treasury bills outstanding.

Answer 10

a. the pricing mechanism.

Question 11

Well functioning capital market include the following attributes except?
Select one:
a. Liquidity
b. Static prices 
c. Transparency
d. Competitiveness

Answer 11

b. Static prices

Question 12

The strong form of the efficient market hypothesis states that:
Select one:
a. market efficiency is strongest during an economic upswing.
b. all information both public and private is immediately reflected in stock prices.
c. prices reflect all public information.
d. past price data is positively correlated to future prices.

Answer 12

b. all information both public and private is immediately reflected in stock prices.

Question 13

Financial instruments in the capital markets generally fall under what category in the balance sheet?
Select one:
a. Long-term liabilities and equities. 
b. Short-term liabilities and equities.
c. Near cash assets.
d. Marketable securities.

Answer 13

a. Long-term liabilities and equities.

Question 14

Which of the following statements is not true with respect to organized securities exchanges?
Select one:
a. Securities exchanges provide corporations and shareholders increased liquidity for their securities.
b. Stocks traded on exchanges are referred to as unlisted securities.
c. Exchanges operate as “auction” markets.
d. Organized exchanges have a physical location.

Answer 14

b. Stocks traded on exchanges are referred to as unlisted securities.

Question 15

The over-the-counter market:
Select one:
a. is limited to high net worth investors.
b. is made up of brokers buying and selling from their inventories.
c. is a close-knit organization of dealers linked together by computers and a telecommunications network.
d. trades mainly stocks of small companies.

Answer 15

c. is a close-knit organization of dealers linked together by computers and a telecommunications network.

Question 16

Security markets provide liquidity:
Select one:
a. by allowing investors access to low-risk investments.
b. by allowing corporations to raise funds by selling new issues.
c. by maintaining confidence in corporate governance of listed firms.
d. by providing the widest range of information to investors.

Answer 16

b. by allowing corporations to raise funds by selling new issues.

Question 17

Which of the following are advantages to private bond placement over public offerings?
Select one:
a. Higher interest costs.
b. Greater flexibility in negotiating terms.
c. Lower registration fees.
d. Lower interest costs.

Answer 17

b. Greater flexibility in negotiating terms.

Question 18

Maxwell Corp. is coming to the market with a new offering of 300,000 shares, at $25 to the public. Maxwell will receive $22 per share. The firm has 1 million shares outstanding and earnings of $6 million. What is the amount of dilution in earnings per share?
Select one:
a. $1.77.
b. $2.00.
c. No dilution occurs since new money is received by Maxwell.
d. $1.38.

Answer 18

d. $1.38.

Question 19

The advantages of being publically traded include all of the following except:
Select one:
a. corporate information on profit margins and product lines must be divulged.
b. the corporation may tap the security markets for a greater amount of funds by selling securities directly to the public through a public placement.
c. shareholders of a heretofore private corporation may also sell part of their holdings if the corporation decides to go public.
d. going public allows the firm to play the merger game, using marketable securities for the purchase of other firms.

Answer 19

a. corporate information on profit margins and product lines must be divulged.

Question 20

Dilution of earnings occurs because:
Select one:
a. poor financial performance leading to reduced earnings.
b. a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily.
c. the company suffers a decline in earnings after taxes.
d. the investment dealer collects an underwriting fee.

Answer 20

b. a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily.

Question 21

Market stabilization:
Select one:
a. is accomplished by repurchasing securities as the market price moves below the initial public offering price.
b. is the action by the managing investment dealer to keep the price of newly issued securities from rising quickly.
c. usually lasts 3-6 days but can last up to 60 days if a security is difficult to distribute.
d. can always keep prices of securities from falling.

Answer 21

a. is accomplished by repurchasing securities as the market price moves below the initial public offering price.

Question 22

Raybac is about to go public. Its present shareholders own 500,000 shares. The new public issue will represent 800,000 shares. The shares will be priced at $25 to the public with a 4% spread. The out-of pocket costs will be $450,000. What is the net proceeds to the firm?
Select one:
a. $18,750,000 
b. $19,550,000
c. $19,200,000
d. $18,250,000

Answer 22

a. $18,750,000

Question 23

Vansteelandt Inc. has net income of $4,000,000 and 1,000,000 shares outstanding. Its common stock is currently selling for $50 per share. It needs to raise $2,000,000 in funds for a new asset. Its investment dealer plans to sell an issue of common stock to the public for $48 with a spread of 4% on offer price. How much must Vansteelandt's after tax income increase to prevent dilution of EPS?
Select one:
a. $40,000
b. $173,612 
c. $80,000
d. $41,667

