Financial Management Set 28 MCQs

Q1 | Which of the following would be included in a cash estimation/ budget?

depreciation charges.

dividends.

goodwill.

patent amortization.

Q2 | Which of the following is NOT a cash outflow for the firm?

depreciation.

dividends.

interest payments.

taxes.

Q3 | Which of the following would be considered a application of funds?

a decrease in accounts receivable.

a decrease in cash.

an increase in account payable.

an increase in cash.

Q4 | All of the following influence capital budgeting cash flows EXCEPT:

accelerated depreciation.

salvage value.

tax rate changes.

method of project financing used.

Q5 | The estimated benefits from a project are expressed as cash flows instead of incomeflows because:

it is simpler to calculate cash flows than income flows.

it is cash, not accounting income, that is central to the firm's capital budgeting decision.

this is required by the Internal Revenue Service.

this is required by the Securities and Exchange Commission.

Q6 | A capital investment is one that

has the prospect of long-term benefits.

has the prospect of short-term benefits.

is only undertaken by large corporations.

applies only to investment in fixed assets.

Q7 | A profitability index of .85 for a project means that:

the present value of benefits is 85% greater than the project's costs.

the project's NPV is greater than zero.

the project returns 85 cents in present value for each current dollar invest

Q8 | Which of the following statements is correct?

If the NPV of a project is greater than 0, its PI will equal 0.

If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.

If the PI of a project is less than 1, its NPV should be less than 0.

If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.

Q9 | A project's profitability index is equal to the ratio of the of a project's future cashflows to the project's .

present value; initial cash outlay

net present value; initial cash outlay

present value; depreciable basis

net present value; depreciable basis

Q10 | The discount rate at which two projects have identical is referred to as Fisher's rate of intersection.

present values

net present values

IRRs

profitability indexes

Q11 | Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods give contradictory results.

will never

will always

may

will generally

Q12 | Preferred shareholders' claims on assets and income of a firm come those of creditors those of common shareholders.

before; and also before

after; but before

after; and also after

equal to; and equal to

Q13 | You are considering two mutually exclusive investment proposals, project A and project B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that

Project A dominates project B.

Project B dominates project A.

Project A is more risky and should offer greater expected value.

Each project is high on one variable, so the two are basically equal.

Q14 | To increase a given present value, the discount rate should be adjusted

upward.

downward.

No change.

constant

Q15 | In finance, "working capital" means the same thing as

total assets.

fixed assets.

current assets.

current assets minus current liabilities.

Q16 | Which of the following would be consistent with a more aggressive approach to financing working capital?

Financing short-term needs with short-term funds.

Financing permanent inventory buildup with long-term debt.

Financing seasonal needs with short-term funds.

Financing some long-term needs with short-term funds.

Q17 | Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?

Increasing current assets while lowering current liabilities.

Increasing current assets while incurring more current liabilities.

Reducing current assets, increasing current liabilities, and reducing long-term debt.

Replacing short-term debt with equity.

Q18 | Which of the following illustrates the use of a hedging (or matching) approach to financing?

Short-term assets financed with long-term liabilities.

Permanent working capital financed with long-term liabilities.

Short-term assets financed with equity.

All assets financed with 50 percent equity, 50 percent long-term debt mixture.

Q19 | In deciding the appropriate level of current assets for the firm, management is confronted with

a trade-off between profitability and risk.

a trade-off between liquidity and marketability.

a trade-off between equity and debt.

a trade-off between short-term versus long-term borrowing.

Q20 | varies inversely with profitability.

Liquidity.

Risk.

Financing.

Liabilities.

Q21 | Spontaneous financing includes

accounts receivable.

accounts payable.

short-term loans.

a line of credit.

Q22 | Permanent working capital

varies with seasonal needs.

includes fixed assets.

is the amount of current assets required to meet a firm's long-term minimum needs.

includes accounts payable

Q23 | Financing a long-lived asset with short-term financing would be

an example of "moderate risk -- moderate (potential) profitability" asset financing.

an example of "low risk -- low (potential) profitability" asset financing.

an example of "high risk -- high (potential) profitability" asset financing.

an example of the "hedging approach" to financing.

Q24 | Net working capital refers to

total assets minus fixed assets.

current assets minus current liabilities.

current assets minus inventories.

current assets.

Q25 | Marketable securities are primarily

short-term debt instruments.

short-term equity securities.

long-term debt instruments.

long-term equity securities.