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MGT201 Virtual University MCQs BANK - MCQs Collection from Online Quizzes

Which of the following is likely to be correct for a company which invests in projects with Positive NPV? 
Select correct option: 

Company’s EVA (Economic Value Added) rises by the same value 
Company’s MVA (Market Value Added) or market value rises 
Company Shareholders’ Wealth rises 
All of the given options

Market Value Added (MVA), Net Present Value (NPV), and Economic Value Added (EVA) 
We use a measure called MVA in our assessment of a company’s net present value (NPV). In turn, we use a metric called EVA in our assessment of prospective  economic earnings. We begin with EVA, as it naturally leads to MVA, the market’s  efficient market assessment of NPV.
From a finance perspective, EVA is defined in terms of how it relates to the firm’s “market value added.” 
In theory (market efficiency), MVA is equal to the net present value (NPV) of the firm’s expected future EVA.
If the marginal reduction in order costs exceeds the marginal carrying cost of inventory, then what should be done by the firm?
Select correct Option:
The firm has minimized its total carrying costs
The firm should increase its order size
The firm should decrease its order size
The firm has maximized its order costs

When marginal benefit (e.g., marginal reduction in order costs) exceeds marginal cost (e.g., marginal carrying cost of inventory) of increasing the order size, it worth doing it.

Which of the following is as EBIT?  
Select correct option:   
 Funds provided by operations 
 Earnings before taxes 
 Net income  
 Operating profit 

EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: 


EBIT =  Revenue - Operating  Expenses


Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and taxes added back to it


Security market line gives the relationship between _______ and _________.  

Select correct option:   
 Market risk and the required return 
 Systematic risk and the required return  
 Non-diversified risk and the required return  
 All of the given options
security market line   A straight line that shows the equilibrium relationship between systematic risk and expected rates of return for individual securities. According to the SML, the excess return on a risky asset is equal to the excess return on the market portfolio multiplied by the beta coefficient. 
In finance, systematic risk, sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with aggregate market returns

All of the following are the reasons for Uncertain NPV calculations EXCEPT:

Select correct option:
Estimated discount rate does not change with the markets
Estimated Life of project is doubtful
Annual after-tax cash flows are difficult to estimate
Timing of cash flows is not exactly predictable
Limitation of NPV analysis in Uncertain settings
 
1. Requires information about cash flow that may often not be known Characterizing the level of risk and uncertainty associated with a new and innovative strategy is itself an uncertain and risky undertaking
2. Assumes uncertainty and risk associated with a strategy remain constant over the life of that strategy Risk level differs over different periods, and is itself affected by strategic actions 
3.Fails to incorporate value of future strategies that are enabled by current strategy Path dependent nature of capability acquisition 

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MGT201 Quiz 2 Solved

Question # 1 of 15 ( Start time: 09:47:52 PM )  Total M - 1 
An investment proposal should be judged in whether or not it provides: 

Select correct option: 

 
 A return equal to the return require by the investor
 A return more than required by investor
 A return less than required by investor
 A return equal to or more than required by investor
 
Question # 2 of 15 ( Start time: 09:47:52 PM )  Total M - 1 
In which of the following approach you need to bring all the projects to the same length in time? 
Select correct option: 
 
 MIRR approach
 Going concern approach
 Common life approach  
 Equivalent annual approach
 
Question # 3 of 15 ( Start time: 09:48:26 PM )  Total M - 1 
Which of the following is the general assumption of Percent of Sales Forecasting? 
Select correct option: 
 
 Current Assets usually grow in proportion to Revenues
 Current Assets usually grow in proportion to Expenses
 Current Assets usually grow in proportion to Liabilities
 Current Assets usually grow in proportion to Sales 
 
Question # 4 of 15 ( Start time: 09:49:18 PM )  Total M - 1 
Which of the following is correct, if a firm has a required rate of return equal to the ROE? 
Select correct option: 
 
 The firm can increase market price and P/E by retaining more earnings. 
 The firm can increase market price and P/E by increasing the growth rate. 
 The amount of earnings retained by the firm does not affect market price or the P/E.
None of the given options
 
Question # 5 of 15 ( Start time: 09:50:02 PM )  Total M - 1 
Which of the following is NOT true regarding an ordinary annuity? 
Select correct option: 
 
 It is a series of equal cash flows
 Cash flows occur for a specific time period
 Payments are made at the start of each period 
 It is also known as deferred annuity
 
