Exam

Maimonna exam
Chapter 1
1) At its most basic level, the function of financial intermediaries is to ____.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society
2) Which of the following is NOT an example of a financial transaction?
A) Your parents use their credit card to pay this term's college tuition.
B) You use the ATM to withdraw British pounds so you can fly to London.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.
3) The movement of money from lender to borrower and back again is known as ____.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering
4) The common objective of borrowing and lending is to ____.
A) make all parties better off
B) gain a profit at the other's expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority
A
5) Which of the following is NOT a function of a financial intermediary in the lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the borrower will not repay
D) All of the above are functions of the financial intermediary.
6) You place $500 into your checking account at First Bank and earn 1% APR on your deposit. Your
professor borrows money at a rate of 8% from the same bank for a tuition loan for her son. Which of the
following statements is true?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the same
financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a recognizable
means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only party
paying net interest.
1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
B) Corporate, investments, capital structure, international
C) Corporate, investments, financial institutions and markets, international
D) Corporate, capital budgeting, financial institutions and markets, regulation
2) Of the following, which is NOT one of the four main areas of finance?
A) International Finance
B) Corporate Finance
C) Investments
D) All are considered main areas of finance.
3) The set of financial activities that support the OPERATIONS of a business is best described by which
main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
4) ____ is the area of finance concerned with activities like borrowing funds to finance projects such as
plant expansions or new product launches.
A) Working capital management
B) International finance
C) Investments
D) Corporate finance
5) ____ is the area of finance concerned with activities like repayment of borrowed funds through
dividends or interest payments.
A) Investments
B) Corporate finance
C) Capital budgeting
6) ____ is the area of finance concerned with the activities of buying and selling financial assets such as
stocks and bonds.
A) Investments
B) Corporate finance
C) International finance
D) Financial markets and institutions
7) Which of the following is NOT typically thought of as an investment activity?
A) Accurately pricing financial assets
B) The process of buying and selling financial assets
C) Repaying borrowed funds
D) Negotiating the rules and regulations of financial transactions
8) The organized financial intermediaries and the forums that promote the cycle of money is a good
definition of which of the following main areas of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
9) Financial institutions and markets
A) are the organized financial intermediaries and the forums that promote the cycle of money.
B) compose the set of financial activities that support the operations of a business.
C) are the activities centered on the purchase and sale of financial assets.
D) are concerned only with the addition of a multinational element to all finance activities.
10) Of the following, which is NOT an example of a financial intermediary?

A) Commercial bank
B) Insurance company
C) Investment bank
D) All of the above are financial intermediaries.
11) Of the following, which is NOT an activity engaged in by a financial intermediary?
A) Matching borrowers and lenders
B) Bearing risk
C) Managing retirement portfolios for large classes of employees
D) All of the above are activities of financial intermediaries.
12) "Concern with the multinational elements of financial activities" best describes which of the four
main areas of finance?
A) Investments
B) International finance
C) Corporate finance
D) Financial institutions and markets
13) Which of the following is a reason why an expertise in international finance is important?
A) Because the process of assessing risk among many countries is more difficult than assessing risk for a
single country
B) Because financial regulatory rules and requirements differ from country to country
C) Because changes in economic conditions impact the relative values of currency among countries
D) All of the above are reasons for gaining expertise in international finance.
D
14) Which of the following is NOT an activity of a financial institution or market?
A) Bringing together buyers and sellers of financial assets
B) Providing a market for the transaction of financial assets
C) Providing information to buyers and/or sellers of financial assets
D) All are activities of financial institutions.
1) ____ are the forums where buyers and sellers of financial assets and commodities meet.
A) Housing markets
B) Federal Reserve banks
C) Financial markets
D) Automotive shows
2) Financial markets can be classified by which of the following?
A) Type of asset traded
B) Maturity of the financial asset
C) Owner of the financial asset
D) All of the above can be classified as financial markets.
3) Stocks are bought and sold in ____ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
4) Bonds are bought and sold in ____ markets.

A) equity
B) debt
C) derivatives
D) foreign exchange
5) Options are bought and sold in ____ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
6) Currencies are bought and sold in ____ markets.
A) equity
B) debt
C) derivatives
D) foreign exchange
7) Which of the following is NOT an example of an equity market transaction?
A) Mary sells her shares of Apple stock.
