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- Which of the following are true given a compromise dividend policy?
I. Firms try to avoid dividend cuts.
II. Firms prefer selling new equity as frequently as possible.
III. Firms prefer to maintain a target debt-equity ratio.
IV. Firms prefer limiting positive NPV projects to pay dividends.
A) I and III only
B) II and III only
C) I and IV only
D) I, III, and IV only
E) I, II, and III only
3- A method of distributing a firm's earnings to shareholders such that the shareholders
can select when they want to claim the income for tax purposes is a:
A) Stock split.
B) Reverse stock split.
C) Stock dividend.
D) Liquidating dividend.
E) Stock repurchases.
4- A dividend becomes a liability of the issuer on the:
A) Date of record.
B) Declaration date.
C) Reinvestment date.
D) Payment date.
E) Ex-dividend date.
5- Which of the following support a low-dividend policy?
I. A tax policy wherein the individual tax rate on dividends is greater than the tax
rate on capital gains
II. Uncertainty about the future financial stability of the issuer
III. Pension plans own the majority of the outstanding shares
IV. Corporate investors own the majority of the outstanding shares
A) I only
B) I and III only
C) II and IV only
D) II, III, and IV only
E) I, II, and IV only
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 is a source of cash?
A) A sale of merchandise to a customer on credit
B) The purchase of new equipment for cash
C) The payment of a long-term debt
D) The purchase of goods from a supplier on credit
E) A stock repurchases
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 compromise 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- The process that transfers the responsibility for collecting accounts receivables from a
firm to a bank in exchange for a percent of the accounts receivables value is referred to
as:
A) Factoring.
B) Issuing trade credit.
C) Field warehousing.
D) Trust receipting.
E) An assignment.
15- A disruption in the production schedule due to a lack of materials is called a:
A) Cash-out.
B) Shortage cost.
C) Flexible cost.
D) Maturity hedging cost.
E) Compensating cost.
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- Custom Furniture provides handcrafted furniture made from raw timber. Each piece
of furniture is custom designed with the color of the finish and the type of
hardware (handles, knobs, etc.) to be applied chosen by the customer. A piece of
furniture that has been cut and assembled and is now waiting for the finish and
hardware would be counted in the _______ inventory of Custom Furniture.
A) Raw materials
B) Derived demand
C) Finished goods
D) Work-in-progress
E) Customer hold
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- Using the EOQ model, a manager can determine _____________. This allows the
firm to place orders before inventories reach a critical level, allowing for
sufficient delivery time.
A) Carrying costs
B) Safety stocks
C) Restocking costs
D) Reorder points
E) Theft losses
24- Upon graduation with your finance degree, you take a position with a medium-sized
manufacturing firm. 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- 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
28- 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.