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One of the major disadvantages of a sole proprietorship is A. the simplicity of decision making. low organizational costs. that there is unlimited...

One of the major disadvantages of a sole proprietorship is
A. the simplicity of decision making.
B. low organizational costs.
C. that there is unlimited liability to the owner. Ch. 1 page 8
D. low operating costs
The statement of cash flows does NOT include which of the following sections?
A. cash flows from sales activities Ch. 2 page 38
B. cash flows from investing activities
C. cash flows from operating activities
D. cash flows from financing activities
Which of the following is not a primary source of capital to the firm? Ch 2?
A. common stock
B. preferred stock
C. assets
D. bonds
Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A. Common stock
B. Accumulated depreciation
C. Paid-in capital
D. Retained earnings
The most rigorous test of a firm's ability to pay its short-term obligations is its
A. quick ratio.
B. times-interest-earned ratio.
C. current ratio.
D. debt-to-assets ratio.
In examining the liquidity ratios, the primary emphasis is the firm's
A. overall debt position.
B. ability to earn an adequate return.
C. ability to effectively employ its resources.
D. ability to pay short-term obligations on time
Which of the following is not considered to be a profitability ratio?
A. times interest earned
B. return on assets (investment)
C. profit margin
D. return on equity



Refer to the figure above. The firm's inventory turnover ratio is
A. 8x.
B. 0.1x.
C. 10x.
D. 2.7x.


Refer to the figure above. Megaframe's current ratio is
A. 1.625:1
B. 3.2:1
C. 1.9:1
D. 1.5:1
A firm’s long term assets= $75,000, total assets= $200,000, inventory= $25,000, and current liabilities= $50,000
A. Current ratio= 1.5; Quick ratio= 2.0
B. Current ratio= 1.0; quick ratio= 2.0
C. Current ratio= 2.5; quick ratio= 2.0
D. Current ratio= 0.5; quick ratio= 1.5
In general, the larger the portion of a firm's sales that are on credit, the
A. higher will be the firm's need to borrow.
B. more the firm can buy raw materials on credit
C.
D.

A corporate governance is the Ch. 1 pages 9-10
A. Relationship and exercise of oversight by the board of directors of the company
B. Governance of the company by the board of directors, with a focus on social responsibility
C. Operation of a company by the chief executive officer (CEO) and other senior executives on the management team
D. Relationship between the chief financial officer and institutional investors
What is the primary goal of financial management? Ch.1 page 11
A. Increased earnings
B. Maximizing shareholder wealth
C. Minimizing risk on the firm
D. Maximizing cash flow
The concept of operating leverage involves the use of _________ to magnify returns at high levels of operation.
A. Variable costs
B. Fixed costs
C. Marginal costs
D. Semi-variable costs
Firms with a high degree of operating leverage are
A. Significantly affected by changes in interest rates
B. Usually trading off lower levels of risk for higher profits
C. Trading off higher fixed costs for lower per-unit variable costs
D. Easily capable of surviving large changes in sales volume
When a firm employs no debt
A. It has a financial leverage of zero
B. It has a financial leverage of one
C. Its operating leverage is equal to its financial leverage
D. It will not be profitable