B) Mark contacts his broker and requests a purchase of IBM bonds.
C) Sahid buys shares of a small company stock traded on the NASDAQ.
D) All of the above are equity market transactions.
8) Financial assets that will mature within a year are bought and sold in the ____ market.
A) debt
B) capital
C) stock
D) money
9) The sale of "new" securities,where the financial asset is being traded for the very first time, is said to
take place in the ____ market.
A) primary
B) money
C) secondary
D) capital
10) The sale of "used" securities,where the financial asset is being traded from one individual to another
and the proceeds do not go to the original issuer of the security, is said to take place in the ____ market.
A) primary
B) money
C) secondary
D) capital
11) Sale of new common stock in the primary market is regulated by the ___, and sales of used common
on the secondary market is regulated by the ___.
A) SEC; FDIC
B) SEC; SEC
C) FDIC; Federal Reserve
D) Federal Reserve; SEC
12) Which of the following is true of a dealer market?

A) The dealer buys and sells assets out of his own inventory.
B) The dealer acts as a broker, lining up the owners of assets with the purchasers of assets.
C) The dealer acts as an auctioneer of securities and takes a percentage of the sale as compensation.
D) None of the above are true of a dealer market.
13) Which of the following is NOT a characteristic of a dealer market?
A) Dealers make a profit on the spread between what they pay for financial assets and what they sell
them for.
B) Securities are auctioned off to the highest bidder.
C) Dealers buy and sell from their own portfolio.
D) All of the above are characteristics of the dealer market.
1) ____ is the typical title of the corporate executive charged with determining the best repayment
structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.
A) Chief Executive Officer (CEO)
B) Chief Financial Officer (CFO)
C) Chairman
D) Chief Operating Officer (COO)
2) ____ is NOT a main category of financial management.
A) Capital budgeting
B) Capital structure
C) Accounts receivable management
D) Working capital management
C
3) The process of planning, evaluating, selecting, and managing the long-term operating projects of the
company is termed ____.
A) capital budgeting
B) capital structure
C) accounts receivable management
D) working capital management
4) ____ addresses the question of what business we should be in over the long run.
C) Working capital management
D) Accounts receivable management
5) The means by which a company is financed refers to the firm's ____.
6) ____ addresses the question of where we raise money to finance our business activities.
B
7) Managing the firm's short-term financing activities is known as ____.
8) Which of the following is NOT a capital structure question?
A) A delivery company chooses to buy more trucks.
B) A manufacturing firm chooses to take the discount for paying accounts payable early.
C) A retail firm chooses to use a new supplier.
D) None of the above are capital structure questions.
9) Capital budgeting is best defined by which of the following questions?
A) How will we fund our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm's best choice for corporate governance?
10) Capital structure is best defined by which of the following questions?
A) How will we fund our product and service choices?
B) What business are we in?
C) How will we manage our day-to-day financial needs?
D) What is our firm's best choice for corporate governance?
11) Which of the following is NOT an activity of working capital management?

A) Establishing the firm's receivable policies
B) Establishing the firm's payment policies
C) Choosing the appropriate level of inventory
D) All of the above are working capital management activities.
12) Which of the following is NOT a capital budgeting question?
A) The choice of which long-term assets to purchase to meet the firm's business goals
B) The choice of what type of business a firm wants to operate
C) The proper mix of stocks and bonds to issue for financing assets
D) None of the above are capital budgeting questions.
13) ____ addresses the question of how to handle our day-to-day business needs.
1) When there are conflicts among managerial goals in U.S. markets, the most important priority is to
____.
A) increase the current market value of equity
B) keep all of the company's customers happy
C) foster good relationships with the community
D) maintain a safe and happy work place
2) Maximizing the market value of firm equity and which of the following are mutually exclusive?
A) Maximizing market value and a safe and happy work place are mutually exclusive.
B) Maximizing market value and good relationships with the local community are mutually exclusive.
C) Maximizing market value and customer satisfaction are mutually exclusive.
D) None of the above are mutually exclusive with maximizing the value of market equity.
3) A firm's stock price most closely reflects which of the following?
A) Current interest rates
B) Expected future cash flows of the firm
C) The amount of debt held by the firm
D) None of the above
4) Which of the following can lead to increased expected cash flow over time to the firm?
