Sample Questions 2
1- A cash payment made by a firm to its owners when some of the firm's assets are sold
off is called a:
A) Liquidating dividend.
B) Regular cash dividend.
C) Special dividend.
D) Extra cash dividend.
2- The date on which the board of directors passes a resolution authorizing payment of a
dividend to the shareholders is the ____________ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
3- Rank the following goals in increasing order of importance in a compromise dividend
policy.
I. Avoid dividend cuts
II. Maintain a target debt/equity ratio
III. Avoid the need to sell equity
IV. Avoid cutting back on positive NPV projects
A) IV, II, I, III
B) II, III, IV, I
C) IV, I, II, III
D) I, II, IV, III
E) IV, I, III, II
4- For the past four years Doodle Dee has paid quarterly dividends of $.25 a share. The
company just announced that dividends are being increased by 8%. As a result,
the market price of Doodle Dee stock increased. The increase in the share price is
generally attributed to the:
A) Increase in the current dividend amount.
B) Change in the dividend policy.
C) Information content of the dividend.
D) Residual effect of the dividend.
E) Reinvestment of the dividend amount.
5- Which of the following are arguments for a high dividend payout?
I. A current dividend is worth more than a future dividend.
II. Some clientele groups prefer current income.
III. Flotation costs exist in the real world.
IV. Uncertainty surrounds the future.
A) I and II only
B) II and IV only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV
6- Flotation costs:
A) Are an argument for a high dividend policy.
B) Increase the effectiveness of homemade dividends.
C) Cause the value of stock to decline when new shares are issued.
D) Tend to increase the growth rate of a firm.
E) Decrease the costs associated with homemade dividends.
7- Suppose BREX Corp. believes its recent stock price increase has made the price of the
stock too expensive for the average investor. To remedy this situation, BREX
could ________________.
A) pay a liquidating dividend
B) complete a reverse stock split
C) pay a regular cash dividend
D) execute a stock repurchase
E) complete a stock split
8- If a firm has excess cash and management believes the firm's shares are currently
undervalued by market participants, the firm is a likely candidate for a
_________.
A) liquidating dividend
B) stock dividend
C) regular cash dividend
D) stock repurchase
E) stock split
9- Which of the following is NOT a goal of a compromise dividend policy?
A) Avoid the need to sell new equity.
B) Maintain a target dividend payout ratio.
C) Allow for reductions in the dividend payment when convenient.
D) Avoid rejection of positive NPV projects to pay a dividend.
E) Maintain a target debt/equity ratio.
10- A firm unexpectedly decreases its dividend payout and its stock price falls. The
information content effect at least partially explains the fall in stock price since
A) an unexpected decrease in dividends means management is signaling that
the firm has no positive NPV projects in which to invest
B) investors will always react unfavourably to changes in dividends
C) investors react to the change as new information regarding expected future
dividends
D) this unexpected decrease may likely be viewed as an attempt by
management to manipulate the stock price
E) unexpected changes in dividends will not affect stock prices if the firm has a
written dividend policy
11- Which one of the following will decrease the operating cycle?
A) An easing of the accounts receivable collection policy
B) Additional inventories are kept on hand
C) The customer discount for early payment is discontinued
D) Suppliers offer a bonus discount for early payment
E) The inventory turnover changes from 9 to 10
12- Shortage costs are those costs that:
A) Increase as the level of investment in current assets rises.
B) Increase as a firm moves from a restrictive to a flexible short-term financing
policy.
C) Result from having insufficient cash or inventory on hand to meet the
demands of the firm.
D) Decrease as the level of inventory declines and inventory orders are placed
more frequently.
E) Decrease as the opportunity cost of lost sales rises.
13- Delta, Inc. follows a flexible short-term financing policy. The firm produces
educational toys, which is a cyclical business. When the firm needs to pay for
large inventories in advance of peak sales, the firm will:
A) Sell marketable securities.
B) Negotiate a compensating balance loan.
C) Arrange for a field warehouse loan.
D) Issue a trust receipt to the bank in exchange for funding.
E) Issue commercial paper with a maturity of 270 days or less.
