tEST bANK fundamentals of financial management, 13th ed , pearson

TEST BANKFundamentals of Financial Management, 13th ed., Pearson Chapter 1: The Role of Financial Management Just click on the button next to each answer and you'll get immediate feedbac

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TEST BANK

Fundamentals of Financial Management, 13th ed., Pearson

Chapter 1: The Role of Financial Management

Just click on the button next to each answer and you'll get immediate feedback

Note: Your browser must support JavaScript in order to use this quiz.

1. "Shareholder wealth" in a firm is represented by:

the number of people employed in the firm

the book value of the firm's assets less the book value of its liabilities

the amount of salary paid to its employees

the market price per share of the firm's common stock

2. The long-run objective of financial management is to:

maximize earnings per share

maximize the value of the firm's common stock

maximize return on investment

maximize market share

3. What are the earnings per share (EPS) for a company that earned $100,000 lastyear in after-tax profits, has 200,000 common shares outstanding and $1.2 million

in retained earning at the year end?

$100,000

$6.00

$0.50

$6.50

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4. A(n) would be an example of a principal, while a(n) would be an example of an agent.

shareholder; manager

manager; owner

accountant; bondholder

shareholder; bondholder

5. The market price of a share of common stock is determined by:

the board of directors of the firm

the stock exchange on which the stock is listed

the president of the company

individuals buying and selling the stock

6. The focal point of financial management in a firm is:

the number and types of products or services provided by the firm

the minimization of the amount of taxes paid by the firm

the creation of value for shareholders

the dollars profits earned by the firm

7. The decision function of financial management can be broken down into the decisions

financing and investment

investment, financing, and asset management

financing and dividend

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capital budgeting, cash management, and credit management

8. The controller's responsibilities are primarily in nature, while the

treasurer's responsibilities are primarily related to

operational; financial management

financial management; accounting

accounting; financial management

financial management; operations

9. In the US, the has been given the power to adopt auditing, quality

control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved

American Institute of Certified Public Accountants (AICPA)

Financial Accounting Standards Board (FASB)

Public Company Accounting Oversight Board (PCAOB)

Securities and Exchange Commission (SEC)

10. A company's is (are) potentially the most effective instrument of good corporate governance

common stock shareholders

board of directors

top executive officers

11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:

a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others

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a dramatic rise in the US trade deficit.

charges of excessive compensation to top corporate executives

rising complaints by investors and security analysts over the financial accounting for stock options

The following item is NEW to the 13th edition.

12. _ refers to meeting the needs of the present without

compromising the ability of future generations to meet their own needs

Corporate Social Responsibility (CSR)

Sustainability

Convergence

Green Economics

Chapter 2: The Business, Tax, and Financial Environments

1. Which of the following enjoys limited liability?

A general partnership

A corporation

A sole proprietorship

None of the above

2. Michael Cohn is a "member" (a type of owner) of a marine supply business Michael's business is

a sole proprietorship

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a corporation.

a limited liability company

a general partnership

3. The Counting House, Inc., purchased 5-year property class equipment for

$60,000 It uses the MACRS method of depreciation What is tax depreciation for the second year of the asset's life?

that you own

a proportional share of all creditor claims based on the number of common shares

that you own

an amount that could, at most, equal what you originally paid for the shares of

common stock in the corporation

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secondary money market.

primary capital market

secondary capital market

6. A major advantage of the corporate form of organization is:

reduction of double taxation

limited owner liability

legal restrictions

ease of organization

7. Money market mutual funds

enable individuals and small businesses to invest indirectly in market instruments

money-are available only to high net-worth individuals

are involved in acquiring and placing mortgages

are also known as finance companies

8. The purpose of financial markets is to:

increase the price of common stocks

lower the yield on bonds

allocate savings efficiently

control inflation

9. Which of the following is NOT an example of a financial intermediary?

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International Business Machines, Inc (IBM).

Vanguard Mutual Fund

El Dorado Savings and Loan Association

Bank of America

10. How are funds allocated efficiently in a market economy?

The most powerful economic unit receives the funds

The economic unit that is willing to pay the highest expected return receives the funds

the economic unit that considers itself most in need of funds

$90,000

$100,000

$135,000

$150,000

Chapter 3: The Time Value of Money

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1 You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years You expect annual interest rates will be 8 percent over that time period The maximum price you would be willing to pay for the annuity is closest to

$32,000

$39,272

$40,000

$80,000

2 With continuous compounding at 10 percent for 30 years, the future value of

an initial investment of $2,000 is closest to

cannot be determined without more information

4 Assume that the interest rate is greater than zero Which of the following inflow streams should you prefer?

Year1 Year2 Year3 Year4

$400 $300 $200 $100

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$100 $200 $300 $400

$250 $250 $250 $250

Any of the above, since they each sum to $1,000

5 You are considering investing in a zero-coupon bond that sells for $250 At maturity in 16 years it will be redeemed for $1,000 What approximate annual rate

of growth does this represent?

