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FIN 331 Multiple Choice

Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of:
A. capital structure management.
B. asset allocation.
C. risk management.
D. capital budgeting.
E. working capital management
D
Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm’s:
A. capital structure.
B. capital budget.
C. asset allocation.
D. working capital.
E. risk structure.
A
3. Lester’s BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm’s:
A. capital structure.
B. cash equivalents.
C. working capital.
D. net assets.
E. fixed accounts.
C
Margie opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Margie own if she is personally liable for all the store’s debts?
A. Sole proprietorship
B. Limited partnership
C. Corporation
D. Joint stock company
E. General partnership
A
Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm’s debts?
A. Limited partnership
B. Corporation
C. Sole proprietorship
D. General partnership
E. Public company
B
The potential conflict of interest between a firm’s owners and its managers is referred to as which type of conflict?
A. Organizational
B. Structural
C. Formation
D. Agency
E. Territorial
D
The federal government has a tax claim on the cash flows of The Window Store. This claim is defined as a claim by one of the firm’s:
A. residual owners.
B. shareholders.
C. financiers.
D. provisional partners.
E. Stakeholders.
E
8. Which one of the following occupations best fits into the international area of finance?
A. Bank teller
B. Treasury bill analyst
C. Currency trader
D. Insurance risk manager
E. Local bank manager
C
9. Which of the following individuals commonly use finance in the course of their job? I. Chief financial officers II. Accountants III. Security analysts IV. Strategic managers
A. I and II only
B. III and IV only
C. I and III only
D. I, II, and III only
E. I, II, III, and IV
E
10. Which one of the following is a working capital decision?
A. How should the firm raise additional capital to fund its expansion?
B. What debt-equity ratio is best suited to the firm?
C. What is the cost of debt financing?
D. Which type of debt is best suited to finance the inventory?
E. How much cash should the firm keep in reserve?
E
11. Which one of the following is a capital structure decision?
A. Determining the optimal inventory level
B. Establishing the preferred debt-equity level
C. Selecting new equipment to purchase
D. Setting the terms of sale for credit sales
E. Determining when suppliers should be paid
B
12. Working capital management includes which one of the following?
A. Deciding which new projects to accept
B. Deciding whether to purchase a new machine or fix a current machine
C. Determining which customers will be granted credit D. Determining how many new shares of stock should be issued
E. Establishing the target debt-equity ratio
C
3. The daily financial operations of a firm are primarily controlled by managing the:
A. total debt level.
B. working capital.
C. capital structure.
D. capital budget.
E. long-term liabilities.
B
14. A sole proprietorship:
A. provides limited liability for its owner.
B. involves significant legal costs during the formation process.
C. has an unlimited life.
D. has its profits taxed as personal income.
E. can generally raise significant capital from nonowner sources.
D
15. Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?
A. Sole proprietorship
B. General partnership
C. Limited partnership
D. Limited liability company
E. Corporation
D
16. The primary goal of financial management is to maximize which one of the following for a corporation?
A. Current profits
B. Market share
C. Number of shares outstanding
D. Market value of existing stock
E. Revenue growth
D
17. Which one of the following best matches the primary goal of financial management?
A. Increasing the dollar amount of each sale
B. Increasing traffic flow within the firm’s stores
C. Transforming fixed costs into variable costs
D. Increasing the firm’s liquidity
E. Increasing the market value of the firm the firm
E
18. The goal of financial management is to increase the:
A. future value of the firm’s total equity.
B. book value of equity.
C. dividends paid per share.
D. current market value per share.
E. number of shares outstanding.
D
19. What is the goal of financial management for a sole proprietorship?
A. Maximize net income given the current resources of the firm
B. Decrease long-term debt to reduce the risk to the owner
C. Minimize the tax impact on the proprietor
D. Maximize the market value of the equity
E. Minimize the reliance on fixed costs
D
20. Which one of the following situations is most apt to create an agency conflict?
A. Compensating a manager based on his or her division’s net income
B. Giving all employees a bonus if a certain level of efficiency is maintained
C. Hiring an independent consultant to study the operating efficiency of the firm
D. Rejecting a profitable project to protect employee jobs E. Selling an under producing segment of the firm
D
Which one of the following is most apt to create a situation where an agency conflict could arise?
A. Increasing the size of a firm’s operations
B. Downsizing a firm
C. Separating management from ownership
D. Decreasing employee turnover
E. Reducing both management and nonmanagement salaries
C
22. Which one of the following is most apt to align management’s priorities with shareholders’ interests?
A. Increasing employee retirement benefits
B. Compensating managers with shares of stock that must be held for three years before the shares can be sold C. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of three years or more
D. Increasing the number of paid holidays that long-term employees are entitled to receive
E. Allowing employees to retire early with full retirement benefits
B
23. Marti had an unexpected surprise when she ate her Lotsa Good cereal this morning. She found a piece of metal mixed in her cereal. The potential claim that Marti has against this firm is that of a(n):
A. general creditor.
B. debtholder.
C. shareholder.
D. stakeholder.
E. agent.
D
24. Which one of the following transactions occurred in the primary market?
A. Maria gave 100 shares of Alto stock to her best friend. B. Gene purchased 300 shares of Alto stock from Ted.
C. South Wind Products sold 1,000 shares of newly issued stock to Mike.
D. Terry sold 3,000 shares of Uno stock to his brother. E. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.
C
Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie’s purchase occurred in which market?