14- Kae owns a wholesale nursery that sells potted plants to large retail outlets. These
sales are seasonal in nature. Kae cannot afford to wait for payment from the
retailers as they often take 60 days or more to pay. Kae has only been in business
for three years. Due to the nature of her business, Kae's bank is not willing to
accept responsibility for collecting the receivables. The type of financing that is
most appropriate for Kae's situation is:
A) Commercial paper.
B) An assignment of receivables.
C) Accounts receivable factoring.
D) Floor plan financing.
E) A bank loan secured with a blanket lien.
15- Which of the following are sources of cash?
I. Increase in inventory
II. Decrease in accounts payable
III. Decrease in accounts receivable
IV. Increase in fixed assets
A) II only
B) III only
C) I and IV only
D) I, II, and IV only
E) III and IV only
16- Suppose that the inventory period is 50 days, the accounts payable period is 35 days,
and the cash cycle is 55 days. What is the operating cycle?
A) 35 days
B) 40 days
C) 85 days
D) 90 days
E) 105 days
17- The forecast of cash receipts and disbursements for the next planning period is called
a:
A) Pro forma income statement.
B) Statement of cash flows.
C) Cash budget.
D) Receivables analysis.
E) Credit analysis.
18- A ____________, issued by a bank, promises to make a loan if certain conditions are
met.
A) compensating balance
B) cleanup loan
C) letter of credit
D) line of credit
E) revolver
19- A company procedure whereby the firm maintains a relatively high ratio of current
assets to sales is called a _____ policy.
A) Cash-out
B) Restrictive
C) Low inventory
D) Flexible
E) Stock-out
20- Costs of the firm that fall with increased levels of investment in its current assets are
called:
A) Carrying costs.
B) Shortage costs.
C) Debt costs.
D) Equity costs.
E) Payables costs
21- The optimal amount of credit to be granted can be located graphically at the point
where the:
A) Opportunity costs of credit are minimized.
B) Sum of the opportunity cost and the carrying cost is minimized.
C) Difference between the opportunity cost and the carrying costs of credit are
maximized.
D) Sum of the opportunity cost and the carrying costs is maximized.
E) Carrying costs of credit are equal to zero.
22- Mark's Tire is applying to the Goodday Tire Company for credit. Goodday has
requested that Mark's provide a copy of their latest income statement as well as a
pro-forma cash flow statement before they will review Mark's credit application.
Goodday wants to check Mark's:
A) Character.
B) Conditions.
C) Collateral.
D) Capacity.
E) Capital.
23- A firm currently has a cash only credit policy. The firm is considering adopting a
credit policy which will extend credit to customers for 45 days and grant the
credit customers who pay in 15 days or less a discount. Which of the following
variables used in the analysis of this proposal are outside of the control of the
firm?
I. Discount percent
II. Default rate
III.
Increase in sales
IV. Credit period
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, III, and IV
24- Upon graduation with your finance degree, you take a position with a medium-sized
manufacturing concern. You find that there are several pieces of inventory
required in the manufacturing process that make up a small percentage of physical
inventory, but a large percentage of inventory value. Anxious to impress your
boss, you suggest the firm use the ______________ of inventory management.
A) EOQ model
B) derived demand model
C) shortage cost model
D) inventory depletion model
E) ABC model
25- SunSign Foods, a retail grocery store, is determining how much inventory to keep on
hand. Which of the following types of inventory does it probably need to
consider?
I. Raw materials
II. Work-in-progress
III. Finished goods
A) II only
B) III only
C) I and II only
D) I and III only
E) I, II, and III
26- A firm has inadequate ____________ if it does not have sufficient assets to pledge in
the case of default. As a result it will likely be rejected for credit.
A) capacity
B) character
C) capital
D) collateral
E) economic conditions
27- Of the following, a firm _______________ will likely have the most liberal credit
policy.
A) that has a core group of customers, who purchase inventory on a frequent
basis,
B) that is presently operating its manufacturing facilities at maximum capacity
C) that is a wholesaler of fresh flowers
D) that is experiencing severe cash flow problems due to tremendous growth
E) whose operating costs are almost all variable costs
28- Which of the following is considered a carrying cost for the firm when it grants
credit?