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8 You are considering borrowing $10,000 for 3 years at an annual interest rate of6% The loan agreement calls for 3 equal payments, to be paid at the end of each ofthe next 3 years (Payments include both principal and interest.) The annual

payment that will fully pay off (amortize) the loan is closest to

11. You can use to roughly estimate how many years a given sum of

money must earn at a given compound annual interest rate in order to double that initial amount

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increases with each payment

decreases with each payment

remains constant with each payment

13. In a typical loan amortization schedule, the total dollar amount of money paid each period

increases with each payment

decreases with each payment

remains constant with each payment

Chapter 4: The Valuation of Long-Term Securities

1 What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?

More than its face value

Less than its face value

$1,000

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2 If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?

The stock has a low level of risk

The stock offers a high dividend payout ratio

The market is undervaluing the stock

The market is overvaluing the stock

3 When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:

the coupon effect

interest rate risk

a perpetuity

an indefinite maturity

5 Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently selling at $100 per share What is the market's required return on this investment if the dividend is expected to grow at 5% forever?

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P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate

P0 > par and YTM < the coupon rate

P0 < par and YTM < the coupon rate

7 Interest rates and bond prices

move in the same direction

move in opposite directions

sometimes move in the same direction, sometimes in opposite directions

have no relationship with each other (i.e., they are independent)

8 In the formula ke = (D1/P0) + g, what does g represent?

the expected price appreciation yield from a common stock

the expected dividend yield from a common stock

the dividend yield from a preferred stock

the interest payment from a bond

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9 In the United States, most bonds pay interest a year, while many European bonds pay interest a year.

capital gains yield

Chapter 5: Risk and Return

1 This type of risk is avoidable through proper diversification

portfolio risk

systematic risk

unsystematic risk

total risk

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2 A statistical measure of the degree to which two variables (e.g., securities' returns) move together.

less than one

4 A line that describes the relationship between an individual security's returns and returns on the market portfolio

characteristic line

security market line

capital market line

beta

5. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium

equal to the security's beta

based on the unsystematic risk of the security

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based on the total risk of the security.

based on the systematic risk of the security

6. The risk-free security has a beta equal to , while the market portfolio's beta is equal to

one; more than one

one; less than one

zero; one

less than zero; more than zero

7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value Carrie shows

risk aversion

risk preference

risk indifference

a strange outlook on life

8. Beta is the slope of

the security market line

the capital market line

a characteristic line

the CAPM

9. A measure of "risk per unit of expected return."

standard deviation

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coefficient of variation

correlation coefficient

beta

10. The greater the beta, the of the security involved

greater the unavoidable risk

greater the avoidable risk

less the unavoidable risk

less the avoidable risk

11. Plaid Pants, Inc common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80 The expected return on the market is

10 percent, and the risk-free rate is 6 percent According to the capital-asset pricingmodel (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be

3.6 percent; 7.2 percent

12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is

calculated to be 0.75 The market beta is, of course, 1.00 and the beta of the

industry of which the company is a part is 1.10 If Merrill Lych were to calculate

an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be

less than 0.75

more than 0.75, but less than 1.10

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equal to 1.10

equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}

Chapter 6: Financial Statement Analysis

1. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is

5 percent, total assets are $8 million, and ROI is 8 percent

3. Which of the following would NOT improve the current ratio?

Borrow short term to finance additional fixed assets

Issue long-term debt to buy inventory

Sell common stock to reduce current liabilities

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Sell fixed assets to reduce accounts payable.

4. The gross profit margin is unchanged, but the net profit margin declined over the same period This could have happened if

cost of goods sold increased relative to sales

sales increased relative to expenses

the U.S Congress increased the tax rate

dividends were decreased

5. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the

industry average of 1.4 This means that the company

will not experience any difficulty with its creditors

has less liquidity than other firms in the industry

will be viewed as having high creditworthiness

has greater than average financial risk when compared to other firms in its industry

6. Kanji Company had sales last year of $265 million, including cash sales of $25million If its average collection period was 36 days, its ending accounts receivablebalance is closest to (Assume a 365-day year.)

