FINANCIAL MANAGEMENT
MIDTERM EXAMINATION
1. An agent has a fiduciary responsibility to the principals:
A. For ethical obligations only
B. For legal obligations only
C. Always
D. Never
Ans: C
2. Which statement is correct about limited partners?
A. They have management control limited to their percent of investment
B. They have no tax liability
C. They can lose only one half of their initial investment
D. There is no limit to the number of partners that may participate
Ans: D
3. Both financial managers and accountants:
A. Use financial statements
B. Work in the area of applied economics
C. Interpret financial statements for internal use only
D. Examine statements only for the firm they work for
Ans: A
4. Statement 1: Agency theory analyzes conflicts of interest and behavior in a principal-agent
relationship.
Statement 2: A principal-agent relationship is a relationship in which one person, an agent,
makes decisions that affect another person, a principal.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: C
5. Statement 1: The investment-vehicle model of the firm implies that managers should maximize
shareholder wealth.
Statement 2: The field of financial management is not influenced by major societal and
economic needs of the time.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: A
6. Statement 1: Equity contains a legal obligation to repay borrowed money.
Statement 2: Company pricing decisions would impose constraints on the firm.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: D
7. Statement 1: In a large corporation, the controller reports to the treasurer.
Statement 2: The purchase of a corporate jet is an example of an agency problem.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: B
8. Statement 1: Financial managers of today have fewer responsibilities than their counterparts
of the early 20th century.
Statement 2: Sustainability is usually in conflict with the idea of Corporate Social Responsibility
(CSR).
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: D
9. Statement 1: Debt ratios analyze debt levels and dividend payout policies.
Statement 2: Liquidity ratios measure the ability of a firm to meet its short-term obligations.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: B
10. Statement 1: Profitability ratios measure a firm’s overall health.
Statement 2: An increasing debt ratio is necessarily indicative of declining firm health.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: A
11. Return on equity represents a measurement of the firm’s:
A. Liquidity
B. Asset utilization
C. Debt level
D. Profitability
Ans: D
12. Analyzing a firm’s ratios relative to industry averages is called
A. Cross-sectional analysis
B. Benchmarking
C. Industry comparison
D. All of the above
Ans: D
13. The Modified DuPont equation is most accurately described as a function of:
A. Profitability and debt
B. Return on asset and debt load
C. Return on equity
D. Asset utilisation
Ans: B
14. Given the following information for TY ALLDY Corporation:
Earnings per share (EPS) = P12.50
Book value per share = P35
Shares outstanding = 100,000
Market price per share = P150
Calculate the P/E ratio:
Ans: 12
15. Given the same information for TY ALLDY Corporation (item#14), Calculate the Market to
Book ratio:
Ans: 4.29
16. The interest expense for a company is equal to its earnings before interest and taxes (EBIT).
The company's tax rate is 30%. The company's times-interest earned ratio is equal to
Ans: 1
17. SGPFOO had net accounts receivable of P16, 800 and P14, 700 at the beginning and end of
the year, respectively. The company’s net income for the year was P20, 400 on P170, 000 in
total sales. Cash sales were 6% of total sales. SGPFOO’s average accounts receivable
turnover ratio for the year is
Ans: 10.15
18. PCNT Company reported net income of P350, 000 for last year. The company had 100,000
shares of P10 par value common stock outstanding and 5,000 shares of common stock in
treasury during the year. PCNT declared and paid P1 per share dividends on common stock.
The market price per common share at the end of last year was P30. The company’s dividend
yield for the year was
Ans: 3.33%
19. If a company has a current ratio of 2.3 and pays off a portion of its accounts payable with
cash, the current ratio will
A. Decrease
B. Increase
C. Remain unchanged
D. Move closer to quick ratio
Ans: B
20. JMC has the following data:
Assets = P100, 000
Profit margin = 6.0%
Tax rate = 40%
Debt ratio = 40.0%
Interest rate = 8.0%
Total assets turnover = 3.0
What is JMC’s EBIT?
Ans: 33,200
21. You observe that a firm’s profit margin is below the industry average, while its return on equity
and debt ratio exceed the industry average. What can you conclude?
A. Total asset turnover must be above the industry average
B. Return on asset must be above the industry average
C. Total asset turnover must be below the industry average
D. Both A and B are correct
Ans: A
22. A firm that has an equity multiplier of 4.0 will have a debt ratio of
Ans: 0.75
23. Makati Corporation has decided to include certain financial ratios in its year-end annual report
to shareholders. Selected information relating to its most recent fiscal year is provided below.
• Cash = 10,000
• Accounts receivable (end of year) = 20,000
• Accounts receivable (beginning of year) = 24,000
• Inventory (end of year) = 30,000
• Inventory (beginning of year) = 26,000
• Notes payable (due in 90 days) = 25,000
• Bonds payable (due in 10 years) = 35,000
• Net credit sales for year = 220,000
• Cost of goods sold = 140,000
Makati’s average inventory turnover for the year was:
Ans: 5 times
24. COOKUSDT Company purchased 10,000 shares of its common stock at the beginning of the
year for cash. This transaction will affect all of the following except the
A. Debt-to-equity ratio
B. Earnings per share
C. Net profit margin
D. Current ratio
Ans: C
25. LeBron Retail Inc. has total assets of P7, 500,000 and a current ratio of 2.3 times before
purchasing P750, 000 of merchandise on credit for resale. After this purchase, the current
ratio will
A. Be exactly 2.3 times since equal amounts were added to both the numerator and
denominator
B. Be higher than 2.3 times
C. Be lower than 2.3 times
D. None of the above
Ans: C
26. Statement 1: Sales forecasts are an input to financial planning.
Statement 2: Demand forecasts drive decisions in many areas.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: C
27. Statement 1: Most forecasting techniques assume that there is some underlying stability in
the system.
