BAM 513 -Financial Management (Set-1)

BAM 513 –

Financial Management

Text:  Principles of Managerial Finance 12th Edition, 2009 ISBN: 0-321-52413-6 Author(s): Lawrence J. Gitman Publisher: Pearson Education

 Financial Management 

Multiple Choice Questions (Enter your answers on the enclosed answer sheet)

1) Managerial finance

devotes the majority of its attention to the collection and presentation of financial data.

involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.

involves the design and delivery of advice and financial products.

recognizes funds on an accrual basis.

2) Financial service

is concerned with the duties of the financial manager.

involves the design and delivery of advice and financial products.

handles accounting activities related to data processing.

provides guidelines for the efficient operation of the business.

3) A major weakness of a partnership is

difficulty liquidating or transferring ownership.

limited liability.

access to capital markets.

low organizational costs.

4) The primary economic principle used in managerial finance is

the crowding out effect.

the liquidity trap.

supply and demand.

marginal analysis.

Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Al- though the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

$7,000 and -$3,000, respectively.

$3,000 and -$7,000, respectively.

$3,000 and $7,000, respectively.

$3,000 and $10,000, respectively.

By concentrating on cash flows within the firm the financial manager should be able to control expenses. avoid insolvency. prepare tax returns. speak authoritatively to stockholders. A firm has just ended its calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The possible problem this firm may face is high leverage. low profitabi I ity. lack of cash flow. inability to receive credit. 8) Included in the primary activities of the financial manager are financial analysis and planning. making financing decisions. analyzing and planning cash flows. making investment decisions. all of the above 9) The financial manager may be responsible for any of the following EXCEPT analyzing the effects of more debt on the firm’s capital structure. determining whether to accept or reject a capital asset acquisition. analyzing budget and performance reports. monitoring of quarterly tax payments. 10) Managing the firm’s assets includes all of the following EXCEPT notes payable. accounts receivable. fixed assets. inventory.

11) The primary goal of the financial manager is maximizing profit. minimizing return. minimizing risk. maximizing wealth. 12) The wealth of the owners of a corporation is represented by share value. profits. earnings per share. cash flow. 13) All of the following are functions of security exchanges EXCEPT aiding in new financing. holding demand deposits. allocating scarce capital. creating continuous markets. 14) The major securities traded in the capital markets are commercial paper and Treasury bills. bonds and commercial paper. Treasury bills and certificates of deposit. stocks and bonds. The average tax rate of a corporation with ordinary income of $105,000 and a tax li- ability of $24,200 is 15 percent. 46 percent. 23 percent. 34 percent. 16) The statement of retained earnings reports all of the following EXCEPT interest. net profits after taxes. preferred stock dividends. common stock dividends.

17) Paid-in-capital in excess of par represents the amount of proceeds from the original sale of stock. at the current market value of common stock. in excess of the par value from the original sale of common stock. at the current book value of common stock. 18) The primary concern of creditors when assessing the strength of a firm is the firm’s leverage. profitability. short-term liquidity. share price.  19)  is where the firm’s ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement. Combined analysis Benchmarking Time-series analysis None of the above 20) Cross-sectional ratio analysis is used to reflect the symptoms of a possible problem. correct expected problems in operations. isolate the causes of problems. provide conclusive evidence of the existence of a problem.  21) The  ratios are primarily measures of return. activity profitability debt liquidity The two categories of ratios that should be utilized to assess a firm’s true liquidity are the liquidity and profitability ratios. current and quick ratios. liquidity and activity ratios. liquidity and debt ratios.

The measures the percentage of each sales dollar remaining after ALL ex- penses, including taxes, have been deducted. operating profit margin earnings available to common shareholders gross profit margin net profit margin 24) All of the following are outflows of cash EXCEPT a decrease in notes payable. a decrease in accounts receivable. an increase in accounts receivable. an increase in inventory. NICO Corporation had net fixed assets of $2,000,000 at the end of 2006 and $1,800,000 at the end of 2005. In addition, the firm had a depreciation expense of $200,000 during 2006 and $180,000 during 2005. Using this information, NICO’s net fixed asset investment for 2006 was $400,000. $380,000. $0. $20,000.

