Question

1. Insider trading occurs when 

A. corporate officers buy stock in their company.

B. lawyers, investment bankers, and others buy common stock in companies represented by their firms.

C. someone has information not available to the public which they use to profit from trading in stocks.

D. any stock transactions occur in violation of the Federal Trade Commissions restrictions on monopolies.

2) Regarding risk levels, financial managers should 

A. avoid higher risk projects because they destroy value

B. focus primarily on market fluctuations

C. pursue higher risk projects because they increase value

D. evaluate investor’s desire for risk

3) Maximization of shareholder wealth is a concept in which 

A. increased earnings is of primary importance.

B. profits are maximized on a quarterly basis.

C. virtually all earnings are paid as dividends to common stockholders.

D. optimally increasing the long-term value of the firm is emphasized.

4) An increase in investments in long-term securities will: 

A. increase cash flow from investing activities.

B. decrease cash flow from investing activities.

C. increase cash flow from financing activities.

D. decrease cash flow from financing activities.

5) Which of the following would represent a use of funds and, indirectly, a reduction in cash balances? 

A. an increase in inventories

B. the sale of new bonds by the firm

C. a decrease in marketable securities

D. an increase in accounts payable

6) Which of the following is not a primary source of capital to the firm? 

A. assets

B. bonds

C. common stock

D. preferred stock

7) If a firm has both interest expense and lease payments, 

A. times interest earned will be smaller than fixed charge coverage.

B. fixed charge coverage cannot be computed.

C. times interest earned will be greater than fixed charge coverage.

D. times interest earned will be the same as fixed charge coverage.

8) In examining the liquidity ratios, the primary emphasis is the firm’s 

A. ability to effectively employ its resources.

B. ability to earn an adequate return.

C. overall debt position.

D. ability to pay short-term obligations on time.

9) 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 decreases.

B. decrease as its times-interest-earned ratio decreases.

C. decrease as its current ratio increases.

D. increase as its debt-to assets ratio increases.

MEGAFRAME COMPUTER COMPANY

Balance Sheetas of 12/31/2006

Assets

Cash $40,000

Accounts Receivable 60,000

Inventory 90,000

New Plant and Equipment 220,000

Total Assets $410,000

LIABILITY 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 CO.

Income Statement For the Year Ended 12/31/2006

Sales (all on credit) $720,000

Cost of Goods Sold 500,000

Gross Profit $220,000

Sales and Administrative Expense 20,000

Depreciation40,000

Operating Profit $160,000

Interest Expense 16,000

Profit before Taxes $144,000

Taxes (30%) 43,200

Net Income $100,800

10) Refer to the figure above. Megaframe’s current ratio is 

A. 1.9:1

B. 3.2:1

C. 1.625:1

D. 1.5:1

Tew Company

Balance Sheet

As of December 31, 2007

Assets

Cash $20,000

A/R 80,000

Inventory 50,000

Net Plat & Equip. 250,000

Total Assets ————-

$400,000

Liabilities and Stockholders’ Equity

A/ P $40,000

Accrued Expenses 60,000

Long-Term debt 130,000

Common Stock100,000

Paid-In capital 10,000

Retained earnings 60,000

Total Liability and Stockholder equity—————

$400,000

Tew Company

Income Statement

For the Year Ended Dec. 31, 2007

Sales (all on credit) $500,000

Cost of Goods Sold 200,000

Gross Profit 300,000

Sales & Admin. Expense 20,000

Fixed Lease Expenses 10,000

Depreciation40,000

Operating Profit 230,000

Interest Expense 20,000

Profit before Taxes 210,000

Taxes (35%) 73,500

Net Income 136,500

11) Refer to the figure above. The firm’s debt to asset ratio is 

A. 58%.

B. 25%.

C. 33%.

D. 48%.

12) A firm’s long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. 

A. current ratio = 0.5; quick ratio = 1.5

B. current ratio = 1.5; quick ratio = 2.0

C. current ratio = 1.0; quick ratio = 2.0

D. current ratio = 2.5; quick ratio = 2.0

13) 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.

14) In general, the larger the portion of a firm’s sales that are on credit, the 

A. lower will be the firm’s need to borrow.

B. more rapidly credit sales will be paid off.

C. higher will be the firm’s need to borrow.

D. more the firm can buy raw materials on credit.

15) The need for an increase or decrease in short-term borrowing can be predicted by 

A. ratio analysis.

B. a cash budget.

C. trend analysis.

D. an income statement.

16) A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that 

A. all sales were from current production.

B. sales were from current production until current production was depleted, and then use sales from beginning inventory.

C. all sales were from beginning inventory.

D. all sales were for cash.

17) A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)? 

A. $9,000

B. $8,000

C. $8,100

D. $7,700

18) In developing the pro forma income statement we follow four important steps:

1) compute other expenses,

2) determine a production schedule,

3) establish a sales projection,

4) determine profit by completing the actual pro forma statement.

What is the correct order for these four steps? 