Question # 6 of 15 ( Start time: 09:50:50 PM )  Total M - 1 
________ is paid by companies with lower grade bonds like CC or C ratings. 
Select correct option: 
 
 Default risk premium 
 Sovereign Risk Premium
 Market risk premium
 Maturity risk premium
 
Question # 7 of 15 ( Start time: 09:51:29 PM )  Total M - 1 
Which of the following are the approaches used to make two projects with different life spans comparable? 
Select correct option: 
 
 Modified internal rate of return and equivalent annual annuity
 Common life and equivalent annual annuity  
 Common life and modified internal rate of return
 None of the given options
 
Question # 8 of 15 ( Start time: 09:52:26 PM )  Total M - 1 
Which of the following will NOT equate the future value of cash inflows to the present value of cash outflows? 
Select correct option: 
 
 Discount rate
 Profitability index
 Internal rate of return
 Multiple Internal rate of return 
 
Question # 9 of 15 ( Start time: 09:53:06 PM )  Total M - 1 
When a bond will sell at a discount? 
Select correct option: 
 
 The coupon rate is greater than the current yield and the current yield is greater than yield to maturity 
 The coupon rate is greater than yield to maturity 
 The coupon rate is less than the current yield and the current yield is greater than the yield to maturity 
 The coupon rate is less than the current yield and the current yield is less than yield to maturity 
 
Question # 10 of 15 ( Start time: 09:53:45 PM )  Total M - 1 
When Investors want high plowback ratios? 
Select correct option: 
 
 Whenever ROE > k
 Whenever k > ROE
 Only when they are in low tax brackets
 Whenever bank interest rates are high
 
Question # 11 of 15 ( Start time: 09:54:28 PM )  Total M - 1 
________ are also known as Spontaneous Financing. 
Select correct option: 
 
 Current liabilities
 Current assets
 Fixed assets
 Long-term liabilities
 
Question # 12 of 15 ( Start time: 09:55:01 PM )  Total M - 1 
Which type of responsibilities are primarily assigned to Controller and Treasurer respectively? 
Select correct option: 
 
 Operational; financial management
 
 Financial management; accounting
 
 Accounting; financial management
 
 Financial management; operations
 
Question # 13 of 15 ( Start time: 09:55:42 PM )  Total M - 1 
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? 
Select correct option: 
 
  Indenture
  Debenture
  Bond
  Bond trustee 
 
Question # 14 of 15 ( Start time: 09:56:19 PM )  Total M - 1 
Which of the following is type a Temporary Account? 
Select correct option: 
 
 Asset
 Liability
 Reserves
 Revenue 
 
 
Which of the following is TRUE about IRR (Internal Rate of Return)? 
Select correct option: 
 
 It changes for each and every year over the life of the project 
 It remains same for each and every year over the life of the project
 It increases over the life of the project
 It decreases over the life of the project  
 
 
The risk that covers events like unexpected changes in the economy refers to:  
Select correct option:  
 
 Systematic risk  
 Unsystematic risk 
 Total risk 
 All of the above 

MGT201 Financial Management solved MCQs from Quiz 1

MGT201 Question # 1 of 15 ( Start time: 05:31:55 PM )Total M - 1
Which of the following is the general assumption of Percent of Sales Forecasting?
Select correct option:
Current Assets usually grow in proportion to Revenues
Current Assets usually grow in proportion to Expenses
Current Assets usually grow in proportion to Liabilities
Current Assets usually grow in proportion to Sales
 
MGT201 Question # 2 of 15 ( Start time: 05:33:20 PM )Total M - 1
In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.
Select correct option:
Fall
Rise
Remain unchanged
Incomplete information
 
MGT201 Question # 3 of 15 ( Start time: 05:33:59 PM )Total M - 1
Effective interest rate is different from nominal rate of interest because:
Select correct option:
Nominal interest rate ignores compounding
Nominal interest rate includes frequency of compounding
Periodic interest rate ignores the effect of inflation
All of the given options
 
MGT201 Question # 4 of 15 ( Start time: 05:35:22 PM )Total M - 1
What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue?
Select correct option:
Indenture
Debenture
Bond
Bond trustee
  
MGT201 Question # 6 of 15 ( Start time: 05:37:36 PM )Total M - 1
Which of the following would generally have unlimited liability?
Select correct option:
A limited partner in a partnership
A shareholder in a corporation
The owner of a sole proprietorship
A member in a limited liability company (LLC)
 