Answer 23

b. $173,612

Question 24

Firm X needs to net $7,800,000 from the sale of common stock. Its investment dealer has informed the firm that the retail price will be $22 per share, and that the firm will receive $19 per share. Out-of-pocket costs are $100,000. How many shares must be sold?
Select one:
a. 354,545
b. 410,526
c. 415,790 
d. 359,091

Answer 24

c. 415,790

Question 25

General Corp. issued new shares at $37.60 with an underwriting fee of $2.22 per share. Calculate the underwriting spread on this new share issue.
Select one:
a. 5.90% 
b. 7.00%
c. 4.56%
d. 7.96%

Answer 25

a. 5.90%

Question 26

The spread is the underwriter’s compensation based on:
Select one:
a. a fee schedule set by the securities commission.
b. the price of the security to the public.
c. the price paid by the brokers.
d. the net proceeds to the firm or the government.

Answer 26

b. the price of the security to the public.

Question 27

The spread is the underwriter’s compensation based on:
Select one:
a. a fee schedule set by the securities commission.
b. the price of the security to the public.
c. the price paid by the brokers.
d. the net proceeds to the firm or the government.

Answer 27

b. the price of the security to the public.

Question 28

Capital budgeting is primarily concerned with:
Select one:
a. capital formation in the economy.
b. planning future financing needs.
c. minimizing the cost of capital.
d. evaluating investment alternatives.

Answer 28

d. evaluating investment alternatives.

Question 29

A firm may adopt capital rationing because:
Select one:
a. it has a constraint on the amount of funds
b. it is hesitant to use external sources of financing.
c. it wishes to maximize value.
d. it is fearful of too much growth.

Answer 29

a. it has a constraint on the amount of funds

Question 30

Which of the following statements about the “payback period” is true?
Select one:
a. The payback period considers cash flows after the payback has been reached.
b. The payback period uses discounted cash-flow techniques.
c. The payback period generally leads to the same decision as other investment selection methods.
d. The payback period does not consider the time value of money.

Answer 30

d. The payback period does not consider the time value of money.

Question 31

The profitability index will give the same investment decision as:
Select one:
a. the payback period.
b. the average accounting return.
c. the net present value.
d. It can be different from each of these techniques.

Answer 31

c. the net present value.

Question 32

The internal rate of return is:
Select one:
a. unrelated to the weighted average cost of capital.
b. the discount rate that produces a positive project net present value.
c. the discount rate that produces a project net present value of zero.
d. less than the weighted average cost of capital.

Answer 32

c. the discount rate that produces a project net present value of zero.

Question 33

The net present value method is a better method of evaluation than the internal rate of return method because:
Select one:
a. the NPV method includes accruals and other accounting discounts.
b. the NPV method discounts cash flows at the firm’s more conservative cost of capital.
c. the NPV method is a more liberal method of analysis.
d. the NPV method discounts cash flows at the internal rate of return.

Answer 33

b. the NPV method discounts cash flows at the firm’s more conservative cost of capital.

Question 34

Which of the following is a characteristic of beta?
Select one:
a. A beta of 1.0 is of equal risk with the market.
b. Beta measures only the volatility of returns on an individual bond relative to a bond market index.
c. A beta of greater than 1.0 has less risk than the market.
d. Beta measures the correlation between the risk free rate and the market rate of risk.

Answer 34

a. A beta of 1.0 is of equal risk with the market.

Question 35

A correlation coefficient of zero indicates:
Select one:
a. the projects have the same standard deviation.
b. there is no correlation and no risk reduction between combined projects.
c. there is no correlation, but some risk reduction when the projects are combined.
d. the projects have the same expected value.

Answer 35

c. there is no correlation, but some risk reduction when the projects are combined.

Question 36

Projects that are totally uncorrelated provide:
Select one:
a. Need more information.
b. extreme risk reduction.
c. some risk reduction. 
d. no risk reduction.

Answer 36

c. some risk reduction.

Question 37

The concept of being risk averse means:
Select one:
a. investors would prefer investments with high standard deviations and greater opportunity for gain.
b. for a given situation investors would prefer relative uncertainty to certainty.
c. that the greater the risk the higher the expected return must be.
d. that the lower the volatility the higher the standard deviation must be.

Answer 37

c. that the greater the risk the higher the expected return must be.

Question 38

The firm's highest risk-adjusted discount should be applied to:
Select one:
a. a new product in a foreign market. 
b. the repair of old machinery.
c. a new product in a related field.
d. the purchase of new equipment.

Answer 38

a. a new product in a foreign market.

Question 39

In order to reduce risk in a firm, the firm would seek to enter a business that:
Select one:
a. has high positive correlation with its present business.
b. has zero correlation with its present business.
c. has high negative correlation with its present business.
d. has low correlation with its present business.

Answer 39

c. has high negative correlation with its present business.

