1. Which of the following statements best represents what finance is about?
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing risk
2. Consider the timing of the profits of the following certain investment projects:
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
a. Project S is preferred to Project L.
b. Project L is preferred to Project S.
c. Projects S and L are equally desirable.
d. A goal of profit maximization would favor Project S only.
3. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
a. Unlimited liability of shareholders
b. Access to the capital markets
c. Limited life
d. Elimination of double taxation on corporate income
e. All of the above
4. How could you compensate an investor for taking on a significant amount of risk?
a. Increase the expected rate of return.
b. Raise more debt capital.
c. Offer stock at a higher price.
d. Increase sales.
5. If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?
a. $1,000 in five years because they are not good at saving money.
b. $1,000 today because it will be worth more than $1,000 received in five years.
c. $1,000 in five years because it will be worth more than $1,000 received today.
d. Investors would be indifferent to when they would receive the $1,000.
e. None of the above.
6. Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm’s strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
d. Some of a firm’s weaknesses can be identified through the usage of ratios.
7. The question “Did the common stockholders receive an adequate return on their investment?” is answered through the use of:
a. liquidity ratios.
b. profitability ratios.
c. coverage ratios.
d. leverage ratios.
8. Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio.
9. The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of:
b. work in process inventory.
c. marketable securities.
10. Which of the following is not a limitation related to the usage of ratios when reviewing a firm’s performance?
a. Many firms experience seasonality in their operations.
b. Ratios cannot be used to compare firms that are in the same industry if one firm’s sales are higher than another firm’s.
c. Some firms operate in a variety of business lines, which makes it difficult to make comparisons.
d. Accounting practices differ widely among firms.
11. The _______ is the federal agency primarily responsible for regulating the securities industry.
12. __________ is a financial specialist who underwrites and distributes new securities of public corporations.
a. The Federal Reserve Board
b. A commercial banker
c. The SEC
d. An investment banker
13. What is the role of the SEC as it relates to the issuance of new securities by U.S. corporations?
a. To guaranty the sale of securities to the public
b. To ensure accurate and complete disclosure of information about the issuing firm to the public
c. To reduce the cost of issuing securities to the public
d. To provide investment advice to the purchasing public
14. All of the following are found in the cash budget except:
a. a net change in cash for the period.
c. cash disbursements.
d. new financing needed.
15. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
d. None of the above
16. Which of the following are considered to be spontaneous sources of financing (i.e., they arise naturally during the course of doing business)?
a. Notes payable and common stock
b. Accounts receivable and bonds
c. Fixed assets and inventory
d. Accounts payable and accrued expenses
17. The first step involved in predicting financing needs is:
a. projecting the firm’s sales revenues and expenses over the planning period.
b. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
c. determining the firm’s financing needs throughout the planning period.
d. none of the above.
18. At 8% compounded annually, how long will it take $750 to double?
a. 6.5 years
b. 48 months
c. 9 years
d. 12 years
19. A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, how much can your friend spend in four years on the purchase? Round off to the nearest $1.
20. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
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