1) Managerial finance
A) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
B) involves the design and delivery of advice and financial products.
C) recognizes funds on an accrual basis.
D) devotes the majority of its attention to the collection and presentation of financial data.
2) High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price.
A) True
B) False
3) When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm’s stock, financial managers should accept only those actions that are expected to increase the firm’s profitability.
A) True
B) False
4) The wealth of corporate owners is measured by the share price of the stock.
A) True
B) False
5) The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk.
A) True
B) False
6 Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of return on investments of higher risk.
A) True
B) False
7) The primary goal of the financial manager is
A) minimizing risk.
B) maximizing profit.
C) maximizing wealth.
D) minimizing return.
8) Profit maximization as a goal is not ideal because it does NOT directly consider
A) risk and cash flow.
B) cash flow and stock price.
C) risk and EPS.
D) EPS and stock price.
9) An effective ethics program can
A) weakened corporate value.
B) had no effect on a corporation’s value
C) enhance a corporation’s value.
D) be thought of as unimportant to corporate owners.
10) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are
A) $3,000 and $10,000, respectively.
B) $3,000 and -$7,000, respectively.
C) $7,000 and -$3,000, respectively.
D) $3,000 and $7,000, respectively.
11) Marginal analysis states that financial decisions should be made and actions taken only when
A) demand equals supply.
B) benefits equal costs.
C) added benefits exceed added costs.
D) added benefits are greater than zero.
12) One way often used to insure that management decisions are in the best interest of the stockholders is to
A) threaten to fire managers who are seen as not performing adequately.
B) remove management’s perquisites.
C) tie management compensation to the performance of the company’s common stock price.
D) tie management compensation to the level of earnings per share.
13) The Sarbanes-Oxley Act of 2002 was passed in response to
A) insider trading activities.
B) false disclosures in financial reporting.
C) the decline in technology stocks.
D) all of the above
14) The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds.
A) demanders; suppliers
B) users; providers
C) suppliers; demanders
D) purchasers; sellers
15) An efficient market is a market that allocates funds to their most productive use as a result of competition among wealth-maximizing investors.
A) True
B) False
16) The primary risk of mortgage-backed securities is
A) that the prices of housing will go down.
B) that the prices of housing will increase.
C) that the government will not be able to meet the guarantees on the cash flows.
D) that homeowners may not be able to, or choose not to, repay their loans.
17) The marginal tax rate represents the rate at which additional income is taxed.
A) True
B) False
18) Retained earnings represent the cumulative total of all earnings retained and reinvested in the firm since its inception.
A) True
B) False
19) The stockholder’s annual report must include
A) a statement of cash flows.
B) an income statement.
C) a balance sheet.
D) a statement of retained earnings.
E) all of the above.
20) Gross profits are defined as
A) operating profits minus depreciation.
B) operating profits minus cost of goods sold.
C) sales revenue minus operating expenses.
D) sales revenue minus cost of goods sold.
21) A firm had the following accounts and financial data for 2005.
The firm’s earnings available to common shareholders for 2005 were
A) -$224.25
B) $195.40
C) $302.40
D) $516.60
22) A firm had the following accounts and financial data for 2005.
The firm’s net profit after taxes for 2005 was ________.
A) -$206.40
B) $213.80
C) $320.40
D) $206.25
23) The firm’s creditors are primarily interested in the short-term liquidity of the company and its ability to make interest and principal payments.
A) True
B) False
24) Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.
A) True
B) False
25) In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.
A) True
B) False
26) ________ analysis involves the comparison of different firms’ financial ratios at the same point in time.
A) Time-series
B) Cross-sectional
C) Marginal
D) Quantitative
27) The primary concern of creditors when assessing the strength of a firm is the firm’s
A) profitability.
B) leverage.
C) short-term liquidity.
D) share price
28) The analyst should be careful when conducting ratio analysis to ensure that
A) the overall performance of the firm is not judged on a single ratio.
B) the dates of the financial statements being compared are the same.
C) audited statements are used.
D) the same accounting procedures were used.
E) all of the above.
29) The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity.
A) True
B) False
30) The ________ measures the percentage of each sales dollar remaining after ALL expenses, including taxes, have been deducted.
A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2010
Balance Sheet
Dana Dairy Products
December 31, 2010
31) The current ratio for Dana Dairy Products in 2005 was ________. (See Table 3.2)
A) 1.58
B) 0.63
C) 1.10
D) 0.91
32) Since 2009, the liquidity of Dana Dairy Products ________. (See Table 3.2)
A) has deteriorated
B) remained the same
C) has improved
D) cannot be determined
33) The inventory turnover for Dana Dairy Products in 2010 was ________. (See Table 3.2)
A) 43
B) 5
C) 20
D) 25
34) The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)
A) 32.5 days.
B) 11.8 days.
C) 25.3 days.
D) 35.9 days.
35) If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25 days, the average collection period ________ since 2009. (See Table 3.2)
A) has deteriorated
B) remained the same
C) has improved
D) cannot be determined
36) The debt ratio for Dana Dairy Products in 2010 was ________.(See Table 3.2)
A) 50 percent
B) 11 percent
C) 55 percent
D) 44 percent
37) Dana Dairy Products’ gross profit margin was inferior to the industry standard. This may have resulted from ________. (See Table 3.2)
A) a high sales price.
B) the high cost of goods sold.
C) excessive selling and administrative expenses.
D) excessive interest expense.
38) The gross profit margin and net profit margin for Dana Dairy Products in 2010 were ________. (See Table 3.2)
A) 13 percent and 0.9 percent, respectively.
B) 13 percent and 1.5 percent, respectively.
C) 2 percent and 0.9 percent, respectively.
D) 2 percent and 1.5 percent, respectively.
39) The return on total assets for Dana Dairy Products for 2010 was ________. (See Table 3.2)
A) 0.9 percent
B) 5.5 percent
C) 25 percent
D) 2.5 percent
40) The return on equity for Dana Dairy Products for 2010 was ________. (See Table 3.2)
A) 0.6 percent
B) 5.6 percent
C) 0.9 percent
D) 50 percent
41) A corporation
A) must use the same depreciation method for tax and financial reporting purposes.
B) must use different depreciation methods for tax and financial reporting purposes.
C) may use different depreciation methods for tax and financial reporting purposes.
D) must use different (than for tax purposes), but strictly mandated, depreciation methods for financial reporting purposes.
42) Given the financial manager’s preference for faster receipt of cash flows,
A) a longer depreciable life is preferred to a shorter one.
B) a shorter depreciable life is preferred to a longer one.
C) the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
D) the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.
43) A corporation sold a fixed asset for $100,000. This is
A) an investment cash flow and a source of funds.
B) an operating cash flow and a source of funds.
C) an operating cash flow and a use of funds.
D) an investment cash flow and a use of funds.
44) Pro forma statements are used for
A) cash budgeting.
B) credit analysis.
C) profit planning.
D) leverage analysis.
45) The future value of $100 received today and deposited at 6 percent for four years is
A) $126.
B) $ 79.
C) $124.
D) $116.
46) The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is
A) $236.
B) $699.
C) $ 42.
D) $ 75.
47) Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?
A) $19,292
B) $14,938
C) $40,000
D) $144,104
48) The risk free rate of interest is equal to the sum of the real rate of interest plus an inflation risk premium.
A) True
B) False
49) The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.
A) True
B) False
50) If expected return is less than required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
D) buy the asset, since price is expected to increase.
51) Tangshan China Company’s stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan’s dividend growth rate assuming that dividends are expected to grow at a constant rate forever?
A) 8%
B) 9%
C) 10%
D) 11%
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