A) Open and collaborative relations with the community
B) Qualified and motivated employees
C) Greater customer satisfaction
D) All of the above
1) Of the following activities which is MOST likely to be an interaction between the financial manager
and the information systems manager?
A) Developing a system to bill customers, pay suppliers, and track inventory
B) Costing of products
C) Setting credit policies
D) Determining the appropriate pricing of products
A
2) Of the following activities, which is NOT likely to be an interaction between the financial manager and
the marketing manager?
A) Costing of products
B) Setting credit policies
C) Determining that there are a sufficient number of trained workers to develop the product
D) Setting advertising budgets
3) Of the following activities, which is MOST likely to be an interaction between the financial manager
and the manufacturing manager?
A) Setting of credit policies
B) Developing a system to bill customers, pay suppliers, and track inventory
C) Budgeting the timing and amount of cash needed for the production schedule
D) Determining that there are a sufficient number of trained workers to develop the product
4) Of the following which group would be considered INTERNAL PLAYERS of the firm?
A) The finance manager
B) The shop foreman
C) The human resources manager
D) All of the above
6) Of the following which group would be considered EXTERNAL PLAYERS of the firm?
A) The loan officer at the firm's commercial bank
B) The shop foreman
C) The human resources manager
D) All of the above
A
1) A ____ is a business that is owned entirely by an individual.
A) sole proprietorship
B) partnership
C) sub-chapter s corporation
D) corporation
2) Which of the following is NOT an ADVANTAGE of a sole proprietorship?
A) The owner receiving all the after-tax profit
B) Limited liability
C) Quick decision making
D) All are advantages of a sole proprietorship.
3) Which of the following is an ADVANTAGE of a sole proprietorship?
A) The owner's unlimited liability
B) The lack of continuity upon death of the owner
C) The ease of start up
D) The ability to raise capital
4) A ____ has limited liability, is a legal entity, and has the greatest potential to raise capital.
A) sole proprietorship
B) general partnership
C) limited partnership
D) corporation
D
5) A ____ is a business that is jointly owned by two or more individuals.
A) partnership
B) sole proprietorship
C) sub-chapter s corporation
D) corporation
6) Which of the following is NOT a DISADVANTAGE of a partnership?
A) Unlimited liability to at least some of the owners
B) The limited life of the business
C) The potential difficulty in transferring ownership
D) All are disadvantages of a partnership.
7) Which of the following is NOT an ADVANTAGE of a partnership?
A) A potential increase in available capital over a sole proprietorship
B) The commingling with the general partner's personal assets
C) The potential for more talent and skills in the business
D) All are advantages of a partnership.
8) Which of the following is NOT true of a sole proprietorship?
A) Sole proprietorships are the least regulated form of business.
B) Sole proprietorships are the easiest form of business to establish.
C) Sole proprietorships are the most popular form of business organization (more sole proprietorships
than other forms of business).
D) All of the above are true.
D
9) ____ is a major disadvantage of the corporate form of business.
A) Double taxation
B) Unlimited liability
C) Lack of ability to raise capital
D) Transfer of ownership
10) The form of business organization in the United States that has the greatest amount of capital is
____.
A) the sole proprietorship
B) the partnership
C) the sub-chapter corporation
D) the publicly traded corporation
11) Double taxation refers to which of the following scenarios?
A) Both bondholders AND shareholders of a corporation must pay taxes on proceeds received.
B) The corporation pays taxes on its earnings, and creditors pay taxes on interest received.
C) The corporation pays taxes on its earnings, and shareholders pay taxes on dividends received.
D) All of the above
12) In practice,
A) the structure of the corporation separates owners from managers.
B) the corporate board selects the main corporate officers.
C) the corporate board is elected by the shareholders.
D) All of the above are true.
D
1) ____ is the name given to the processes surrounding recognition of the principal-agent problem and
ways to align agents with the interests of the principals.
A) Principal theory
B) Interested party theory
C) Agency theory
D) Compensation process theory
2) In agency theory, the owners of the business are referred to as ___, and the managers are referred to
as ___.
A) bondholders, principals
B) stockholders, bondholders
C) agents, principals
D) principals, agents
3) Which of the following is NOT an example of an agency cost?
A) Paying an accounting firm to audit your financial statements
B) Paying an insurance company to assure that building codes have been met for new construction
C) Paying a landscaping firm to maintain your firm's grounds
D) All of the above are agency costs.
