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Fin 370 Final Exam (Set-12)
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FIN 370 Final Exam.

 

 

 

True or False Questions

 

1. Financial management is concerned with the maintenance and creation of wealth. 

True

False

 

2. The current ratio and the acid test ratio are both measures of financial leverage. 

True

False

 

3. Sales occurring in the secondary markets increase the total stock of financial assets that exist in the economy. 

True

False

 

4. The key ingredient in a firm’s financial planning is the sales forecast. 

True

False

 

5. The present value of an annuity increases as the discount rate increases. 

True

False

 

6. As the volume of production increases, the fixed cost per unit of the product decreases.

True

False

 

7. Whenever the IRR on a project equals that project’s required rate of return, the NPV equals zero. 

True

False

 

8. The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used. 

True

False

 

9. Because they operate within a highly uncertain environment, utilities hold a large percentage of their total assets in cash. 

True

False

 

10. Accounts receivable are an asset that reflects sales made on credit. 

True

False

 

11. Working capital for a project includes investment in fixed assets. 

True

False

 

12. Sales captured from the firm’s competitors can be relevant to the capital-budgeting decision. 

True

False

 

13. The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged. 

True

False

 

14. The firm financed completely with equity capital has a cost of capital equal to the required return on common stock. 

True

False

 

15. Financial structure includes long-term and short-term sources of funds. 

True

False

 

16. Real assets should be financed with temporary capital due to the short-term nature of depreciation expense. 

True

False

 

17. The nature of a firm’s assets has a major influence on the types of financial capital a firm uses. 

True

False

 

18. Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self-subsistence. 

True

False

 

19. The foreign exchange market is similar in form to the New York Stock Exchange. 

True

False

 

20. The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs. 

True

False

 

21. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations. 

True

False

 

22. Capital markets in foreign countries in general are becoming more integrated due to the widespread availability of interest rate and currency swaps. 

True

False

 

Multiple Choice Questions

 

23. Which of the following statements best represents what finance is about?

a. How political, social, and economic forces affect corporations

b. Maximizing profits

c. Creation and maintenance of economic wealth

d. Reducing Risk

 

24. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?

a. Unlimited liability of shareholders

b. Access to the capital markets

c. Limited life

d. Elimination of double taxation on corporate income

e. All of the above

 

25. Which of the following decrease new competition in competitive markets?

a. Economies of scale

b. Proprietary technology

c. Product differentiation

d. Both a and b

e. All of the above

 

26. Kingsbury Associates has current assets as follows:

Cash $3,000

Accounts receivable $4,500

Inventories $8,000

If Kingsbury has a current ratio of 3.2, what is its quick ratio?

a. 2.07

b. 1.55

c. 0.48

d. 0.96

 

27. Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers’s return on equity. 

a. 17.5%

b. 19.5%

c. 21.5%

d. 23.5%

 

28. Which of the following is not a driving force of the operating profit margin?

a. The average selling price for each product

b. The ability to control all of the firm’s expenses

c. The ability to control general and administrative expenses

d. The number of units of product sold

 

29. Where is the availability of prices most continuous?

a. Organized exchanges

b. OTC

c. FRB

d. NASDAQ

 

30. Which of the following refers to the institutions and procedures that provide for transactions in short-term debt instruments?

a. Capital market

b. Commercial banks

c. Money market

d. Stock market

 

31. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?

a. $25,000

b. $15,000

c. $35,000

d. None of the above

 

32. Which of the following is a source of external capital?

a. Retained earnings

b. Inventory

c. Long-term debt

d. Operating income (earnings before interest and taxes)

e. None of the above

 

33. Which of the following expenses should be included as a cash outlay in the preparation of a cash budget?

a. The payment of accounts payable

b. The payment of depreciation expense

c. The payment of accrued income taxes

d. All of the above

e. None of the above

 

34. At 8% compounded annually, how long will it take $750 to double?

a. 6.5 years

b. 48 months

c. 9 years

d. 12 years

 

35. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:

a. 24%.

b. 8%.

c. 18%.

d. 12%.

 

36. Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

a. 500(1+.08)5

b. 500(1+.08)20

c. 500(1+.02)5

d. 500(1+.02)20

 

37. Which of the following is NOT an example of variable costs?

a. Packaging

b. Depreciation

c. Direct labor

d. Freight costs on products

 

38. Financial leverage means financing some of a firm’s assets with:

a. commercial paper.

b. preferred stock.

c. corporate bonds.

d. all of the above.

 

39. The NPV assumes cash flows are reinvested at the:

a. IRR.

b. NPV.

c. real rate of return.

d. cost of capital.

 

40. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?

a. 16%

b. 13%

c. 21%

d. 15%

 

41. An increase in ___________________ would increase a firm’s liquidity.

a. notes payable

b. inventories

c. cash

d. both b and c

e. all of the above

 

42. A quite risky working capital management policy would have a high ratio of:

a. short-term debt to bonds and equity.

b. short-term debt to total debt.

c. bonds to property, plant, and equipment.

d. short-term debt to equity.

 

43. The precautionary motive for holding cash assumes that balances are held:

a. to satisfy the need for cash that arises in the ordinary course of doing business.

b. to satisfy possible but as yet indefinite needs.

c. as a precaution against missing possible profit-making opportunities.

d. for speculative purposes.

 

44. The primary concern in the management of cash and marketable securities for an operating company is to:

a. be profitable.

b. balance liquidity needs against investment opportunities.

c. keep enough cash on hand to buy a competitor if it becomes available.

d. both a and c.

e. all of the above.

 

45. Which of the following is considered to be a spontaneous source of financing?

a. Operating leases

b. Accounts receivable

c. Inventory

d. Accounts payable

 

46. The purpose of carrying inventory is to:

a. make different production processes more dependent on sales.

b. make sales more independent of the production process.

c. have collateral for loans.

d. improve the current ratio.

 

47. The net present value always provides the correct decision provided that:

a. cash flows are constant over the asset’s life.

b. the required rate of return is greater than the internal rate of return.

c. capital rationing is not imposed.

d. the internal rate of return is positive.

 

48. When selecting the best project from a group of mutually exclusive projects you should choose the project with the highest:

a. net present value.

b. internal rate of return.

c. accounting rate of return.

d. payback.

 

49. The most expensive source of capital is:

a. preferred stock.

b. new common stock.

c. debt.

d. retained earnings.

 

50. When calculating the average cost of capital, which of the following has to be adjusted for taxes?

a. Common stock

b. Retained earnings

c. Debt

d. Preferred stock

 

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