MGT201 Question # 7 of 15 ( Start time: 05:38:38 PM )Total M - 1
Why we need Capital rationing?
Select correct option:
Because, there are not enough positive NPV projects
Because, companies do not always have access to all of the funds they could make use of
Because, managers find it difficult to decide how to fund projects
Because, banks require very high returns on projects
 
MGT201 Question # 8 of 15 ( Start time: 05:39:53 PM )Total M - 1
What is the present value of Rs. 3,500,000 to be paid at the end of 50 years if the correct risk adjusted interest rate is 18%?
Select correct option:
Rs.105,000
Rs.1,500,000
Rs.3975,000
Rs. 350,000
 PV = FV/(1+rn)
PV = 3,500,000/(1+.18*50) = 350,000
 
 
MGT201 Question # 9 of 15 ( Start time: 05:41:20 PM )Total M - 1
When the zero coupon bond approaches to its maturity, the market value of the bond approaches to which of the following?
Select correct option:
Intrinsic value
Book value
Par value
Historic cost
 
MGT201 Question # 10 of 15 ( Start time: 05:41:27 PM )Total M - 1
Which of the following would be considered a cash-flow item from an "operating" activity?
Select correct option:
Cash outflow to the government for taxes
Cash outflow to shareholders as dividends
Cash inflow to the firm from selling new common equity shares
Cash outflow to purchase bonds issued by another company
 
MGT201 Question # 11 of 15 ( Start time: 05:42:22 PM )Total M - 1
Which of the following refers to the risk associated with interest rate uncertainty?
Select correct option:
Default risk premium
Sovereign Risk Premium
Market risk premium
Maturity risk premium
 
MGT201 Question # 12 of 15 ( Start time: 05:42:35 PM )Total M - 1
Which of the following refers to a highly competitive market where good business ideas are taken up immediately?
Select correct option:
Capital market
Efficient market
Money market
Real asset market
 
 
MGT201 Question # 13 of 15 ( Start time: 05:42:58 PM )Total M - 1
What is the most important criteria in capital budgeting?
Select correct option:
Return on investment
Profitability index
Net present value
Pay back period
 
 
MGT201 Question # 14 of 15 ( Start time: 05:43:23 PM )Total M - 1
Which of the following statements (in general) is correct?
Select correct option:
A low receivables turnover is desirable
The lower the total debt-to-equity ratio, the lower the financial risk for a firm
An increase in net profit margin with no change in sales or assets means a weaker ROI
The higher the tax rate for a firm, the lower the interest coverage ratio
 
 
MGT201 Question # 15 of 15 ( Start time: 05:44:06 PM )Total M - 1
What should be the focal point of financial management in a firm?
Select correct option:
The number and types of products or services provided by the firm
The minimization of the amount of taxes paid by the firm
The creation of value for shareholders
The dollars profits earned by the firm

Review of Accounting

 

1                     

The accounting statements that a firm is required to file include all but one of these.

 

            A)        Balance Sheet

            B)        Statement of Accounts Receivable

            C)        Income Statement

            D)        Statement of Cash Flows

 

Explanation: The required statements include the income statement, balance sheet and statement of changes in cash flows. The statement of changes in owners equity (or retained earnings) is also required by Generally Accepted Accounting Principles but is not covered in this text.

 

2         

The _______________ shows the firm's operating results over a period of time.

 

            A)        Income Statement

            B)        Statement of Cash Flows

            C)        Balance Sheet

            D)        None of the above

 

Explanation: The Income Statement represents a moving picture of a firm's revenues and expenses.

 

3         

All of the following except one are tax-deductible expenses.

 

            A)        interest expense

            B)        depreciation

            C)        common stock dividends

            D)        income taxes

 

Explanation: Common stock dividends are not tax deductible to a firm.

 

4         

All of the following are non-operating expenses except _____________.

 

            A)        interest expense

            B)        cost of goods sold

            C)        preferred stock dividends

            D)        taxes

 

Explanation: The cost of goods sold is an operating expense.

 

5                     

Bondholders receive _____________ from the business firm.

 

            A)        preferred dividend payments

            B)        common stock payments

            C)        interest payments

            D)        royalties

 

Explanation: Bondholders are typically paid interest semi-annually.

