Archives: Quiz

Financial planning is the process of projecting a company’s financial statements into the future, and is separate and distinct from the broader activity of business planning. If the expected return on a stock exceeds the return required by investors, the […]

The stock market is really the entire network of investors, brokers, and exchanges all connected together. It is generally best to forecast revenue with unit and price detail. Answer: TRUE In Modigliani and Miller’s model with taxes, a firm’s value […]

Economies of scale are rarely realized in a horizontal merger. In two successive years, it is possible for a firm to have identical profit and maintain identical levels of assets, but have different return on equity. Answer: TRUE The technical […]

It can be argued that there are no economic benefits to shareholders from a conglomerate merger. If a project’s NPV is greater than zero, its IRR must be equal to the cost of capital. Answer: FALSE An amortized loan is […]

A security’s value is equal to the present value of its expected future cash flows discounted by an appropriate rate of return. A merger for diversification is unnecessary from the perspective of stockholders, because they can accomplish the same diversification […]

FVFk,nis always greater than 1, whereas PVFk,nis always less than €1. Under just-in-time (JIT) inventory systems, manufacturers shifts the task of maintaining inventory to their suppliers, who in turn shift it to their own suppliers. Answer: TRUE An annuity due […]

Convertible bonds allow the issuing company to convert outstanding bonds to shares of common stock when the company deems necessary. The present value of a stock’s projected future cash flows is what the share is worth today. Answer: TRUE All […]

Only project cash flows that are incremental to the rest of the business are relevant for capital budgeting purposes. Transaction costs tend to make tailoring an income stream impractical. Answer: TRUE Companies sometimes create liabilities that exceed their assets when […]

The cost of capital is a single rate that reflects the average return paid to investors who provide the firm’s capital. The availability of funds under a line of credit is not guaranteed by the lender. Answer: TRUE Including financing […]

The investment opportunity schedule (IOS) and the MCC viewed together identify which capital projects should or should not be undertaken. When an acquiring firm pays too much for an acquisition the real losers are the acquirer’s stockholders. Answer: TRUE Preferred […]

A stock’s intrinsic value is based on assumptions about future cash flows made from technical analysis of the firm and the industry. Technical insolvency is a firm’s inability to meet its current obligations. Legal insolvency means the firm’s liabilities exceed […]

The level of a firm’s receivables is influenced solely by factors outside the financial managers’ control. The incremental cash flow principle states that the new project’s cash flows should include all increases or decreases in cash flows to the firm […]

Policy decisions regarding inventories, accounts receivable, cash balances, and marketable securities can control the amount invested in these assets. A firm’s net working capital reflects the amount of funds required to support its day-to-day routine operations. The word net reflects […]

An LBO is a takeover but not a merger. In a friendly merger, the target’s management and board of directors approve of the deal and cooperate with the acquiring company. Answer: TRUE The administrative reason for holding cash is to […]

A project with a negative NPV always has an IRR that’s less than the cost of capital. Certainty equivalent factors can take any numerical value. Answer: FALSE When a new stock is introduced into a portfolio and the “peaks” in […]

Ratio analysis involves taking a set of numbers out of the financial statements and forming ratios with them. Ordinary annuities differ from annuities due in that annuities due occur at the ends of time periods while ordinary annuities occur at […]

Financial assets are valuable because they give owners rights to future cash flows. Replacement projects tend to require the same elements as new ventures, but generally require less new equipment and facilities. Answer: FALSE Carrying costs represent those expenses that […]

Financial risk, which makes a firm’s ROE and EPS more volatile, exists only if the firm has some debt financing (leverage). The concept of risk aversion from portfolio theory, applies to capital budgeting because firms prefer to undertake less risky […]

The single most significant reason for an investor to hold a stock that pays no dividends is that favorable tax implications are associated with appreciation in value and capital gains. If a company truly never paid a dividend, there would […]

Market values are appropriate because new projects are generally funded with newly raised money. The components of a firm’s capital are debt, common equity, and preferred stock. Answer: TRUE It is important to understand that money like any other commodity […]

A major disadvantage of the proprietorship form is the difficulty of raising money. The cash budget measures both the timing and amount of a firm’s cash flows. Answer: TRUE Since the component cost of debt is less than the component […]

Loans are said to be self-liquidating if the project the funds support automatically generates the cash to repay the loan. The traditional income statement is intended to measure profits by identifying cash flows in and out of the firm over […]

Most changes in EBIT are due to cost conditions and the effectiveness of management. The consumption and production sectors, have in fact been unable to establish a flow of savings dollars into the hands of producers, so there is a […]

Accounts receivable represents credit sales that have not yet been paid by customers. The fact that exchange rates are continually changing gives rise to the possibility that money may be made or lost on an international transaction because of rate […]

The maturity matching principle says that the maturity of financing should generally match the length of the project it supports. The economic order quantity model attempts to minimize total inventory cost by recognizing the tradeoff between carrying and ordering costs. […]

Jessica is a recent college graduate who is seeking a job that includes telecommuting, shared jobs, flextime, and organization-sponsored sabbaticals. Based on this information, Jessica most likely belongs to which demographic group? a. Baby Boomer b. Generation X c. Generation […]