$26.1 million

$23.7 million

$7.4 million

$18.7 million

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7. A company can improve (lower) its debt-to-total assets ratio by doing which ofthe following?

Borrow more

Shift short-term to long-term debt

Shift long-term to short-term debt

Sell common stock

8. Which of the following statements (in general) is correct?

A low receivables turnover is desirable

The lower the total debt-to-equity ratio, the lower the financial risk for a firm

An increase in net profit margin with no change in sales or assets means

a poor ROI

The higher the tax rate for a firm, the lower the interest coverage ratio

9. Retained earnings for the "base year" equals 100.0 percent You must be

looking at

a common-size balance sheet

a common-size income statement

an indexed balance sheet

an indexed income statement

10. Krisle and Kringle's to-total assets (D/TA) ratio is 4 What is its to-equity (D/E) ratio?

debt-.2

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.667

.333

11. A firm's operating cycle is equal to its inventory turnover in days (ITD)

plus its receivable turnover in days (RTD)

minus its RTD

plus its RTD minus its payable turnover in days (PTD)

minus its RTD minus its PTD

12. When doing an "index analysis," we should expect that changes in a number

of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company

net sales

cost of goods sold

earnings before interest and taxes (EBIT)

earnings before taxes (EBT)

The following item is NEW to the 13th edition.

13. The process of convergence of accounting standards around the world aims

to

narrow or remove national accounting differences

move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP)

create one set of rules-based accounting standards for all countries

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Chapter 7: Funds Analysis, Cash Flow Analysis, and Financial Planning

1. According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?

cash inflow from interest income

cash inflow from dividend income

cash outflow to acquire fixed assets

all of the above

2. According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?

cash outflow to the government for taxes

cash outflow to shareholders as dividends

cash outflow to lenders as interest

cash outflow to purchase bonds issued by another company

3. If the following are balance sheet changes:

$5,005 decrease in accounts receivable

$7,000 decrease in cash

$12,012 decrease in notes payable

$10,001 increase in accounts payable

a "use" of funds would be the:

$7,000 decrease in cash

Clear Answ ers

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$5,005 decrease in accounts receivable.

$10,001 increase in accounts payable

$12,012 decrease in notes payable

4. On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears as

a cash flow from operating activities

a cash flow from investing activities

a cash flow from financing activities

none of the above

5. Uses of funds include a (an):

decrease in cash

increase in any liability

increase in fixed assets

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a forecasting technique.

a funds flow analysis

a ratio analysis

calculations for preparing the balance sheet

8. Which of the following is NOT a cash outflow for the firm?

depreciation

dividends

interest payments

taxes

9. Which of the following would be considered a use of funds?

a decrease in accounts receivable

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11. For a profitable firm, total sources of funds will always total uses of funds.

be equal to

be greater than

be less than

have no consistent relationship to

Chapter 8: Overview of Working Capital Management

1. In finance, "working capital" means the same thing as

total assets

fixed assets

current assets

current assets minus current liabilities

2. 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

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3. 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 term debt

long-Replacing short-term debt with equity

4. 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 a 50 percent equity, 50 percent long-term debt mixture

5. 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

6. varies inversely with profitability

Liquidity

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8. 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

9. 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

10. Net working capital refers to

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total assets minus fixed assets.

current assets minus current liabilities

current assets minus inventories

current assets

Chapter 9: Cash and Marketable Securities Management

1. Marketable securities are primarily

short-term debt instruments

short-term equity securities

long-term debt instruments

long-term equity securities

2. Time consumed in clearing a check through the banking system

Processing float

Deposit float

Collection float

Availability float

3. Commercial paper is essentially

another term for a junk bond

a short-term unsecured corporate IOU

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an intermediate-term corporate bond.

a certificate that may be exchanged for a share of common stock at a specified future

date

4. Concentration banking

increases idle balances

moves excess funds from a concentration bank to regional banks

is less important during periods of rising interest rates

improves control over corporate cash

5. Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?

