Financial Management
1. The mixture of debt and equity used by a firm to finance its operations is called:
(a) working capital management.
(b) financial depreciation.
(c) cost analysis.
(d) capital budgeting..
(e) capital structure.
2. The management of a firm's short-term assets and liabilities is called:
(a) working capital management.
(b) debt management.
(c) equity management.
(d) capital budgeting.
(e) capital structure.
3. The primary goal of financial management is to:
(a) maximize current dividends per share of the existing stock.
(b) maximize the current value per share of the existing stock.
(c) avoid financial distress.
(d) minimize operational costs and maximize firm efficiency.
(e) maintain steady growth in both sales and net earnings.
4. Which one of the following is a capital budgeting decision?
(a) determining how much debt should be borrowed from a particular lender
(b) deciding whether or not to open a new store,
(c) deciding when to repay a long-term debt
(d) determining how much inventory to keep on hand
(e) determining how much money should be kept in the checking account
5. The time value of money concept can be defined as:
(a) the relationship between the supply and demand of money.
(b) the relationship between money spent versus money received.
(c) the relationship between a dollar to be received in the future and a dollar today.
(d) the relationship between interest rate stated and amount paid.
(e) None of the above.
6. Find the present value of $5,325 to be received in one period if the rate is 6.5%.
(a) $5,000.00
(b) $5,023.58
(c) $5,644.50
(d) $5,671.13
(e) None of the above.
7. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?
(a) Simple interest by $50.00
(b) Compound interest by $22.97
(c) Compound interest by $150.75
(d) Compound interest by $150.00
(e) None of the above.
8. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual
payments of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to
you today?
(a) $180.238.31
(b) $201,867.47
(c) $210,618.19
(d) $223,162.58
(e) $224,267.10
9. All else constant, the net present value of a typical investment project increases when:
(a) the discount rate increases,
(b) each cash inflow is delayed by one year.
(c) the initial cost of a project increases,
(d) the rate of return decreases.
(e) all cash inflows occur during the last year of a project's life instead of periodically throughout
the life of the project.
10. The primary reason that company projects with positive net present values are considered
acceptable is that:
(a) they create value for the owners of the firm,
(b) the project's rate of return exceeds the rate of inflation.
(c) they return the initial cash outlay within three years or less.
(d) the required cash inflows exceed the actual cash inflows.
(e) the investment's cost exceeds the present value of the cash inflows.
11. If a project has a net present value equal to zero, then:
I. the present value of the cash inflows exceeds the initial cost of the project.
II. the project produces a rate of return that just equals the rate required to accept the project.
III the project is expected to produce only the minimally required cash inflows.
IV. any delay in receiving the projected cash inflows will cause the project to have a negative net
present value.
(a) II and III only
(b) II and IV only x
(c) I, II, and IV only x
(d) XII, III, and IV only
(e) 1, II, and III only X
12. The internal rate of return (IRR):
I. rule states that a typical investment project with an IRR that is less than the required rate
should be accepted.
II. is the rate generated solely by the cash flows of an investment payback.
III. is the rate that causes the net present value of a project to exactly equal zero.
IV. can effectively be used to analyze all investment scenarios, x
(a) I and IV only
(b) II and III only
(c) I, II, and III only
(d) II, III, and IV only
(e) I, II, III, and IV
13. Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000.
The lot was recently appraised at $810,000. At the time of the purchase, the company spent
$50,000 to grade the lot and another $4,000 to build a small building on the lot to house a
parking lot attendant who has overseen the use of the lot for daily commuter parking. The
company now wants to build a new retail store on the site. The building cost is estimated at
$1.2 million. What amount should be used as the initial cash flow for this building project?
(a) $1,200,000
(b) $1,840,000
(c) $1,890,000
(d) $2,010,000
(e) $2,060,000
14. Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were
made to the building which cost $60,000. The annual taxes on the property are $20,000. The
warehouse has a current book value of $268,000 and a market value of $295,000. The warehouse
is totally paid for and solely owned by your firm. If the company decides to assign this
warehouse to a new project, what value, if any, should be included in the initial cash flow of
the project for this building?
(a) $0
(b) $268,000
(c) $295,000
(d) $395,000
(e) $515,000
15. Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by
$30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book
value over the 10 year life of the project. The applicable tax rate is 34%. What is the operating
cash flow for thisproject?
(a) $3,300
(b) $5,000
(c) $8,300
(d) $13,300
(e) $18,300
16. A project will produce operating cash flows of $45,000 a year for four years. During the life
of the project, inventory will be lowered by $30,000 and accounts receivable will increase by
$15,000. Accounts payable will decrease by $10,000. The project requires the purchase of
equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a
zero book value over the life of the project. The equipment will be salvaged at the end of the
project creating a $25,000. after-tax cash flow At the end of the project, net working capital will
return to its normal level. What is the net present value of this project given a required return
of 14%?
(a) $3,483.48
(b). $16,117.05
(c) $27,958.66
(d) $32,037.86
(e) $49,876.02
17. Sensitivity analysis is conducted by:
(a) holding all variables at their base level and changing the required rate of return assigned
to a project.
(b) changing the value of two variables to determine their interdependency.
(c) changing the value of a single variable and computing the resulting change in the current
value of a project.
(d) assigning either the best or the worst possible value to every variable and comparing the
results to those achieved by the base case
(e) managers after a project has been implemented to determine how each variable relates
to the level of output realized.
18. The timing option that gives the option to wait:
I. may be of minimal value if the project relates to a rapidly changing technology
II is partially dependent upon the discount rate applied to the project being evaluated
III is defined as the situation where operations are shut down for a period of time.
IV has a value equal to the net present value of the project if it is started today versus the net
present value if it is started at some later date.
(a) I and III only
(b) II and IV only
(c), I and II only
(d) II, III, and IV only
(e) I, II, and IV only
19. Last month you introduced a new product to the market, Consumer demand has been
overwhelming and it appears that strong demand will exist over the long-term, Given this
situation, management should consider the option to:
(a) suspend.
(b) expand.
(c) abandon.
(d) contract.
(e) withdraw.
20. You are considering a project which has been assigned a discount rate of 8%. If you start
the project today, you will incur an initial cost of $480 and will receive cash inflows of $350 a
year for three years. If you wait one year to start the project, the initial cost will rise to $520
and the cash flows will increase to $385 a year for three years. What is the value of the option
to wait?
(a) $15.23
(b) $17.08
(c) $18.67
(d) $20.20
(e) $50.20