4) The problem of motivating one party to act in the best interest of another party is known as the ____.
A) leadership directive
B) management priority
C) principal-agent problem
D) sigma six structure
C
5) Which of the following compensation packages is likely to work best for executive managers?
A) Piece-meal
B) Stock options
C) Quarterly bonuses
D) Commission
6) According to the annual Fortune Magazine list of top paid executives in America, what percentage of
annual compensation for the very highest paid managers comes in the form of performance bonuses or
stock options?
A) Less than 10%
B) Between 10% and 40%
C) Between 50% and 60%
D) Nearly 70%
1) ____ is the area of business that deals with how a company conducts its business and implements
controls to ensure proper procedures and ethical behavior.
A) Leadership
B) Agency Relationship
C) Corporate Governance
D) None of the above
2) Of the following, which is the most recent example of legislation passed by the federal government to
deal with a major economic or highly visible corporate event?
A) The Federal Deposit Insurance Corporation Improvement Act
B) The Securities and Exchange Act
C) The Sarbanes-Oxley Act

D) The Securities Act
3) Which of the following is NOT a feature of the Sarbanes-Oxley Act?
A) The company and auditors must annually assess the effectiveness of financial controls.
B) The company must maintain effective internal financial controls.
C) The CEO and CFO must attest to the fairness of the financial reports.
D) All of the above are features of the Sarbanes-Oxley Act.
4) Which of the following is NOT a generally accepted way to remove ineffective management of a
publicly traded firm?
A) The Board of Directors can vote to remove management.
B) The shareholders can vote out directors who won't discipline managers.
C) Outside management teams can "take over" the company.
D) All of the above are recognized methods for the removal of ineffective management.
5) The ____ removed the removed the last segments of Federal law that separated investment banking
activities from commercial banking activities.
A) Gramm-Leach-Bliley Act
B) Sarbanes-Oxley Act
C) Federal Deposit Insurance Corporation Improvement Act
D) Glass-Steagall Act
Mix
favorable; lower
In general, securities with __ characteristics will offer __ yields.

BBB corporate securities.
Default risk is likely to be highest for
investment-grade bonds.
Some financial institutions such as commercial banks are required by law to invest only in
True
Credit ratings are most commonly used to indicate which financial institutions have available funds that
they can lend to borrowers.
is liquid.
If a security can easily be converted to cash without a loss in value, it
lower; higher
Securities that offer __ liquidity will offer a __ yield to be preferred.
taxable securities; a higher before-tax yield than tax-exempt securities
If all other characteristics are similar, __ would have to offer __.
9.00 percent
Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the
after-tax yield?
15.71 percent
An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax
yield of 11 percent?
10.8 percent.
A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent.
To match this yield, taxable securities must offer a before-tax yield of
term structure of interest rates.
Holding other factors such as risk constant, the relationship between the maturity and annualized yield
of securities is called the
between maturity and yield.
The term structure of interest rates defines the relationship
False
Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.
is downward sloping.
If shorter term securities have higher annualized yields than longer term securities, the yield curve
become upward sloping.
Assume that annualized yields of short-term and long-term securities are equal. If investors believe
interest rates will increase, their actions may cause the yield curve to
None of the above
If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions
to benefit from their expectations should cause
lowest; above that
Within the category of capital market securities, municipal bonds have the __ before-tax yield, and their
after-tax yield is typically __ of Treasury bonds from the perspective of investors in high tax brackets.
positively; positively
The yield offered on a debt security is __ related to the prevailing risk-free rate and __ related to the
security's risk premium.
pure expectations theory.
The theory for the term structure of interest rates that says the shape of the yield curve is determined
solely by expectations of future interest rates is called the
15.08 percent
Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is
12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure
expectations theory?
become upward sloping.
Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market,
they may cause the yield curve to
upward; downward
According to pure expectations theory, if interest rates are expected to decrease, there will be __
pressure on the demand for short-term funds by borrowers and __ pressure on the demand for long-
term funds issued by borrowers.upward; downward
maturity markets are segmented.