A. Dealer market
B. Over-the-counter market
C. Secondary market
D. Primary market
E. Tertiary market
C
Net working capital is defined as:
A. the depreciated book value of a firm’s fixed assets.
B. the value of a firm’s current assets.
C. available cash minus current liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
E
The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:
A. statement of cash flows.
B. income statement.
C. GAAP statement.
D. Balance sheet.
E. net working capital schedule.
B
The financial statement that summarizes a firm’s accounting value as of a particular date is called the:
A. income statement.
B. cash flow statement.
C. liquidity position.
D. balance sheet.
E. periodic operating statement
D
Which one of the following terms is defined as the total tax paid divided by the total taxable income?
A. Average tax rate
B. Variable tax rate
C. Marginal tax rate
D. Absolute tax rate
E. Contingent tax rate
A
Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?
A. Average tax rate
B. Variable tax rate
C. Marginal tax rate
D. Absolute tax rate
E. Contingent tax rate
C
Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C. operating cash flow minus the change in net working capital minus net capital spending.
D. operating cash flow plus net capital spending plus the change in net working capital.
E. cash flow to shareholders minus net capital spending plus the change in net working capital.
C
Operating cash flow is defined as:
A. a firm’s net profit over a specified period of time.
B. the cash that a firm generates from its normal business activities.
C. a firm’s operating margin.
D. the change in the net working capital over a stated period of time.
E. the cash that is generated and added to retained earnings.
B
Which one of the following has nearly the same meaning as free cash flow?
A. Net income
B. Cash flow from assets
C. Operating cash flow
D. Cash flow to shareholders
E. Addition to retained earnings
B
Cash flow to creditors is defined as:
A. interest paid minus net new borrowing.
B. interest paid plus net new borrowing.
C. the operating cash flow minus net capital spending minus change in net working capital.
D. dividends paid plus net new borrowing.
E. cash flow from assets plus net new equity.
A
Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to creditors.
B. operating cash flow minus cash flow to creditors.
C. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
E. net income minus the addition to retained earnings.
D
Which one of the following is an intangible fixed asset?
A. Inventory
B. Machinery
C. Copyright
D. Account receivable
E. Building
C
Which one of the following is included in net working capital?
A. Land
B. Accounts payable
C. Equipment
D. Depreciation
E. Dividend
B
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm’s net working capital:
A. had to increase.
B. had to decrease.
C. could have remained constant if the amount of the decrease in current assets equaled the amount of the increase in current liabilities.
D. could have either increased, decreased, or remained constant.
E. was unaffected as the changes occurred in the firm’s current accounts.
B
Common-size financial statements present all balance sheet account values as a percentage of:
A. the forecasted budget.
B. sales.
C. total equity.
D. total assets.
E. last year’s account value.
D
Which one of the following is the maximum growth rate that a firm can achieve without any additional external financing?
A. DuPont rate
B. External growth rate
C. Sustainable growth rate
D. Internal growth rate
E. Cash flow rate
D
The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?
A. No new external financing of any kind
B. No new debt but additional external equity equal to the increase in retained earnings
C. New debt and external equity in equal proportions
D. New debt and external equity, provided the debt-equity ratio remains constant
E. No new equity and a constant debt-equity ratio
E
Builder’s Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm’s sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?
A. Income statement
B. Balance sheet
C. Common-size income statement
D. Common-size balance sheet
E. Statement of cash flows
C
A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:
A. pays cash for its inventory.
B. has more than half its current assets invested in inventory.
C. has more cash than inventory.
D. has more current liabilities than it does current assets. E. has positive net working capital.
E
Fred is the owner of a local feed store. Which one of the following ratios should he compute if he wants to know how long the store can pay its bills given the amount of cash the store currently has?
A. Current ratio
B. Debt ratio
C. Cash coverage ratio
D. Quick ratio
E. Cash ratio
E
Which one of the following is a measure of long-term solvency?
A. Price-earnings ratio
B. Profit margin
C. Equity multiplier
D. Receivables turnover
E. Quick ratio
C
The cash coverage ratio is used to evaluate the:
A. liquidity of a firm.
B. speed at which a firm generates cash.
C. length of time that a firm can pay its bills if no additional cash becomes available.
D. ability of a firm to pay the interest on its debt.
E. relationship between the firm’s cash balance and its current liabilities.
D
Kelso’s Pharmacy generates $2 in sales for every $1 the firm has invested in total assets. Which one of the following ratios would reflect this relationship?
A. Receivables turnover
B. Equity multiplier
C. Profit margin
D. Return on assets
E. Total asset turnover
E
You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?
A. Times interest earned = 1.7; debt-equity ratio = 1.6
B. Times interest earned = 1.5; debt-equity ratio = 1.2
C. Cash coverage ratio = 0.8; debt-equity ratio = 0.8
D. Cash coverage ratio = 2.6; debt-equity ratio = 0.3
E. Cash coverage ratio = 0.5; total debt ratio = 0.2
D
The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm’s assets. IV. rate of return on a firm’s assets.
A. II and III only
B. I and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
E

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