Multiple Choice Questions (Enter your answers on the enclosed answer sheet) If a person’s required return does not change when risk increases, that person is said to be risk-indifferent. risk-aware. risk-averse. risk-seeki ng. The of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested. return risk probability value 3) Prime-grade commercial paper will most likely have a higher annual return than a common stock. a Treasury bill. a preferred stock. an investment-grade bond.  4) The of an event occurring is the percentage chance of a given outcome. reliability standard deviation probability dispersion Since for a given increase in risk, most managers require an increase in return, they are risk-free. risk-i nd ifferent. risk-seeking. risk-averse.  6) The the coefficient of variation, the  the risk. more stable; higher lower; higher lower; lower higher; lower

 

A(n) portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return. efficient continuous coefficient risk-i nd ifferent Perfectly correlated series move exactly together and have a correlation co-  efficient of , while perfectly correlated series move exactly in op-  posite directions and have a correlation coefficient of  _ negatively; +1; positively; -1 negatively; -1; positively; +1 positively; -1; negatively; + 1 positively; +1; negatively; -1 Combining negatively correlated assets having the same expected return results in a portfolio with level of expected return and level of risk. the same; a lower the same; a higher a higher; a lower a lower; a higher Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that decreases to a level below that of either asset. increases to a level above that of either asset. remains unchanged. stabilizes to a level between the asset with the higher risk and the asset with the lower risk. 11) Risk that affects all firms is called nondiversifiable risk. total risk. diversifiable risk. management risk. 12) A beta coefficient of +1 represents an asset that is unaffected by market movement. has the same response as the market portfolio. is less responsive than the market portfolio. is more responsive than the market portfol io. 13) The higher an asset’s beta, the lower the expected return will be in an up market. the more responsive it is to changing market returns. the higher the expected return will be in a down market. the less responsive it is to changing market returns. An increase in the Treasury Bill rate  the required rate of return of a common stock. has no effect on decreases increases cannot be determined by Nico wants to invest all of his money in just two assets: the risk free asset and the market portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in the market portfol io and the rest in the risk free asset? 1.00 0.25 0.00 0.75 In the capital asset pricing model, the beta coefficient is a measure of  risk and an index of the degree of movement of an asset’s return in response to a change in  _ diversifiable; the prime rate nondiversifiable; the market return nondiversifiable; the Treasury bill rate diversifiable; the bond index rate 17) As risk aversion increases a firm’s beta will decrease. investors’ required rate of return will increase. investors’ required rate of return will decrease. a firm’s beta will increase. The rate of interest is typically the required rate of return on a three-month U.S. Treasury bill. nominal premium risk-free real A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called flat yield curve. normal yield curve. inverted yield curve. none of the above. The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called expectation hypothesis. market segmentation theory. liquidity preference theory. none of the above. 21) At any time, the slope of the yield curve is affected by liquidity preferences. the comparative equilibrium of supply and demand in the short-term and long-term market segments. inflationary expectations. all of the above. A  is a restrictive provision on a bond which provides for the systematic re- tirement of the bonds prior to their maturity. conversion feature subordination clause sinking-fund requirement redemption clause Violation of any standard or restrictive provision by the borrower gives the lender the right to do all of the following EXCEPT seize the loan collateral. demand immediate repayment. increase the interest rate. alter the terms of the initial agreement, for example accelerate the maturity date. To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically charges a higher interest rate on long-term loans. reserves the right to change the terms of the loan at any time. reserves the right to demand immediate payment at any time. includes excessively restrictive debt provisions. 25) Bonds are a series of short-term debt instruments. long-term debt instruments. a form of equity financing that pays interest. a hybrid form of financing used to raise large sums of money from a diverse group of lenders.