*Refer to the figure above. The firm’s break-even point is
A. 14,634 units
B. 7,142 units
C. 4,800 units
D. 18,000 units
If a firm has a price of $4.00, variable cost per unit of $2.50 and a break-even point of 20,000 units, fixed costs are equal to:
A. $10,000
B. $30,000
C. $13,333
D. $50,000
A firm’s break-even point will rise if
A. Contribution Margins increase
B. Price per unit rises
C. Fixed costs decrease
D. Variable cost per unit rises
In a break-even analysis, the contribution margin is defined as
A. Price minus fixed cost
B. Variable cost minus fixed cost
C. Fixed cost minus variable cost
D. Price minus variable cost
The theory of the term structure of interest rates which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the
A. Segmentation theory
B. Liquidity premium theory
C. Expectations hypothesis
D. Market average rate theory
Kuznets Rental Center requires $1,000,000 in financing over the next two years. Kuznets can borrow long-term at 9% interest for two years. Alternatively, Kuznets can borrow short-term and pay 7% interest in the first year. Then, Kuznets projects paying 10% interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?
A. Kuznets will definitely end up paying less under the long-term financing plan
B. Kuznets will probably pay more under the short-term financing plan
C. Kuznets will definitely end up paying more under the long-term financing plan
D. Kuznets will probably pay less under the short-term financing plan
During tight money periods
A. Short-term rates are higher than long-term rates
B. Short-term rates are equal to long-term rates
C. Long-term rates are higher than short-term rates
D. The relationship between short and long-term rates remains unchanged
An aggressive, risk-oriented firm will likely
A. Borrow short-term and carry low levels of liquidity
B. Borrow long-term and carry high levels of liquidity
C. Borrow long-term and carry low levels of liquidity
D. Borrow short-term and carry high levels of liquidity
Which of the following combination of asset structures and financing patterns is likely to create the most volatile earnings?
A. Illiquid assets and heavy long-term borrowing
B. Liquid assets and heavy long-term borrowing
C. Liquid assets and heavy short-term borrowing
D. Illiquid assets and heavy short-term borrowing
Which of the following is not a condition under which a prudent manager would accept some risk in financing?
A. Inventory is highly perishable
B. Price of inventory is stable
C. Predictable cash-flow patterns
D. Easy access to capital markets
The difference between the amount of cash on the firm’s books and the amount credited to it by the bank is
A. Interest revenue
B. Extended disbursement
C. An overdraft
D. Float
“Float” takes place because
A. The level of cash on the firm’s books is equal to the level of cash in the bank
B. A lag exists between writing a check and clearing it through the banking system
C. A firm is early in paying its bills
D. A customer writes “hot” checks
The system whereby funds are moved between computer terminals without the use of checks is called a
A. Float
B. Lock-box system
C. Electronic funds transfer
D. Magnetic character recognition
Which of the following is not a valid quantitive measure for accounts receivable collection policies?
A. Aging of accounts receivables
B. Ratio of debt to equity
C. Average collection period
D. Ratio of bad debts to credit sales
The most subjective and also significant segment of the 5 C’s of credit for giving final approval is
A. Collateral
B. Character
C. Capacity
D. Conditions
Variables important to credit scoring models include
A. Negative public records
B. Facility ownership
C. Age of company in years
D. All of these variables apply
Commercial paper that is sold without going through a broker or dealer is known as
A. Dealer paper
B. Book-entry transactions
C. Term paper
D. Direct paper
Compensating balances
A. Are created by having a sweep account
B. Generate returns to customers from interest bearing accounts
C. Are used to reward new accounts
D. Are used by banks as a substitute for charging service fees
What is generally the largest source of short-term credit small firms?
A. Commercial paper
B. Installment loans
C. Trade credit
D. Bank loans
Which of the following is not a method for lenders to control pledged inventory?
A. Trust receipts
B. Warehousing
C. Factoring
D. Blanket inventory liens
Which method of controlling pledged inventory provides the greatest degree of security to the lender?
A. Overall inventory liens
B. Trust receipts
C. Warehousing
D. Blank inventory liens
From the bankers point of view, short term bank credit is an excellent way of financing
A. Permenant working capital needs
B. Repayment of long term debt
C. Seasonal bulges in inventory and recievables
D. Fixed assets
General Rent-All’s officers arrange a $50,000 loan. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called
A. A compensating balance
B. A discounted loan
C. A balloon payment
D. An installment loan
As the interest rate increases, the present value of an amount to be received at the end of a fixed period
A. Decreases
B. Remains the same