Question 40

A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, what is the market value of the bond?
Select one:
a. Over $1,200
b. Not enough information given to tell
c. Over $1,000
d. Under $1,000

Answer 40

a. Over $1,200

Question 41

A 10-year bond pays 8% annual interest (paid semi-annually). If similar bonds are currently yielding 6% annually, what is the market value of the bond?
Select one:
a. $1,148.77 
b. $1,080.00
c. $1,000.00
d. $1,147.20

Answer 41

a. $1,148.77

Question 42

A 14-year stripped (zero-coupon) bond was issued with a $1,000 par value and a coupon of 9%. If similar bonds are currently yielding 12%, what is the approximate market value of the bond?
Select one:
a. $299
b. $1,000
c. $205 
d. $801

Answer 42

c. $205

Question 43

A 10-year bond pays 12% interest on a $1,000 face value annually. If it currently sells for $1,100, what is its approximate yield to maturity?
Select one:
a. 11.00%
b. 10.91%
c. 12.00%
d. 10.35%

Answer 43

d. 10.35%

Question 44

A 4-year bond pays 4% annual interest (paid semi-annually). It currently sells for $872.25. What is the bond's yield to maturity?
Select one:
a. 4.59%
b. 6.06% 
c. 7.78%
d. 4.00%

Answer 44

c. 7.78%

Question 45

A bond which has a yield to maturity less than its coupon interest rate will sell for a price:
Select one:
a. above par.
b. that is equal to the face value of the bond plus the value of all interest payments.
c. below par.
d. at par.

Answer 45

a. above par.

Question 46

The dividend valuation model stresses the:
Select one:
a. importance of earnings per share.
b. importance of dividends and legal rules for maximum payment.
c. relationship of dividends to earnings per share.
d. relationship of dividends to market prices.

Answer 46

d. relationship of dividends to market prices.

Question 47

An issue of common stock is selling for $57.20. The year-end dividend is expected to be $2.32 assuming a constant growth rate of 6%. What is the required rate of return?
Select one:
a. 10.3%
b. 4.1%
c. 10.1% 
d. 6.0%

Answer 47

c. 10.1%

Question 48

A preferred share has a price of $40 and pays an annual dividend of $1.20.  What is the preferred share's yield?
Select one:
a. 0.03%
b. 30%
c. 3% 
d. 0.3%

Answer 48

c. 3%

Question 49

An issue of common stock has just paid a dividend of $3.75. Its growth rate is 8%. What is its price if the market's rate of return is 16%?
Select one:
a. $50.63 
b. $46.88
c. $54.38
d. $25.01

Answer 49

a. $50.63

Question 50

An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current price?
Select one:
a. $48.00
b. $36.92
c. $103.68 
d. $96.00

Answer 50

d. $96.00

Question 51

An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 12%. What is the preferred stock price if the required rate of return is 10%?
Select one:
a. $41.67
b. $22.73
c. $50.00 
d. $5.00

Answer 51

c. $50.00

Question 52

Which is a characteristic of the cost of preferred stock?
Select one:
a. Preferred stock dividends are fixed, they are tax deductible.
b. The price earnings ratio stays the same.
c. Preferred stock is valued as a perpetuity.
d. Preferred stock has no maturity, the cost analysis is similar to that of debt.

Answer 52

c. Preferred stock is valued as a perpetuity.

Question 53

The longer the supernormal growth period for a firm’s lasts,:
Select one:
a. the lower the required rate of return used in finding the price of its common stock.
b. the lower the value of its common stock.
c. the higher the value of its preferred stock.
d. the higher the value of its common stock.

Answer 53

d. the higher the value of its common stock.

Question 54

Valuation of financial assets requires knowledge of:
Select one:
a. future cash flows.
b. appropriate discount rate.
c. past asset performance.
d. future cash flows and appropriate discount rate.

Answer 54

d. future cash flows and appropriate discount rate.

Question 55

Carey Co. needs $200,000 to complete a project. If a compensating balance of 15% is required, how much must be borrowed?

a. $200,000
b. $235,000
c. $235,294
d. $230,000

Answer 55

c. $235,294

Question 56

In financing accounts receivable, pledging uses receivables \_\_\_\_\_\_\_ while factoring uses receivables \_\_\_\_\_\_\_\_\_.
Select one:
a. to sell; to purchase
b. as collateral; to sell 
c. as collateral; to purchase
d. to sell; as collateral

Answer 56

b. as collateral; to sell

Question 57

In determining the cost of bank financing, which is the important factor?
Select one:
a. Annual rate.
b. Prime rate. 
c. Discount rate.
d. Nominal rate.

Answer 57

a. Annual rate.

Question 58

The average price of a 91-day Treasury Bill is 98.671 with a maturity value of 100.