A long-term Aaa-rated corporate bond with a current annual yield of 9.4 percent

A 30-year Treasury bond with a current annual yield of 8.7 percent

Ninety-day commercial paper with a current annual yield of 6.2 percent

Common stock that has been appreciating in price 8 percent annually, onaverage, and

paying a quarterly dividend that is the equivalent of a 5 percent annual yield

6. Which of the following marketable securities is the obligation of a commercialbank?

Commercial paper

Negotiable certificate of deposit

Repurchase agreement

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Free cash segment

Controllable cash segment

Ready cash segment

None of the above

9. The most basic requirement for a firm's marketable securities

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Depository transfer check (DTC)

ACH transfer

Repo

11. According to the Bond Equivalent Yield (BEY) method, the yield on a

$1,000, 13-week US Treasury bill purchased for $960 would be closest to

16.0 percent

16.7 percent

17.0 percent

17.8 percent

The following items are NEW to the 13th edition.

12. US Treasury bills are now sold in minimum amounts of and multiples

of above the minimum

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a foreign currency

14. The US Federal National Mortgage Association (FNMA, "Fannie Mae") andthe US Federal Home Loan Mortgage Corporation (FHLMC, "Freddie Mac") are Interest and principal on debt securities that they issue explicity guaranteed by the US government

federal agencies; are

federal agencies; are not

government sponsored entities (GSEs); are

government sponsored enterprises (GSEs); are not

Chapter 10: Accounts Receivable and Inventory Management

1. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of

$800,000 If the IT is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory

365 days and $108,000

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5. Which of the following relationships hold true for safety stock?

the greater the risk of running out of stock, the smaller the safety of stock

the larger the opportunity cost of the funds invested in inventory, the larger the safety

stock

the greater the uncertainty associated with forecasted demand, the smaller the safety

stock

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the higher the profit margin per unit, the higher the safety stock

necessary

6. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:

an increase in the average collection period

a decrease in bad debt losses

an increase in sales

higher profits

7. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice What would receivables be if all customers took the cash discount?

Lower than the present level

No change from the present level

Higher than the present level

Unable to determine without more information

8. An increase in the firm's receivable turnover ratio means that:

it is collecting credit sales more quickly than before

cash sales have decreased

it has initiated more liberal credit terms

inventories have increased

9. Receiving a required inventory item at the exact time needed

ABC

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FOB

PERT

10. EOQ is the order quantity that over our planning horizon

minimizes total ordering costs

minimizes total carrying costs

minimizes total inventory costs

the required safety stock

11. A B2B exchange is a Internet marketplace that matches supply and

demand by real-time auction bidding

buyer-to-business

business-to-business

business-to-buyer

buyer-to-buyer

Chapter 11: Short-Term Financing

1. Under COD terms, the seller:

extends credit to the buyer on open account

extends credit to the buyer subject to bank approval

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requires the buyer to make partial payment at fixed intervals.

bears the risk of the buyer's refusing the goods shipped

2. The type of business most likely to use trust receipt financing would be:

a forest products company

an oil refinery

an automobile dealership

a grocery store chain

3. The trade terms "2/15, net 30" indicate that:

a 2% discount is offered if payment is made within 15 days

4. If credit terms of "2/10, net 40" are offered, the approximate cost of not taking the discount and paying at the end of the credit period would be closest to which ofthe following? (Assume a 365-day year.)

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As soon as possible after the discount date so as to not upset the

supplier

No sooner than six months so as to maximize the use of "free" trade credit financing

On the final due date

None of the above

6. If MetroPulse Media receives an invoice for purchases dated 10/21/X5 subject

to credit terms of "3/10, net 30 EOM," what is the last possible day the payment should be made (1) if the discount is taken and (2) if the discount is not taken?

November 1 and November 20, respectively

December 10 and December 30, respectively

7. When a firm needs short-term funds for a specific purpose, the bank loan will likely be a:

compensating balance arrangement

revolving credit agreement

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Chattel mortgage

Trust receipts

9. The Houser Company has negotiated a $500,000 revolving credit agreement with Chitwood National Bank The agreement calls for an interest rate of 10% on fund used, a 15% compensating balance, and a commitment fee of 1% on the unused amount of the credit line Assuming that the compensating balance would not otherwise be maintained, the effective annual interest cost if the firm borrows

$200,000 for one year is closest to

inventory and/or receivables

common stock and/or bonds

real estate

machinery

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Chapter 12: Capital Budgeting and Estimating Cash Flows

1. All of the following influence capital budgeting cash flows EXCEPT:

accelerated depreciation

salvage value

tax rate changes

method of project financing used

2. In proper capital budgeting analysis we evaluate incremental

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

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