C. Not enough information to tell
D. Increases
In determining the future value of a single amount, one measures
A. The present value of an amount at a given interest rate
B. The future value on an amount allowed to grow at a given interest rate
C. The present value of periodic payments at a given interest rate
D. The future value of periodic payments at a given interest rate
As the compounding rate becomes lower and lower, the future value of inflows approaches
A. The present value of the inflows
B. Infinity
C. Need more information
D. 0
John Doeber borrowed $125,000 to buy a house. His loan cost was 11% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?
A. $9,250
B. $13,113
C. $17,383
D. $3,633
If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
A. Future value of $1
B. Present value of annuity of $1
C. Future value of annuity of $1
D. Present value of $1
Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:
A. Future value of an annuity of $1; present value of an annuity of $1
B. Future value of an annuity of $1; present value of a $1
C. Future value of an annuity of $1; future value of a $1
D. Present value of an annuity of $1; future value of an annuity of $1
Normally, permanent current assets should be financed by
A. Short-term funds
B. Long-term funds
C. Borrowed funds
D. Internally generated funds
Financial leverage deals with
A. The relationship of fixed and variable costs
B. The relationship of debt and equity in a capitol structure
C. ?
D. ?
A firm has current assets of $75,000, and total assets of $375,000. The firm’s sales are $900,000. The firms fixed asset turnover is
A. 3.0x
B. 2.4x
C. 12x
D. 5.0x
*Refer to the figure above, The firms debt to asset ratio is
A. 58%
B. 25%
C. 33%
D. 48%
*Refer to the figure above. The firms inventory turnover ratio is
A. 10x
B. 2.7x
C. 8x
D. 0.1x
The key initial element in developing pro forma statements is
A. A cash budget
B. A sales forecast
C. An income statement
D. A collections schedule
The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for:
A. Interest expense
B. Gross profit
C. Prepaid expenses
D. Change in retained earnings
The difference between total receipts and total payments is referred to as
A. Net cash flow
B. Beginning cash flow
C. Cash balance
D. Cumulative cash flow
In managing cash and marketable securities, what should be the managers primary concern?
A. Maximization of profit
B. Maximization of liquid assets
C. Acceptable return on investment
D. Liquidity and safety
In the percent of sales method, an increase in dividends
A. Will increase required new funds
B. Has no effect on required new funds
C. Will decrease required new funds
D. More information is needed
The percent of sales method of financial forecasting
A. Assumes that balance sheet accounts maintain a constant relationship to sales
B. Requires more time than a cash budget approach
C. Provides a month to month breakdown of data
D. Is more detailed than a cash budget approach
In order to estimate production requirements, we
A. Add beginning inventory to desired inventory and divide by two
B. Add projected sales in units to desired ending inventory and subtract beginning inventory
C. Add beginning inventory to desired ending inventory and subtract projected sales in units
D. Add beginning inventory to projected sales in units and subtract desired ending inventory
The key initial element in developing pro forma statements is
A. A sales forecast
B. An income statement
C. A collections schedule
D. A cash budget
One of the major disadvantages of a sole proprietorship is
A. Low operating costs
B. The simplicity of decision making
C. Low organizational costs
D. That there is limited liability to the owner
Regarding risk levels, financial managers should
A. Focus primary on market fluctuations
B. Avoid higher risk projects because they destroy value
C. Pursue higher risk projects because they increase value
D. Evaluate investors desire for risk
Which of the following is not a primary source of capital for a firm?
A. Perferred stock
B. Common stock
C. Assets
D. Bonds
Which of the following is an inflow of cash?
A. The sales of the firms bonds
B. The purchase of a new factory
C. Funds spent in normal business operations
D. The retirement of the firm’s bonds
Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A. Retained earnings
B. Common stock
C. Paid-in capital
D. Accumulated depreciation
The most rigorous test of a firm’s ability to pay its short-term obligations is its
A. Debt-to-assets ratio
B. Quick ratio
C. Current ratio
D. Times-interest-earned ratio
For a given level of profitability as measured by profit margin, the firm’s return on equity will
A. Increase as its debt-to-assets ratio increases
B. Decrease as its current ratio increases
C. Decrease as its times-interest-earned ratio decreases
D. Increase as its debt-to-assets ratio decreases
If a firm has both interest expense and lease payments,
A. Times interest earned will be the same as fixed charge coverage
B. Times interest earned will be greater than fixed charge coverage
C. Fixed charge coverage cannot be computed
D. Times interest earned will be smaller than fixed charge coverage