 

6                     

The ratio of net income to common shares outstanding is called ______________.

 

            A)        price/earnings ratio

            B)        earnings per share

            C)        dividends per share

            D)        none of the above

 

Explanation: This is called the earnings per share (EPS).

 

7

Usually, firms with high price/earnings ratios are ____________ firms.

 

            A)        growth

            B)        declining

            C)        mature

            D)        none of the above

 

Explanation: A high p/e ratio indicates a firm with strong growth prospects

 

8

One of the limitations of the ____________ is that it is based on historical costs.

 

            A)        income statement

            B)        statement of cash flows

            C)        balance sheet

            D)        none of the above

 

Explanation: The balance sheet uses historical costs.

 

9                     

A source of funds is a:

 

            A)        decrease in a current asset

            B)        decrease in a current liability

            C)        increase in a current liability

            D)        a and c above

 

Explanation: A decrease in current assets is equivalent to an increase in current liabilities.

10                   

Short-term financing for a business firm includes:

 

            A)        bonds

            B)        accounts payable

            C)        stockholder's equity

            D)        mortgages

 

Explanation: The other three answers represent long-term financing

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1                     

Trend analysis allows a firm to compare its performance to:

 

            A)        other firms in the industry

            B)        other time periods within the firm

            C)        other industries

            D)        all of the above

 

Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firm’s performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry.

 

2         

Ratio analysis allows a firm to compare its performance to:

 

            A)        other firms in the industry

            B)        other time periods within the firm

            C)        other industries

            D)        all of the above

 

Explanation: Trend analysis gives an analyst a long-term perspective. As a security analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is one thing to compare a firm’s performance against competitors within the same industry. But investors are not limited to specific industries. In fact, investors seek to diversify their investments across many different industries. So management should also compare performance to any well run company--both in and outside of their industry.

 

3         

Usually, a firm's suppliers are most interested in its ________ ratios.

 

            A)        profitability

            B)        debt

            C)        asset utilization

            D)        liquidity

 

Explanation: The suppliers are most interested in getting paid, as shown by the liquidity of the firm.

 

4                     

_______________ would be most interested in a firm's debt utilization ratios.

 

            A)        bondholders

            B)        stockholders

            C)        short-term creditors

            D)        Both A and B

 

Explanation: Debt is indicated by a firm issuing bonds but is also a function of the debt to equity relationship or the degree of financial leverage. Both bond holders and stockholders are interested in this relationship although frof opposing viewpoints.

 

5                     

The _____________ ratio indicates the return firm shareholders are earning.

 

            A)        return on assets

            B)        return on investment

            C)        return on equity

            D)        net profit margin

 

Explanation: The shareholders represent equity, or ownership in the firm.

 

6                     

Which of the following is an example of a profitability ratio?

 

            A)        Quick ratio

            B)        Average collection period

            C)        Return on equity

            D)        Times interest earned

 

Explanation: This is the only profitability ratio that is listed. All profitability ratios have net income in the denominator.

 

7                     

Total asset turnover will indicate if there is a problem with the _________ ratio.

 

            A)        debt to assets

            B)        times interest earned

            C)        fixed asset turnover

            D)        current

 

Explanation: Fixed asset turnover is part of total asset turnover.

 

8                     

All of the following are asset utilization ratios except:

 

            A)        average collection period

            B)        inventory turnover

            C)        receivables turnover

            D)        return on assets

 

Explanation: Return on assets is a profitability ratio. Any ratio with net income in the denominator is a profitability ratio.

 

9                     

If a firm's debt ratio is 55%, this means ______ of the firm's assets are financed by equity financing.

 

            A)        55%

            B)        50%

            C)        45%

            D)        not enough information to answer question

 

Explanation: The equity portion plus the debt portion must add up to 100%.

 

10       

All of the following can present problems for ratio analysis except:

 

            A)        inflation

            B)        inventory accounting methods

            C)        disinflation

            D)        all of the above

 

Explanation: These all may cause problems.

Financial Forecasting Solved MCQs

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1         

Planning for future growth is called:

 

            A)        capital budgeting

            B)        working capital management

            C)        financial forecasting

            D)        none of the above

 

Explanation: This involves looking ahead to the future.

 

2         

Which one of the following is NOT a tool of financial forecasting?

 

            A)        cash budget

            B)        capital budget

            C)        pro forma balance sheet

            D)        pro forma income statement

 

Explanation: The other three are all tools used by an analyst.