A. 1,2,3,4

B. 3,2,4,1

C. 3,2,1,4

D. 2,1,3,4

19) Financial leverage deals with: 

A. the relationship of fixed and variable costs.

B. the relationship of debt and equity in the capital structure.

C. the entire balance sheet.

D. the entire income statement.

20) When a firm employs no debt 

A. it has a financial leverage of one.

B. it has a financial leverage of zero.

C. it will not be profitable.

D. its operating leverage is equal to its financial leverage.

21) The degree of operating leverage is computed as 

A. percent change in operating profit divided by percent change in net income.

B. percent change in volume divided by percent change in operating profit.

C. percent change in operating income divided by percent change in volume.

D. percent change in EPS divided by percent change in operating income.

22) The break-even point can be calculated as 

A. variable costs divided by contribution margin.

B. total costs divided by contribution margin.

C. fixed cost divided by contribution margin.

D. variable cost times contribution margin.

23) In break-even analysis, the contribution margin is defined as 

A. price minus variable cost.

B. price minus fixed cost.

C. fixed cost minus variable cost.

D. variable cost minus fixed cost.

24) A firm’s break-even point will rise if 

A. fixed costs decrease

B. contribution margins increase

C. variable cost per unit rises

D. price per unit rises

25) When the yield curve is upward sloping, generally a financial manager should: 

A. utilize long-term financing

B. utilize short-term financing

C. lease

D. wait for future financing

26) During tight money periods 

A. long-term rates are higher than short-term rates.

B. short-term rates are higher than long-term rates.

C. the relationship between short and long-term rates remains unchanged.

D. short-term rates are equal to long-term rates.

27) 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. expectations hypothesis.

B. segmentation theory.

C. market average rate theory.

D. liquidity premium theory.

28) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? 

A. Illiquid assets and heavy short-term borrowing

B. Liquid assets and heavy short-term borrowing

C. Liquid assets and heavy long-term borrowing

D. Illiquid assets and heavy long-term borrowing

29) Risk exposure due to heavy short-term borrowing can be compensated for by 

A. carrying highly liquid assets.

B. carrying more receivables to increase cash flow.

C. carrying longer term, more profitable current assets.

D. carrying illiquid assets.

30) An aggressive, risk-oriented firm will likely 

A. borrow long-term and carry low levels of liquidity.

B. borrow short-term and carry high levels of liquidity.

C. borrow long-term and carry high levels of liquidity.

D. borrow short-term and carry low levels of liquidity.

31) “Float” takes place because 

A. a firm is early in paying its bills.

B. a customer writes checks.

C. a lag exists between writing a check and clearing it through the banking system.

D. the level of cash on the firm’s books is equal to the level of cash in the bank.

32) How would electronic funds transfer affect the use of “Float”? 

A. Increase its use somewhat

B. Have no effect on its use

C. Virtually eliminate its use

D. Decrease its use somewhat

33) Which of the following is not a valid reason for holding cash? 

A. to meet transaction requirements

B. to provide a compensating balance for a bank

C. to satisfy emergency needs for funds

D. to earn the highest return possible

34) Variables important to credit scoring models include 

A. age of company in years.

B. all of these variables apply.

C. facility ownership.

D. negative public records.

35) Which of the following is not a valid quantitative measure for accounts receivable collection policies? 

A. average collection period

B. ratio of bad debts to credit sales

C. ratio of debt to equity

D. aging of accounts receivables

36) When developing a credit scoring report, many variables would be considered. Which of the following best represent the major factors Dun & Bradstreet would examine? 

A. The age of the management team, the dollar amount of sales, net profits, and long-term debt.

B. The company’s cash balances, return on equity, and its average tax rates.

C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies).

D. The age of the company, the number of employees, the level of current assets.

37) Which of the following is not a method for lenders to control pledged inventory? 

A. Blanket inventory liens

B. Factoring

C. Warehousing

D. Trust receipts

38) Compensating balances 

A. are used by banks as a substitute for charging service fees.

B. generate returns to customers from interest bearing accounts.

C. are used to reward new accounts.

D. are created by having a sweep account.

39) What is generally the largest source of short-term credit small firms? 

A. Bank loans

B. Installment loans

C. Trade credit

D. Commercial paper

40) Trade credit may be used to finance a major part of the firm’s working capital when 

A. the firm extends less liberal credit terms than the supplier.

B. the firm and the supplier both extend the same credit terms.

C. neither the firm nor the supplier extends credit.

D. the firm extends more liberal credit terms than the supplier.

41) Which method of controlling pledged inventory provides the greatest degree of security to the lender? 

A. Blanket inventory liens

B. Trust receipts

C. Warehousing

D. Overall inventory liens

42) A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers? 

A. Decreased receivables and increased bank loans

B. Increased payables and decreased bank loans

C. Increased payables and increased bank loans

D. Increased receivables and increased bank loans

43) As the compounding rate becomes lower and lower, the future value of inflows approaches 

A. 0

B. infinity

C. need more information

D. the present value of the inflows

44) An annuity may be defined as 

A. a payment at a fixed interest rate.

B. a series of yearly payments.

C. a series of consecutive payments of equal amounts.

D. a series of payments of unequal amount.

45) In determining the future value of a single amount, one measures 

A. the future value of periodic payments at a given interest rate.

B. the future value of an amount allowed to grow at a given interest rate.

C. the present value of periodic payments at a given interest rate.

D. the present value of an amount discounted at a given interest rate.

46) 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. $3,633

B. $13,113

C. $17,383

D. $9,250

47) If you invest $8,000 at 12% interest, how much will you have in 7 years? 

A. $18,016

B. $3616

C. $80,712

D. $17,688

48) 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. Present value of an annuity of $1

C. Future value of an annuity of $1

D. Future value of $1