1. Proper risk-return management means that
A) the firm should take as few risks as possible.
B) consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.
2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.
3. Future financial managers will need to understand
A) international cash flows.
B) computerized funds transfers.
C) international currency hedging strategies.
D) all of the above.
4. Which of the following is not a primary source of capital to the firm?
A) assets
B) common stock
C) preferred stock
D) bonds
5. The best indication of the operational efficiency of management is
A) net income.
B) earnings per share.
C) earnings before interest and taxes (EBIT).
D) gross profit.
6. A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock?
A) $40 per share
B) $44 per share
C) $4 per share
D) $3.00 per share
7. The major limitation of financial statements is
A) in their complexity.
B) in their lack of comparability.
C) in their use of historical cost accounting.
D) in their lack of detail.
8. A short-term creditor would be most interested in
A) profitability ratios.
B) asset utilization ratios.
C) liquidity ratios.
D) debt utilization ratios.
9. ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,000,000. What is the balance in accounts receivable at year-end?
A) $50,000
B) $100,000
C) $500,000
D) $80,000
10. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's fixed asset turnover is
A) 3.0x
B) 12.0x
C) 2.4x
D) 5.0x

Use the following to answer questions 11-18:
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31, 2003

ASSETS

Cash $ 40,000
Accounts Receivable 60,000
Inventory 90,000
New Plant and Equipment 220,000
Total Assets $410,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts Payable $ 60,000
Accrued Expenses 40,000

Long-Term debt 130,000
Common Stock 60,000
Paid-In capita 20,000
Retained earnings 100,000
Total Liabilities and Stockholders' Equity $410,000

MEGAFRAME COMPUTER COMPANY
Income Statement
For the Year Ended December 31, 2003

Sales (all on credit) $720,000
Cost of Goods Sold 500,000
Gross Profit 220,000
Sales and Administrative Expense 20,000
Depreciation 40,000
Operating Profit 160,000
Interest Expense 16,000
Profit before Taxes 144,000
Taxes (30%) 43,200
Net Income $100,800

11. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately
A) 15%
B) 25%
C) 29%
D) 35%
12. The firm's average collection period is
A) 30 days.
B) 25 days.
C) 14.4 days.
D) 20 days.
13. Megaframe's quick ratio is
A) 2:1
B) 1:1
C) 1.6:1
D) 10:1
14. Megaframe's current ratio is
A) 1.9:1
B) 1.625:1
C) 1.5:1
D) 3.2:1
15. The firm's debt to asset ratio is
A) 56.1%
B) 47.22%
C) 33.33%
D) none of the above
16. What is Megaframe Computer's total asset turnover?
A) 4.50x
B) 3.6x
C) 2x
D) 1.76x
17. Compute Megaframe's after tax profit margin.
A) 10.0%
B) 14.0%
C) 15.4%
D) 20.0%
18. The firm's return on equity is
A) 52.8%
B) 55.6%
C) 56.0%
D) 100.0%
19. At the break-even point, a firm's profits are
A) greater than zero.
B) less than zero.
C) equal to zero.
D) Not enough information to tell
20. A highly automated plant would generally have
A) more variable than fixed costs.
B) more fixed than variable costs.
C) all fixed costs.
D) all variable costs.
21. Firms with a high degree of operating leverage are
A) easily capable of surviving large changes in sales volume
B) usually trading off lower levels of risk for higher profits.
C) significantly affected by changes in interest rates.
D) trading off higher fixed costs for lower per-unit variable costs.
22. Working capital management is primarily concerned with the management and financing of
A) cash and inventory.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.
23. A financial executive devotes the most time to
A) Long-range planning.
B) Capital budgeting.
C) Short-term financing.
D) Working capital management.
24. Ideally, which of the following types of assets should be financed with long-term financing?
A) Fixed assets only
B) Fixed assets and temporary current assets
C) Fixed assets and permanent current assets
D) Temporary and permanent current assets
25. What is generally the largest source of short-term credit small firms?
A) Bank loans
B) Commercial paper
C) Installment loans
D) Trade credit
26. In determining the cost of bank financing, which is the important factor?
A) Prime rate
B) Nominal rate
C) Effective rate
D) Discount rate
27. Analog Computers needs to borrow $800,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800,000 spendable cash?
A) $920,000
B) $1,058,264
C) $941,177
D) none of the above
28. Hedging refers to
A) avoiding high-risk investment opportunities.
B) a transaction that reduces risk exposure.
C) the same thing as asset diversification.
D) avoiding the financial futures market.
29. A dollar today is worth more than a dollar to be received in the future because
A) risk of nonpayment in the future.
B) the dollar can be invested today and earn interest.
C) inflation will reduce purchasing power of a future dollar.
D) None of the above.
30. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1
31. The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?
A) $2,500
B) $2,000
C) $1,778
D) none of the above
32. A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be?
Present value of $1 PVIF = .2
Future value of $1 FVIF = 5.
Present value of annuity PVIFA = 9.818
Future value of annuity FVIFA = 46.0
A) $5,560
B) $7,384
C) $8,074
D) $13,900
33. Which of the following is not one of the components that makes up the required rate of return on a bond?
A) risk premium
B) real rate of return
C) inflation premium
D) maturity payment
34. Leasing is a popular form of financing because
A) lease provisions are generally less restrictive than a bond indenture.
B) the lessor likely has experience with the equipment being leased.
C) the lessee may not be financially able to purchase.
D) all of the above
35. Which of the following best represents the hierarchy of creditor and stockholder claims?
A) Common stock, senior secured debt, subordinated debentures
B) Senior debentures, subordinated debentures, junior secured debt
C) Senior secured debt, subordinated debentures, common stock
D) Preferred stock, secured debt, debentures.
36. A "subordinated debenture"
A) must be transferred with the bond to which it is attached.
B) is used mainly by railroad companies and usually specifies equipment as collateral.
C) entitles the bondholder to purchase shares of common stock at a specific price.
D) is an unsecured bond with an inferior claim on assets in the event of liquidation.
37. Long-term financing leases currently
A) show up on the balance sheet.
B) appear in the footnotes to the annual report.
C) appear on the company's statement of retained earnings.
D) do not appear on any financial statements.
38. The weighted average cost of capital is used as a discount rate because
A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
39. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because
A) interest rates may change.
B) the firm's stock price will increase and raise the cost of equity financing.
C) the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D) underwriting costs may change.
40. Which is not true about debt financing and the weighted average cost of capital?
A) Debt is usually the cheapest source of financing.
B) As the level of debt increases beyond the optimum capital structure, the cost of capital increases.
C) No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital.
D) None of the above.
41. The Jersey Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Jersey Corporation's capital structure?
A) $105,000
B) $75,000
C) $120,000
D) $21,000
42. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with
A) rates of return greater than or equal to the WACC.
B) rates of return less than the WACC.
C) rates of return equal to or less than the WACC.
D) positive rates of return.
43. Financial capital does not include
A) stock.
B) bonds.
C) preferred stock.
D) working capital.