 

3         

The first step in developing a pro forma income statement is to:

 

            A)        build a sales forecast

            B)        determine the production schedule

            C)        determine cost of goods sold

            D)        none of the above

 

Explanation: A sales forecast begins the process.

 

4         

Pro forma statements are _______ statements.

 

            A)        actual

            B)        projected

            C)        a previous year's

            D)        none of the above

 

Explanation: Pro forma statements are based on estimates or projections.

 

5                     

All of the following compose cost of goods sold except ________________.

 

            A)        raw material

            B)        labor

            C)        overhead

            D)        all of the above are part of cost of goods sold

 

Explanation: The cost of good sold involves all three of these items.

 

6         

Financial managers use the _____________ to plan for monthly financing needs.

 

            A)        capital budget

            B)        cash budget

            C)        pro forma income statement

            D)        none of the above

 

Explanation: The cash budget allows for planning cash needs.

 

7                     

The payments that a firm collects from its customers are called _______________.

 

            A)        cash disbursements

            B)        cash outflows

            C)        cash receipts

            D)        none of the above

 

Explanation: Cash receipts represent cash coming into the firm.

 

8                     

Examples of cash disbursements are all but _________________.

 

            A)        payment for materials purchased

            B)        collection of accounts receivable

            C)        payment of dividends

            D)        payment of taxes

 

Explanation: The collection of accounts receivable is an example of a cash receipt, not a cash disbursement.

 

9         

In developing the pro forma balance sheet, we get common stock from _________________.

 

            A)        the firm's previous balance sheet

            B)        the firm's cash budget

            C)        the firm's income statement

            D)        none of the above

 

Explanation: Common stock appears on the balance sheet.

 

10       

The percent of sales method of financial forecasting shows us the relationship between ___________ and financing needs.

 

            A)        changes in the level of liabilities

            B)        changes in the level of assets

            C)        changes in debt

            D)        changes in the level of sales

 

Explanation: It compares the relationship between balance sheet items and sales.

 

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1         

An example of a semi-variable cost is:

 

            A)        rent

            B)        raw material

            C)        depreciation

            D)        utilities

 

Explanation: The other three represent fixed or variable costs.

 

2         

_____________ is the point at which firm profit is equal to zero.

 

            A)        breakeven

            B)        operating breakeven

            C)        financial leverage

            D)        combined breakeven

 

Explanation: This is the point where the firm's revenues equal its expenses.

 

3         

In breakeven analysis, if fixed costs rise, then the breakeven point will __________.

 

            A)        fall

            B)        rise

            C)        stay the same

            D)        none of the above

 

Explanation: This implies that a larger quantity will have to be sold in order to break even.

 

4                     

In the breakeven formula, Price - Variable Cost is called the_____________.

 

            A)        breakeven point

            B)        leverage

            C)        contribution margin

            D)        none of the above

 

Explanation: This implies that a larger quantity will have to be sold in order to cover the additional fixed costsand still break even.

 

5         

Which of the following types of firms may operate with high operating leverage?

 

            A)        a doctor's office

            B)        an auto manufacturing facility

            C)        a mental health clinic

            D)        none of the above would have high operating leverage

 

Explanation: This implies a high break-even point and high operating expenses.

 

6                     

The ____________________ is the percentage change in operating income that results from a percentage change in sales.

 

            A)        degree of financial leverage

            B)        breakeven point

            C)        degree of operating leverage

            D)        degree of combined leverage

 

Explanation: This is called the degree of operating leverage (DOL).

 

7         

If interest expenses for a firm rise, we know that firm has taken on more ______________.

 

            A)        financial leverage

            B)        operating leverage

            C)        fixed assets

            D)        none of the above

 

Explanation: Financial leverage refers to interest expense on debt.

 

8                     

The ________________ is the percentage change in earnings per share that results from a percentage change in operating income.

 

            A)        degree of combined leverage

            B)        degree of financial leverage

            C)        breakeven point

            D)        degree of operating leverage

 

Explanation: This is known as the degree of financialleverage (DFL).

 

9         

Combined leverage is the percentage change in relationship between sales and ____________.

 

            A)        operating income

            B)        operating leverage

            C)        earnings per share

            D)        breakeven point

 

Explanation: This combines operating leverage and financial leverage.

 

10       

A highly leveraged firm is __________ risky than its peers.