I. The required return on receivables
II. Losses from bad debts
III. The cost of managing credit
IV. The cost of managing credit collections
A) I and III only
B) II and IV only
C) I, II, and IV only
D) II, III, and IV only
E) I, II, III, and IV
29- A ______________ factor of credit policy effects occurs when a firm that institutes
changes in its existing credit policy finds that, as a result, some of its customers
choose to pay early to take advantage of the new terms.
A) cost
B) cost of debt
C) revenue
D) probability of nonpayment
E) cash discount
30- The conditions under which a firm sells its goods and services for cash or credit are
called the:
A) Terms of sale.
B) Credit analysis.
C) Collection policy.
D) Payables policy.
E) Collection float.
31- A cash payment made by a firm to its owners in the normal course of business is
called a:
A) Share repurchase.
B) Liquidating dividend.
C) Regular cash dividend.
D) Special dividend.
E) Extra cash dividend.
32- The date before which a new purchaser of stock is entitled to receive a declared
dividend, but on or after which she does not receive the dividend, is called the
____________ date.
A) ex-rights
B) ex-dividend
C) record
D) payment
E) declaration
33- The date on which the firm mails out its declared dividends is called the
______________.
A) date of ex-rights
B) date of ex-dividend
C) date of record
D) date of payment
E) date of declaration
34- The ability of shareholders to undo the dividend policy of the firm and create an
alternative dividend payment policy via reinvesting dividends or selling shares of
stock is called (A):
A) Perfect foresight model.
B) M&M Proposition I.
C) Capital structure irrelevancy.
D) Homemade leverage.
E) Homemade dividend policy.
35- The market's reaction to the announcement of a change in the firm's dividend payout
is the:
A) Information content effect.
B) Clientele effect.
C) Efficient Markets Hypothesis.
D) M&M Proposition I.
E) M&M Proposition II.
36- The observed empirical fact that stocks attract particular investors based on the firm's
dividend policy and the resulting tax impact on investors is called the
_________________.
A) information content effect
B) clientele effect
C) Efficient Markets Hypothesis
D) M&M Proposition I
E) M&M Proposition II
37- A policy under which the firm pays dividends only after its capital investment needs
are met, and while maintaining a constant debt/equity ratio, is called a
__________________.
A) homemade dividend
B) clientele effect
C) residual dividend approach
D) bird-in-the-hand approach
E) constant dividend growth model
38- The fraction of earnings a firm expects to pay out as dividends over the long-run is
its:
A) Internal rate of return.
B) Required return on investment.
C) Target ROA.
D) Target payout ratio.
E) Target capital structure.
39- An alternative to a cash dividend payment by the firm from its earnings to the
shareholders, achieved by the firm buying some of its outstanding stock on the
open market, is a:
A) Merger.
B) Tender offer.
C) Payment-in-kind.
D) Stock split.
E) Share repurchase.
40- An increase in the firm's number of shares outstanding without any change in owners'
equity is called a ________________.
A) special dividend
B) stock split
C) share repurchase
D) tender offer
E) liquidating dividend
41- The clientele effect states that stocks:
A) Are divided into groups based on their overall level of risk.
B) Are sold to various groups depending upon their industry.
C) Conform to various risk elements based on their volatility.
D) Can be divided into groups based upon their sales to individuals versus
institutions.
E) Attract certain investor groups based on the dividend yield and the tax
effects.
42- A residual dividend is a payment to shareholders that:
A) Occurs on a regular quarterly basis and normally remains constant in
amount.
B) Is paid in addition to the normal quarterly distribution amount.
C) Is paid only from funds remaining after all positive net present value
projects have been funded.
D) Represents the funds remaining after a partial liquidation has been used to
reduce debt.
E) Occurs based on funds generated from an unusual one-time event.
43- Shares of GME, Inc. stock normally sell at a price no lower than $42 and no higher
than $55. These prices are referred to as the stock's:
A) Repurchase range.
B) Trading range.
C) Liquidation range.
D) Target payout range.
E) Clientele range.
44- Consider the following two statements:
I. Dividends are irrelevant in determining share value.
II. Dividend policy is irrelevant in determining share value.
A) Both statements are definitely false.
B) Both statements are definitely true.
C) Statement I is definitely false; statement II is definitely true.
D) Statement I is definitely false; statement II is true if investors can create
homemade dividends.