When interest rates are high, people prefer investments that return cash quickly. Accelerated debt is an anti-takeover strategy in which the target’s debt must be paid off in the event it is taken over. Answer: TRUE Profitable firms can go […]

The essence of finance is the process of raising capital (money), exclusively through the sale of bonds. Both operating leverage and financial leverage involve the substitution of fixed costs for variable costs. Answer: TRUE In the case of a replacement […]

A firm acquires a competitor in a vertical merger. Typically, firms with high operating leverage will have high debt. Answer: FALSE The time value of money means that a dollar today is worth less than a dollar at any time […]

The replacement chain and the equivalent annual annuity methods are designed to evaluate stand-alone projects that have substantially different initial outlays. Money markets deal in short-term government and corporate debt, while capital markets deal in long-term corporate and government debt […]

One reason that investors may assign a different value to a stock is due to differences in the appropriate discount rate to use in solving for present values. The dividend irrelevance theory implies that the firm should follow a residual […]

The return on a portfolio of stocks is the average of the returns on the stocks in the portfolio weighted by the percentage of the portfolio’s value invested in each stock. The formula for determining the degree of operating leverage […]

The capital structure is industry specific and not firm specific. That is, all firms in a particular industry will have the same capital structure. Financial risk is defined as the expected variation in EBIT. Answer: FALSE In most companies, the […]

A firm should not invest in a capital project unless its NPV exceeds the firm’s cost of capital. EBIT measures operating efficiency only, while ROE and EPS measure only financial efficiency. Answer: FALSE The traditional C-corporation, in which the firm’s […]

The fixed charge coverage ratio is a more comprehensive version of the times interest earned ratio. Net working capital is the difference between current assets and current liabilities. Answer: TRUE In a consolidation, a new firm is formed from the […]

Financial leverage affects a firm’s EBIT. Operational or operating plans contain great detail about who is going to do what, commonly over a one-year planning horizon. Answer: TRUE Projects are said to be mutually exclusive when undertaking one precludes doing […]

Both fluctuating exchange rates and deferred payment terms are necessary for foreign exchange risk to exist. By foregoing the prompt payment discount offered in terms of 1/10, net 30, the customer is effectively borrowing at rate of 36.5%. Answer: FALSE […]

Stock pricing models do not give precise results due to the uncertainty of future cash flows. In many financial mergers, private equity groups are taking advantage of firms whose market value is less than their intrinsic value. Answer: TRUE Lock […]

Which of these falls under the responsibility of top management? A.assuring the integrity of financial information presented to outsiders. B.maintaining adequate internal control. C.unintentional errors in preparing financial statements. D.assuring the integrity of financial information presented to outsiders and maintaining […]

Activity-based management can reduce customer response time by all of the following, except for A.identifying those activities that consume the most resources. B.making activities more efficient. C.identifying non-value added activities. D.identifying fraudulent activities. Audits that compare the estimates made in […]

Which of the following is a key characteristic of divisional incentive compensation plans for rewarding short-term performance? A.Cash bonuses and profit sharing B.Deferred compensation C.Employee stock options D.Retirement plans Fred’s Fine Roasted Coffee Fred’s Fine Roasted Coffee reports the following […]

The following information relates to the operating performance of two divisions of Sound Machine, Inc., for last year. Required: a. Compute the return on investment (ROI) of each division, using total assets at gross book value as the investment base. […]

When using the internal rate of return to evaluate investment alternatives, which rate would analysts specify? A.hurdle rate. B.Federal funds rate. C.prime interest rate. D.time-adjusted rate. Which of the following statements is true if a company overstates the ending balance […]

Trade-offs must be made in and among the prevention, appraisal, internal failure, and external failure costs in order to reduce total costs of quality over time. Over the long-term, what should the targeted level of defective units? A.Zero B.Over zero […]

Parker Division had revenue of $250,000, operating profit of $10,000, and a division investment of $100,000. The investment turnover is A.0.04 B.2.50 C.4.00 D.0.25 Provide the missing data in the following situations: Answer: B Answer: Use the following information to […]

What effect would an increase in fixed costs have on the break-even point and the contribution margin? Break-even Point Contribution Margin A. Increase Increase B. Increase Decrease C. Decrease Increase D. Decrease Decrease What is the objective of value engineering? […]

Which of the following is the appropriate procedure to apply overhead to production using normal costing? A.Assign actual direct material and direct labor costs plus an amount representing “normal” manufacturing overhead to products. B.Assign “normal” direct material and direct labor […]

Which of the following is notone of the three major manufacturing cost categories? A.Direct materials costs that can be easily traced to a product B.Direct labor costs of workers who transform materials into finished products and whose time can be […]

High-pressure performance evaluation systems not only put pressure on people to perform well but also create incentives to A.be motivated. B.”manage earnings.” C.leave the company. D.None of the answers is correct. Which statement is true concerning negotiated transfer pricing? A.It […]

Which of the following costs are capacity-sustaining activities in the product cost hierarchy? A.Product testing. B.Energy to run machines. C.Heat and lighting. D.Direct Materials. Different types of companies use different types of cost systems. An effective cost system must have […]