A firm has operating profits of $10,000 on unit sales of 5,000 units. Fixed costs are $30,000. What is the firm's break-even sales level?

less than 4000 units.
4000 units.
more than 4000 units
There is not enough information to determine the unit break-even point.

The degree of operating leverage is computed as

percent change in operating profit divided by percent change in net income.
percent change in volume divided by percent change in operating profit.
percent change in EPS divided by percent change in operating income.
percent change in operating income divided by percent change in volume.

Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?

A has a lower break-even point than B, but A's profit grows faster after the break-even.
A has a higher break-even point than B, but A's profit grows slower after the break-even.
B has a lower break-even point than A, but A's profit grows faster after break-even.
B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

If a firm has fixed costs of $30,000, a price of $4.00, and a breakeven point of 15,000 units, the variable cost per unit is:

$5.00
$2.00
$.50
$4.00

If the price per unit decreases because of competition but the cost structure remains the same

the breakeven point rises.
the degree of combined leverage declines.
the degree of financial leverage declines.
All of these

If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is $3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?

$90,000
$30,000
$15,000
$45,000

If the business cycle were just beginning its upswing, which firm would you anticipate would be likely to show the best XXXXXX XX EPS over the next year? Firm A has high combined leverage and Firm B has low combined leverage.

Firm A
Firm B
Indifferent between the two
It depends on how much financial leverage each firm has.

If sales volume exceeds the break-even point, the firm will experience

an operating loss.
an operating profit.
an increase in plant and equipment.
an increase in stock price.

Firms with a high degree of operating leverage are

easily capable of surviving large changes in sales volume
usually trading off lower levels of risk for higher profits.
significantly affected by changes in interest rates.
trading off higher fixed costs for lower per-unit variable costs.

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