 

            A)        less

            B)        more

            C)        the same

            D)        none of the above

 

Explanation: Leverage is equivalent to risk, because it implies a higher level of fixed costs.

Working Capital and the Financing Decision Solved MCQs

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1                     

Working capital management involves the financing and management of the _______ assets of the firm.

 

            A)        fixed

            B)        total

            C)        current

            D)        none of the above

 

Explanation: Working capital management deals with the financing and management of current assets.

 

2                     

An asset sold at the end of a specified time period is called a _____________ asset.

 

            A)        temporary current

            B)        self-liquidating

            C)        current

            D)        permanent current

 

Explanation: A self-liquidating asset is one that will be sold after a certain amount of time.

 

3         

Fixed assets are usually financed with _____________ funds.

 

            A)        long-term

            B)        short-term

            C)        permanent

            D)        none of the above

 

Explanation: Fixed assets are by definition long-term assets.

 

4                     

______________ is usually used to finance self-liquidating assets.

 

            A)        Long-term financing

            B)        Short-term financing

            C)        Permanent financing

            D)        none of the above

 

Explanation: These are short-term or temporary assets.

 

5                     

Short-term interest rates, in a normal economy, are generally ________ than long-term rates.

 

            A)        higher

            B)        the same

            C)        lower

            D)        none of the above

 

Explanation: Long-term interest rates are normally higher than short-term interest rates to compensate for uncertainty or risk.

 

6                     

The expectations hypothesis says that _________ interest rates are a function of _______ interest rates.

 

            A)        short-term; long-term

            B)        long-term; short-term

            C)        short-term; short-term

            D)        none of the above

 

Explanation: This theory says that long-term interest rates reflect the average of short-term expected rates.

 

7                     

Insurance companies would tend to invest in __________ securities.

 

            A)        short-term

            B)        intermediate term

            C)        long-term

            D)        not enough information to answer

 

Explanation: An insurance company would prefer long-term securities because they are more conservative or safer.

 

8                     

The ______________ theory says that investors must be paid a premium to hold long-term securities.

 

            A)        expectations hypothesis

            B)        time value theory

            C)        segmentation

            D)        liquidity premium

 

Explanation: This is the liquidity premium.

 

9         

Short-term financing plans with high liquidity have:

 

            A)        high return and high risk

            B)        moderate return and moderate risk

            C)        low profit and low risk

            D)        none of the above

 

Explanation: This is known as a "middle-of-the-road" approach.

 

10                   

Long-term financing plans with low liquidity have:

 

            A)        high return and high risk

            B)        moderate return and moderate risk

            C)        low return and low risk

            D)        none of the above

 

Explanation: This is also known as a "middle-of-the-road" approach.

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1                     

The transaction motive for holding cash is for

 

            A)        a safety cushion

            B)        daily operating requirements

            C)        compensating balance requirements

            D)        none of the above

 

Explanation: This is money for everyday transactions.

 

2         

Which of the following motives for holding cash is required by the bank before loaning money?

 

            A)        compensating balance motive

            B)        transactions motive

            C)        precautionary motive

            D)        none of the above

 

Explanation: This can be considered a form of collateral.

 

3                     

The difference between the cash balance on the firm's books and the balance shown on the bank's books is called:

 

            A)        the compensating balance

            B)        float

            C)        a safety cushion

            D)        none of the above

 

Explanation: Float implies that it takes time for checks to clear.

 

4                     

Electronic funds transfer has __________ the use of float.

 

            A)        reduced

            B)        increased

            C)        had no effect on

            D)        none of the above

 

Explanation: Electronic funds transfer (EFT) has moved cash more quickly and reduced float.

 

5                     

The most utilized marketable security by most firms is the:

 

            A)        Treasury bond

            B)        Agency security

            C)        Certificate of Deposit

            D)        Treasury bill

 

Explanation: Treasury bills (T-Bills) are very safe, popular investments.

 

6                     

Of the following marketable securities, which are guaranteed by the Federal government?

 

            A)        agency securities

            B)        negotiable certificates of deposit

            C)        banker's acceptances

            D)        none of the above

 

Explanation: None of these are backed by the government.

 

7                     

The 5 C's of credit include:

 

            A)        conditions

            B)        collateral

            C)        character

            D)        all of the above

 

Explanation: The other two C's of credit are capacity and capital.

