1. Maximization of shareholder wealth is a concept in which:
increased dividends are of primary importance.
increased cash flows are of primary importance.
increased earnings are of primary importance.
increased share price is of primary importance.
2. Which of the following securities is not included as part of the capital market?
Common stock
Commercial paper
Correct answer
Government bonds
Preferred stock
3. Proper risk-return management means that:
consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
the firm should value future profits more highly than current profits.
the firm should earn the highest return possible.
the firm should take as few risks as possible.
4. One of the major disadvantages of a sole proprietorship is:
low operating costs.
the simplicity of decision making.
that there is unlimited liability to the owner.
low organizational costs.
5. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the:
third market.
primary market.
on-line market.
secondary market.
1. A firm has current assets of $25,000, long term assets of $100,000, long term liabilities of $50,000, and
$50,000 in shareholders' equity. What is its net working capital?
$100,000
$0
$50,000
$25,000
2. The major limitation of financial statements is:
in their lack of detail.
in their lack of comparability.
in their use of historical cost accounting.
in their complexity.
3. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
Retained earnings
Accumulated amortization
Common stock
Share price
4. A firm's purchase of plant and equipment would be considered as a:
use of cash for operating activities.
use of cash for investment activities.
use of cash for financing activities.
source of cash for investment activities.
5. Which of the following is an outflow of cash?
The sale of the company's common stock
The sale of equipment
The payment of cash dividends
Profitable operations
1. All of the following are common examples of possible distortion in reported income except
reporting of cash.
inflation.
treatment of nonrecurring items.
reporting of revenue.
2. If a company's accounts receivable turnover is increasing, the average collection period:
is going down.
could be moving in either direction.
is going up by a significant amount.
is going up slightly.
3. A decreasing average collection period could be associated with:
increasing sales.
increasing profits.
increasing accounts receivable.
decreasing sales.
4. For a given level of profitability as measured by profit margin, the firm's return on equity will:
increase as its debt-to-assets ratio decreases.
decrease as its current ratio increases.
increase as its debt-to assets ratio increases.
decrease as its times-interest-earned ratio decreases.
5. In addition to comparison with industry ratios, it is also helpful to analyze ratios using
future projections
trend analysis and historical comparisons.
only industry ratios provide valid comparisons.
historical data
1. Required production during a planning period will depend on the:
cost of beginning inventory of products.
desired level of ending inventory.
credit sales during the period.
desired level of beginning inventory.
2. The percent-of-sales method of financial forecasting:
is more detailed than a cash budget approach.
requires more time than a cash budget approach.
assumes that balance sheet accounts maintain a constant relationship to sales.
provides a month-to-month breakdown of data.
3. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending
inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's
required production?
1,100 units
-0- units
500 units
400 units
4. A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in March. All sales are on
credit. 40% is collected the month of sale and the remainder the following month. How much is collected
from accounts receivable in February?
$4,800
$5,400
$6,000
$3,000
5. Pro forma financial statements are
the most comprehensive means of financial forecasting.
All of the options are true.
often required by prospective creditors.
projections of financial statements for a future period.
1. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
Low interest cost compared to return on assets.
Upswing of business cycle.
Cyclical demand for the firm's products.
Stable industry.
2. If a firm has fixed costs of $60,000, a sales price of $7.00 per unit, and a break-even point of 25,000 units, the
variable cost per unit is ________.
$4.60
$5.40
$5.00
$4.00
3. If a firm has a break-even point of 20,000 units and the contribution margin on the firm's single product is
$3.00 per unit and fixed costs are $60,000, what will the firm's net income be at sales of 30,000 units?
$45,000
$15,000
$30,000
$90,000
4. If sales volume exceeds the break-even point, the firm will experience:
an operating profit.
an increase in plant and equipment.
an operating loss.
an increase in share price.
5. In break-even analysis the contribution margin is defined as:
sales minus variable costs.
variable costs minus fixed costs.
sales minus fixed costs.
fixed costs minus variable costs.
1. Pressure for current asset build-up often results from:
increased demands of short-term creditors.
decline in sales growth.
decreased demands of short-term creditors.
rapidly expanding sales.
2. Risk exposure due to heavy short-term borrowing can be compensated for by:
carrying more receivables to increase cash flow.
carrying illiquid assets.
carrying longer term, more profitable current assets.
carrying highly liquid assets.
3. A "normal" term structure of interest rates would depict:
no general relationship between short-and long-term rates.
medium rates (1-5 years) lower than both short-term and long-term rates.
long-term rates higher than short-term rates.
short-term rates higher than long-term rates.
4. An aggressive working capital policy would have which of the following characteristics?
A high ratio of long-term debt to capital assets
A short average collection period
A high ratio of short-term debt to long-term sources of funds
A low ratio of short-term debt to total debt
5. Ideally, which of the following types of assets should be financed with long-term financing?
Temporary and permanent current assets
Capital assets and temporary current assets
Capital assets only
Capital assets and permanent current assets
1. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is:
an overdraft.
interest revenue.
extended disbursement.
float.
2. One of the first considerations in cash management is:
to have as much cash as possible on hand.
to put any excess cash into accounts receivable.
profitability.
synchronization of cash inflows and cash outflows.
3. A firm that wishes to minimize risk when investing idle cash would be least likely to buy:
commercial paper.
long-term corporate bonds.
negotiable certificates of deposit.
Treasury bills of the Canadian government.
4. Which of the following are characteristics of money market investments?
Money market funds are insured up to $60,000 by CDIC.
Money market funds are quite risky.
The minimum balance for money market accounts is $5,000.
Short term and most commonly issued for periods of up to one year.
5. How will widespread adoption of electronic funds transfer affect the use of "float"?
It will increase its use somewhat.
It will decrease its use somewhat.
It will virtually eliminate its use.
It will have no effect on its use.