Statement 2: In the consumer market survey approach to forecasting, groups of 5 to 10
experts make the actual forecast.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: A
28. Statement 1: Decreasing the value of alpha in exponential smoothing makes the forecast
more accurate.
Statement 2: An advantage of exponential smoothing is its lack of record keeping involved.
A. Statement 1 is true, Statement 2 is false
B. Statement 1 is false, Statement 2 is true
C. Both statements are true
D. Both statements are false
Ans: B
29. Sales forecasts are usually influenced by all but which of the following?
A. Projected purchases of new equipment
B. Changing economic conditions
C. Current company capacity levels
D. Last year’s cash position
Ans: D
30. A forecast based on the previous forecast plus a percentage of the forecast error is a(n)
A. Exponentially smoothed forecast
B. Qualitative forecast
C. Naïve forecast
D. Moving average forecast
Ans: A
31. Which of the following values of alpha would cause exponential smoothing to respond the
fastest to forecast errors?
A. 0.10
B. 0.20
C. 0.40
D. Cannot be determined
Ans: C
32. Given an actual demand of 61, a previous forecast of 58, an a α of 0.3, what would the forecast
for the next period be using simple exponential smoothing?
Ans: 58.9
33. Which of the following smoothing constants would make an exponential smoothing forecast
equivalent to a naive forecast?
A. 0
B. 0.5
C. 1 divided by the number of periods
D. 1.0
Ans: D
34. Which of the following statements about time series forecasting is true?
A. It is based on the assumption that future demand will be the same as past demand
B. It makes extensive use of the data collected in the qualitative approach
C. The analysis of the past demand helps predict future demand
D. Because it accounts for trend, cycles, and seasonal patterns, it is more powerful than
causal forecasting
Ans: C
35. December = 117
January = 108
February = 120
March = 126
April = 144
May = 138
What is the approximate forecast for June using a four-month moving average?
Ans: 132
36. Calculate the production budget from the following data:
Sales 109,350 units;
Opening inventory 43,864 units;
Closing inventory 33,156 units
Ans: 98, 642 units
37. KEEPR Co. recently reported sales of P3, 000,000 and net income equal to P150, 000. The
company has P2, 100,000 in total assets. Over the next year, the company is forecasting a 20
percent increase in sales. Since the company is at full capacity, its assets must increase in
proportion to sales. The company also estimates that if sales increase by 20 percent,
spontaneous liabilities will increase by P60, 000. If the company’s sales increase, its profit
margin will remain at its current level. The company’s dividend payout ratio is 40 percent.
Based on the AFN formula, how much additional capital must the company raise in order to
support the 20 percent increase in sales?
Ans: 252, 000
38. DAVIN Company has P750, 000 in sales and P240, 000 in fixed assets. Currently, the
company’s fixed assets are operating at 75 percent of capacity. What level of sales could
DAVIN Company have obtained if it had been operating at full capacity?
Ans: 1,000,000
39. From the previous problem (item #38), what is DAVIN’s target fixed assets/sales ratio?
Ans: 24%
40. From the same problem(item #38); If DAVIN’s sales increase by 50 percent, how large of an
increase in fixed assets would the company need in order to meet its target fixed assets/sales
ratio?
Ans: 30,000
41. Sales will grow from P1, 000,000 this year to P1, 500,000 next year. Preferred dividends were
P10, 000 this year. What is the new projected amount of preferred dividends?
Ans: 10,000
42. The balancing problem in forecasting refers to which of the following?
A. How many dividends the company should pay out
B. Where the firm should borrow new funds
C. Where new interest payments should be placed
D. The cost of new debt and its impact on forecasting retained earnings
Ans: D
43. All but which of the following items on the income statement and balance sheet tend to vary
spontaneously with sales?
A. Cost of goods sold
B. Accumulated depreciation
C. Selling expenses
D. Taxes
Ans: B
44. Your debt ratio is currently at 15%. All else equal, which of the following would probably be
the best way to fund additional funds needed?
A. Reduce cash holdings to zero
B. Buy back common stock shares
C. Increase long-term debt
D. Increase marketable securities
Ans: C
45. All else equal, which of the following is likely to increase a company’s additional funds needed
(AFN)?
A. An increase in dividend payout ratio
B. The company has a lot of excessive capacity
C. Accounts payable increase faster than sales
D. All of the statements above are correct
Ans: A
46. QUALITATIVE forecasts incorporate such factors as the decision maker's intuition, emotions,
personal experiences, and value system.
47. The types of budgets (Operating, Financial and Capital Investment Budgets) are also the
major composition of the MASTER BUDGET.
48. FINANCIAL PLANNING formulates the way in which financial goals are to be achieved.
49. VERTICAL ANALYSIS is a percentage analysis used to show the relationship of each
component to the base total within a single statement.
50. The concept of SUSTAINABILITY has evolved to such an extent that it is now viewed by
many businesses to mean meeting the needs of the present without compromising the ability
of future generations to meet their own needs.