 

8         

The use of safety stock by a firm will:

 

            A)        reduce inventory costs

            B)        increase inventory costs

            C)        have no effect on inventory costs

            D)        none of the above

 

Explanation: Safety stock is extra inventory a firm keeps in case of unforseen circumstances.

 

9                     

All of these factors are used in credit policy administration except:

 

            A)        credit standards

            B)        terms of trade

            C)        dollar amount of receivables

            D)        collection policy

 

Explanation: The other three choices are the primary policy variables to consider.

 

10

Firms aim to hold ______ cash balances since cash is a non-interest earning asset.

 

            A)        low

            B)        average

            C)        high

            D)        none of the above

 

Explanation: A firm does not want to keep too much cash on hand because it will lose interest (by not keeping the money in a bank).

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1                     

The largest provider of short-term credit for a business is:

 

            A)        banking organizations

            B)        suppliers to the firm

            C)        commercial paper

            D)        Eurodollars

 

Explanation: This is also known as trade credit.

 

2                     

The number of days until the firm is past due to a supplier is called the:

 

            A)        discount period

            B)        term to credit

            C)        payment period

            D)        none of the above

 

Explanation: The payment period is the number of days a firm has to pay its bill.

 

3                     

If a firm is given trade credit terms of 2/10, net 30, then the cost of the firm failing to take the discount is:

 

            A)        2%

            B)        30%

            C)        36.72%

            D)        10%

 

 

4         

The interest rate given by a bank to its most creditworthy customers is the:

 

            A)        prime rate

            B)        LIBOR rate

            C)        federal funds rate

            D)        discount rate

 

Explanation: This is the "best" interest rate charged to people with excellent credit.

 

5                     

Which of the following types of bank loans generally have the highest effective rate of interest?

 

            A)        simple interest loan

            B)        discount interest loan

            C)        loan with a compensating balance

            D)        installment loan

 

Explanation: Installment loans tend to be the most expensive.

 

6         

If a firm needs to borrow $100,000, at 8% interest, to finance working capital needs and a 20% compensating is required, then the firm should borrow __________.

 

            A)        $100,000

            B)        $80,000

            C)        $125,000

            D)        $108,000

 

Explanation: The formula to calculate this is: amount needed/(1-c), where c = the compensating balance percentage.

 

7         

If a bank offers a firm a simple interest loan of $1000 for 120 days at a cost of $60 interest, what is the effective rate of interest on the loan?

 

            A)        18.00%

            B)        6.00%

            C)        20.00%

            D)        none of the above

 

Explanation: This is calculated by using formula 8-2 in this chapter.

 

8                     

If a company raises money to finance short-term needs by selling its accounts receivable to another party, this is called ___________.

 

            A)        pledging

            B)        warehousing

            C)        factoring

            D)        none of the above

 

Explanation: Factoring means selling the accounts receivable outright.

 

9                     

The most restrictive policy for using inventory as collateral for short-term borrowing is called:

 

            A)        blanket inventory lien

            B)        warehousing inventory

            C)        trust receipt

            D)        factoring

 

Explanation: This is a complex method of inventory financing wherein the lender takes control of the inventory.

 

10

A type of accounts receivable financing where a firm uses its receivables as collateral is called:

 

            A)        pledging

            B)        securitization

            C)        factoring

            D)        warehousing

 

Explanation: Pledging means using accounts receivable as collateral.

The Time Value of Money Solved MCQs

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1                     

Both the future and present value of a sum of money are based on:

 

            A)        interest rate

            B)        number of time periods

            C)        both a and b

            D)        none of the above

 

Explanation: These two factors are used in time value of money calculations.

 

2                     

An annuity is ___________________.

 

            A)        more than one payment

            B)        a series of unequal but consecutive payments

            C)        a series of equal and consecutive payments

            D)        a series of equal and non-consecutive payments

 

Explanation: An annuity is a stream of equal payments to be received in the future.

 

3                     

If you have $1000 and you plan to save it for 4 years with an interest rate of 10%, what is the future value of your savings?

 

            A)        $1464.00

            B)        $1000.00

            C)        $1331.00

            D)        cannot be determined

 

 

 

4                     

Time value of money is an important finance concept because:

 

            A)        it takes risk into account

            B)        it takes time into account

            C)        it takes compound interest into account

            D)        all of the above

 

Explanation: Time value of money incorporates all of these concepts.