The nominal yield is:

5.40%
5.51%
6.00%
6.51%
The effective annual yield is:
5.51%
5.40%
6.00%
6.51%

Answer 58

5. 40%

5. 51%

Question 59

Which of the following is a characteristic of commercial paper?
Select one:
a. Issued by small firms.
b. Rates are usually above prime rates on business loans.
c. One-to-two year maturity.
d. Issued by large firms.

Answer 59

d. Issued by large firms.

Question 60

Mr. Phelps borrows $3,000 for 30 days and pays $80 interest. What is his annual rate of interest?
Select one:
a. 24.54%
b. 32.44% 
c. 2.67%
d. 16.24%

Answer 60

b. 32.44%

Question 61

If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on an $800,000 loan where a 15% compensating balance is required?
Select one:
a. 17.27%.
b. 11.18%. 
c. 3.16%.
d. 9.50%.

Answer 61

b. 11.18%.

Question 62

Marty McFly is going to borrow $8,000 for 120 days and pay $215 in interest.  What is the annual rate of interest if the loan is discounted?
Select one:
a. 8.00%
b. 8.17%
c. 8.40% 
d. 8.50%

Answer 62

c. 8.40%

Question 63

The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to:
Select one:
a. 22.35%.
b. 18.43%. 
c. 12.00%
d. 20.52%.

Answer 63

b. 18.43%

Question 64

Large firms tend to be:
Select one:
a. firms with low levels of inventory turnover and accounts receivable turnover.
b. firms with high levels of profitability.
c. net users of trade credit.
d. net suppliers of trade credit.

Answer 64

d. net suppliers of trade credit.

Question 65

If a firm has total accounts receivable of $6,000,000 and its average daily credit sales are $45,000 what is its collection period?
Select one:
a. 133 days 
b. 156 days
c. 45 days
d. 120 days

Answer 65

a. 133 days

Question 66

The three primary policy variables to consider when extending credit include all of the following except:
Select one:
a. the terms of trade.
b. the level of interest rates. 
c. collection policy.
d. credit standards.

Answer 66

b. the level of interest rates.

Question 67

Average daily remittances are $5 million, and "extended disbursement float" adds 5 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 12% on excess funds.
Select one:
a. $3,000,000 
b. $0
c. $1,000,000
d. $600,000

Answer 67

a. $3,000,000

Question 68

“Float” takes place because:
Select one:
a. a firm is early in paying its bills.
b. a lag exists between writing a cheque and it being debited to the bank account.
c. the level of cash on the firm’s books is equal to the level of cash in the bank.
d. a customer writes “hot” cheques.

Answer 68

b. a lag exists between writing a cheque and it being debited to the bank account.

Question 69

The costs of carrying inventory do not include:
Select one:
a. the cost of warehouse space.
b. the interest on funds tied up in inventory.
c. ordering costs.
d. insurance and handling costs.

Answer 69

c. ordering costs.

Question 70

Driveline Sprockets expects total sales of $20,000. The price per unit is $5. The firm estimates an ordering cost of $9.00 per order, with an inventory carrying cost of $1.20 per unit. What is the optimum order size?
Select one:
a. 245 units 
b. 173 units
c. 1,852 units
d. 2,000 units

Answer 70

a. 245 units

Question 71

A bankers’ acceptance:
Select one:
a. is a long term investment accepted by the bank.
b. may be accepted by the corporation for future payment.
c. is a draft drawn on a corporation.
d. is traded in a relatively liquid market until maturity.

Answer 71

d. is traded in a relatively liquid market until maturity.

Question 72

Commercial paper is selling for 97.682 of par and matures in 91 days. What is the yield as quoted in the market?

9.52%
8.76%
2.185%
9.06%
….
The effective annual rate is

9. 87%
10. 762%
11. 185%
12. 76%

Answer 72

9. 52%

9. 87%

Question 73

Mountain Home Systems, Inc. is debating whether to expand its sales in a new market. Sales are currently $5,000,000 annually, but MHS Inc. expects sales to increase to $7,000,000 annually if it enters this market.   MHS Inc. also knows that 15% of its sales are ultimately be uncollectible. In addition, collection costs will be 2% of sales and the firm's production costs are 72% of sales. Selling expenses are 8% of sales and Mountain Home has an opportunity cost of funds (before tax) of 20%. Mountain Home can turn its receivables 5 times per year. Should Mountain Home Systems Co. enter the new market? 
The incremental contribution margin is:
560,000
1,400,000
1,440,000
1,960,000

The incremental bad debt expense is:
(300,000)
300,000
1,050,000
(1,050,000)
The incremental selling expenses are:
(160,000)
(400,000)
560,000
(560,000
The change in accounts receivable is:

400,000
(400,000)
1,400,000
(1,400,000)

Answer 73

560,0000

(300,000)

(160,000)

400,000