E) Statement II is definitely false; statement I is true if investors can create
homemade dividends
45- A firm can make it easier for an investor to create a homemade dividend policy if the
firm:
A) Offers an automated dividend reinvestment plan.
B) Uses the residual dividend approach.
C) Pays a regular cash dividend.
D) Completes a stock split.
E) Pursues a compromise dividend policy.
46- Costs of the firm that rise with increased levels of investment in its current assets are
called:
A) Carrying costs.
B) Shortage costs.
C) Order costs.
D) Safety costs.
E) Trading costs.
47- A prearranged, short-term bank loan made on a formal or informal basis, and
typically reviewed for renewal annually, is called a ____________________.
A) letter of credit
B) cleanup loan
C) compensating balance
D) line of credit
E) revolver
48- A short-term loan secured by the borrower's inventory, either directly or via an
intermediary, is called a(n) ____________________.
A) debenture
B) line of credit
C) banker's acceptance
D) compensating balance
E) inventory loan
49- An agreement by a bank which guarantees payment on the prompt arrival of a
shipment of goods from an overseas supplier is called a:
A) Factored inventory loan.
B) Letter of credit.
C) Blanket inventory lien.
D) Line of credit.
E) Compensating agreement.
50- Which of the following represent an increase in cash, all else the same?
I. Long-term debt is reduced
II. Inventory is acquired
III. Fixed assets are sold
IV. Receivables are factored
A) I only
B) II and III only
C) I and IV only
D) I, II, and III only
E) III and IV only
51- Which of the following is a use of cash, all else the same?
A) Increasing accounts payable.
B) Factoring accounts receivable.
C) Reduction of inventory that results from increased sales.
D) Reduction of short-term loans.
E) Cancellation of the need for a compensating balance.
52- If the initial current ratio for a firm is greater than one, which of the following
activities will decrease net working capital?
I. Sale of inventory (at book value) on credit
II. Using cash to purchase marketable securities
III. Factoring receivable at 90% of their book value
IV. Obtaining a short-term bank loan to purchase fixed assets
A) II only
B) IV only
C) I and III only
D) III and IV only
E) II, III, and IV only
53- A discount on the purchase price given to buyers as an inducement for prompt
payment is called a(n) _______________.
A) cash discount
B) purchases discount
C) original issue discount
D) open market discount
E) receivables discount
54- The credit instrument is the ___________________.
A) legal document submitted to the CCRA for every business transaction in
Canada
B) basic evidence of indebtedness in a credit transaction
C) cost of obtaining financing on consumer products
D) means of payment chosen by the purchaser in a standard EOM transaction
E) receipt for payment issued by the firm on its cash disbursements
55- The basic factors to be evaluated in the credit evaluation process, the five Cs of
credit, are:
A) Conditions, control, cessation, capital, and capacity.
B) Conditions, character, capital, control, and capacity.
C) Capital, collateral, control, character, and capacity.
D) Character, capacity, control, cessation, and collateral.
E) Character, capacity, capital, collateral, and conditions.
56- _______________ is the process of quantifying the likelihood of default when
granting consumer credit based on objective characteristics of the buyer.
A) Credit scoring
B) Credit rationalization
C) Receipts assessment
D) Payables risk analysis
E) Disbursement specialization
57- A compilation of the firm's accounts receivable ordered by the length of time each
account has remained unpaid is called a(n):
A) Credit report.
B) Aging schedule.
C) Risk assessment report.
D) Turnover delineation.
E) Cost consolidation and consistency report.
58- The restocking quantity that minimizes the firm's total inventory costs is called the:
A) Shortage cost quantity.
B) Carrying cost quantity.
C) Economic order quantity.
D) Speculation quantity.
E) Special-order quantity.
59- The minimum level of inventory a firm keeps on hand at any given time is called its:
A) Net working capital in inventory.
B) Shortage cost.
C) Economic order quantity.
D) Safety stock.
E) Reorder point.
60- _______________ is a system for managing demand-dependent inventories that
minimizes the inventory holdings of the firm at any given time.
A) Just-in-time inventory
B) Turnover inventory
C) Net working capital planning
D) Inventory scoring
E) Inventory ranking