 

5                     

The present value of a dollar to be received in the future is:

 

            A)        more than a dollar

            B)        equal to a dollar

            C)        less than a dollar

            D)        none of the above

 

Explanation: The reason is because you can earn interest on the money.

 

6                     

The future value of a dollar that you invest today is:

 

            A)        more than a dollar

            B)        equal to a dollar

            C)        less than a dollar

            D)        none of the above

 

Explanation: Again, the reason is because the money can earn interest.

 

7                     

The future value of an annuity is:

 

            A)        less than each annuity payment

            B)        equal to each annuity payment

            C)        more than each annuity payment

            D)        none of the above

 

Explanation: The reason has to do with compound interest (or interest earning more interest).

 

8                     

The concepts of present value and future value are:

 

            A)        directly related to each other

            B)        not related to each other

            C)        proportionately related to each other

            D)        inversely related to each other

 

Explanation: They are essentially opposite sides of a coin.

 

9                     

If you win the lottery and you choose to have your proceeds distributed to you over a twenty-year time period, with the first payment coming to you one year from today, which calculation would you use to calculate the worth of those proceeds to you today?

 

 

            A)        future value of a lump sum

            B)        future value of an annuity

            C)        present value of a lump sum

            D)        present value of an annuity

 

Explanation: This is shown by formula 9-4 in this chapter. But this is not a typical situation. Most lotteries (let’s say $1 Million over 20 years), will pay you the first payment today and $50,000 each year for the next 19 years. This is actually an “annuity due” which is not covered in this text. You’d have to calculate the present value of the annuity for 19 years and add the initial $50,000 you received today.

 

10

You have $1000 you want to save. If four different banks offer four different compounding methods for interest, which method should you choose to maximize your $1000?

 

            A)        compounded daily

            B)        compounded quarterly

            C)        compounded semi-annually

            D)        compounded annually

 

Explanation: The more often interest is compounded the faster it will grow because you will begin to earn interest on the interest sooner.

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1         

In valuing a financial asset, you use these variables:

 

            A)        present value of future cash flows

            B)        discount rate

            C)        required rate of return

            D)        all of the above

 

Explanation: All of these are needed in order to value an asset.

 

2         

The principal amount of a bond at issue is called:

 

            A)        par value

            B)        coupon value

            C)        present value of an annuity

            D)        present value of a lump sum

 

Explanation: This is also known as the face value or stated value.

 

3                     

If a bond's value rises above its par value during its life, interest rates have:

 

            A)        gone up

            B)        gone down

            C)        stayed the same

            D)        there is no correlation with interest rates

 

Explanation: There is an inverse relationship between bond prices and interest rates (or yields).

 

4                     

The basic "rent" that you are charged when you borrow money is called:

 

            A)        inflation premium

            B)        risk premium

            C)        real rate of return

            D)        none of the above

 

Explanation: This is known as the opportunity cost in economics.

 

5                     

As time to maturity draws near, a bond's value approaches:

 

            A)        zero

            B)        par

            C)        the coupon payment

            D)        none of the above

 

Explanation: The bond price gets closer to its face value the closer it is to maturity (see figure 10-2 in this chapter).

 

6                     

One characteristic of preferred stock is that:

 

            A)        it has no maturity date

            B)        it is a hybrid security with characteristics of both common stock and debt

            C)        it pays a fixed dividend payment

            D)        all of the above

 

Explanation: Preferred stock is described by all of the above characteristics.

 

7

Common stock that has no growth in dividends is valued as if it were:

 

            A)        preferred stock

            B)        a bond

            C)        an option

            D)        none of the above

 

Explanation: It is treated the same as preferred stock.

 

8                     

A high price/earnings ratio usually indicates that a firm is a:

 

            A)        value stock

            B)        growth stock

            C)        convertible security

            D)        constant security

 

Explanation: A high p/e ratio indicates a stock that is growing and has positive future expectations.

 

9         

A low price/earnings ratio usually means that a firm:

 

            A)        is a growth stock

            B)        has positive expectations for the future

            C)        is a mature firm

            D)        is doomed in the marketplace.

 

Explanation: This is the opposite of a growth stock.

 

10                   

The premium to compensate an investor for the eroding effect of rising prices is called the:

 

            A)        risk premium

            B)        inflation premium

            C)        real rate of return

            D)        none of the above

 

Explanation: This is compensation for inflation or the loss of purchasing power

 

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