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1. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. 

A) fixed costs 

B) variable costs 

C) marginal costs 

D) semi-variable costs 


2. In break-even analysis the contribution margin is defined as 

A) sales minus variable costs. 

B) sales minus fixed costs. 

C) variable costs minus fixed costs. 

D) fixed costs minus variable costs. 


3. At the break-even point, a firm’s profits are 

A) greater than zero. 

B) less than zero. 

C) equal to zero. 

D) Not enough information to tell 


4. If a firm has a break-even point of 20,000 units and the contribution margin on the firm’s single product is $3.00 per unit and fixed costs are $60,000, what will the firm’s net income be at sales of 30,000 units? 

A) $90,000 

B) $30,000 

C) $15,000 

D) $45,000 


5. If sales volume exceeds the break-even point, the firm will experience 

A) an operating loss. 

B) an operating profit. 

C) an increase in plant and equipment. 

D) an increase in stock price. 


6. The break-even point can be calculated as 

A) variable costs divided by contribution margin. 

B) total costs divided by contribution margin. 

C) variable cost times contribution margin. 

D) fixed cost divided by contribution margin. 


7. A highly automated plant would generally have 

A) more variable than fixed costs. 

B) more fixed than variable costs. 

C) all fixed costs. 

D) all variable costs. 


8. The degree of operating leverage is computed as 

A) percent change in operating profit divided by percent change in net income. 

B) percent change in volume divided by percent change in operating profit. 

C) percent change in EPS divided by percent change in operating income. 

D) percent change in operating income divided by percent change in volume. 


9. Firms with a high degree of operating leverage are 

A) easily capable of surviving large changes in sales volume 

B) usually trading off lower levels of risk for higher profits. 

C) significantly affected by changes in interest rates. 

D) trading off higher fixed costs for lower per-unit variable costs. 


10. Financial leverage is concerned with the relation between 

A) changes in volume and changes in EPS. 

B) changes in volume and changes in EBIT. 

C) changes in EBIT and changes in EPS. 

D) changes in EBIT and changes in operating income. 


11. Heavy use of long-term debt may be beneficial in an inflationary economy because 

A) the debt may be repaid in more “expensive” dollars. 

B) nominal interest rates exceed real interest rates. 

C) inflation is associated with the peak of a business cycle. 

D) the debt may be repaid in “cheaper” dollars. 


12. Working capital management is primarily concerned with the management and financing of 

A) cash and inventory. 

B) current assets and current liabilities. 

C) current assets. 

D) receivables and payables. 


13.A financial executive devotes the most time to 

A) Long-range planning. 

B) Capital budgeting. 

C) Short-term financing. 

D) Working capital management. 


14. Pressure for current asset buildup often results from 

A) decline in sales growth. 

B) rapidly expanding sales. 

C) increased demands of short-term creditors. 

D) none of the above. 


15. The term “permanent current assets” implies 

A) the same thing as fixed assets. 

B) nonmarketable assets. 

C) some minimum level of current assets that are not self-liquidating. 

D) inventory. 


16. Ideally, which of the following types of assets should be financed with long-term financing? 

A) Fixed assets only 

B) Fixed assets and temporary current assets 

C) Fixed assets and permanent current assets 

D) Temporary and permanent current assets 


17. Generally, more use is made of short-term financing because 

A) short-term interest rates are generally lower than long-term interest rates. 

B) most firms do not have easy access to the capital markets. 

C) short-term financing is usually more predictable than long-term financing. 

D) a and b above. 


18. During tight money periods 

A) long-term rates are higher than short-term rates. 

B) short-term rates are higher than long-term rates. 

C) short-term rates are equal to long-term rates. 

D) the relationship between short and long-term rates remains unchanged. 


19. A “normal” term structure of interest rates would depict 

A) short-term rates higher than long-term rates. 

B) long-term rates higher than short-term rates. 

C) no general relationship between short- and long-term rates. 

D) medium rates (1-5 years) lower than both short-term and long-term rates. 


20. How would electronic funds transfer affect the use of “float”? 

A) Increase its use somewhat 

B) Decrease its use somewhat 

C) Virtually eliminate its use 

D) Have no effect on its use 


22. Probably the safest and most marketable instrument for short-term investment is 

A) commercial paper. 

B) large denomination certificates. 

C) Treasury notes. 

D) Treasury bills. 


23. Which of the following securities trades on a discount basis? 

A) Treasury notes 

B) Treasury bills 

C) Commercial paper 

D) Certificates of deposit 


24. Which of the following securities represents an unsecured promissory note issued by a corporation? 

A) Certificates of deposit 

B) Savings accounts 

C) Commercial paper 

D) Money market fund 


25. A firm that wishes to minimize risk when investing idle cash would be least likely to buy 

A) commercial paper. 

B) long-term corporate bonds. 

C) negotiable certificates of deposit. 

D) Treasury bills of the U.S. government. 


26. For a given firm, holding other factors constant, ordering costs per unit generally 

A) decline as average inventory increases. 

B) increase in proportion to increases in inventory. 

C) are considered fixed costs. 

D) are negotiated. 


27. Which of the following is not a valid quantitative measure for accounts receivable collection policies. 

A) average collection period 

B) aging of accounts receivables 

C) ratio of debt to equity 

D) ratio of bad debts to credit sales 


28. What is generally the largest source of short-term credit small firms? 

A) Bank loans 

B) Commercial paper 

C) Installment loans 

D) Trade credit 


29. LIBOR is 

A) a resource used in production. 

B) an interest rate paid on Eurodollar deposits in the London market. 

C) an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks. 

D) the interest rate paid by the British government on its long-term bonds. 


30 A large manufacturing firm has been selling on a 3/10, net 30 basis.  The firm changes its credit terms to 2/20, net 90.  What change might be expected on the balance sheets of its customers? 

A) Decreased receivables and increased bank loans 

B) Increased receivables and increased bank loans 

C) Increased payables and decreased bank loans 

D) Increased payables and increased bank loans 


31. From the banker’s point of view, short-term bank credit an excellent way of financing 

A) fixed assets. 

B) permanent working capital needs. 

C) repayment of long-term debt. 

D) seasonal bulges in inventory and receivables. 


32. Compensating balances 

A) are used by banks as a substitute for charging service fees. 

B) are created by having a sweep account.

C) generate returns to customers from interest bearing accounts.

D) are used to reward new accounts 


Extra Credit:


What is the current federal discount rate  (the rate that  bank can borrow money from the Federal Reserve)?

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