The degree to which the Treasury's debt management policy could affect the term structure of interest
rates is greatest if
greater; greater, less; less
24. According to the pure expectations theory of the term structure of interest rates, the __ the
difference between the implied one-year forward rate and today's one-year interest rate, the __ is the
expected change in the one-year interest rate.
slight downward slope
Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume
the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now
have a __ (assuming no other changes).
be greater than
According to the liquidity premium theory, the expected yield on a two-year security will __ the
expected yield from consecutive investments in one-year securities.
7.6 percent.
Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year
security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one- year
forward rate is
overestimates
If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the
forward interest rate __ the market's expectation of the future interest rate.
a slight decrease
If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting __ in
interest rates.
segmented markets theory.
The theory of the term structure of interest rates, which states that investors and borrowers choose
securities with maturities that satisfy their forecasted cash needs, is the
upward pressure on the price of short-term securities.
According to the segmented markets theory, if most investors suddenly preferred to invest in short-term
securities and most borrowers suddenly preferred to issue long-term securities there would be
preferred habitat theory.
A theory states that while investors and borrowers may normally concentrate on a particular natural
maturity market, conditions may cause them to change maturity markets. This theory is called the
upward; upward
According to segmented markets theory, if investors have mostly short-term funds available and
borrowers want long-term funds, there would be __ pressure on the supply of short-term funds
provided by investors and __ pressure on the yield of long-term securities.
riding the yield curve.
If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling
them after a short period (say, one year) is called
less than
Other things equal, the yield required on A-rated bonds should be __ the yield required on B-rated
bonds whose other characteristics are exactly the same.
greater than
Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the
credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-
rated bond will likely offer a yield today that is __ the yield that was offered on an A- rated bond issued
one year ago.
expectations theory
In some time periods there is evidence that corporations initially financed long-term projects with short-
term funds. They planned to borrow long-term funds once interest rates were lower. This specifically
supports the __ for explaining the term structure of interest rates.
small; large
According to expectations theory, the sudden expectation of lower interest rates in the future will cause
a __ supply of short-term funds provided by investors, and a __ supply of long-term funds.
Expectations theory
If research showed that anticipation about future interest rates was the only important factor for all
investors in choosing short-term or long-term securities, this would support the argument made by the
segmented markets theory.
If research showed that all investors attempt to purchase securities that perfectly match their time in
which they will have available funds, this would specifically support the argument made by the
long-term; long-term
If the Treasury uses a relatively large proportion of __ debt to finance the deficit, this may place upward
pressure on __ interest rates, and corporations may reduce their investment in fixed assets.
14 percent.
You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You
are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities
that pay.
15.1
The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12
percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is __ percent.
15.0
The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12
percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is __ percent.
downward; downward
According to segmented markets theory, if investors have mostly long-term funds available and
borrowers want short-term funds, this will place __ pressure on the demand for long-term funds issued
by borrowers and the yield curve will be __ sloping.
longer; higher, shorter; lower
An upward-sloping yield curve indicates that Treasury securities with __ maturities offer __ annualized
yields.
decrease; upward
Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large
number of T-bills. This action will __ the supply of T-bills in the market and places __ pressure on the
yield of T-bills.
7.6
Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it
should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium,
a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial
paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information,
Vaughn should offer __ percent on its commercial paper.
False
If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the
future interest rate.
typically has the same slope as the Treasury yield curve.
The yield curve for corporate bonds.
True
Some types of debt securities always offer a higher yield than others.
False
Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a
higher level of risk.
True
The higher a bond rating, the lower the perceived default risk.
False
Treasury securities are exempt from federal and state income taxes.
True
The term structure of interest rates defines the relationship between maturity and annualized yielding,
holding other factors such as risk constant.
False
The graphic comparison of maturities and annualized yields is known as the interest rate
False
According to the segmented markets theory, the term structure of interest rates is determined solely by
expectations of future interest rates.
True
The forward rate is commonly used to represent the market's forecast of the future interest rate.
False
Other things being equal, an expected decrease in interest rates will increase the demand for long-term
funds by borrowers.
False
The preference for more liquid short-term securities places downward pressure on the slope of the yield
curve.
False
When expectations theory is combined with the liquidity theory, the yield on a security will always be
equal to the yield from consecutive investments in shorter-term securities over the same investment
horizon.
False
The segmented markets theory suggests that although investors and borrowers may normally
concentrate on a particular natural maturity market, certain events may cause them to wander from it.
True
If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on
longer-term securities, even when they have funds for only a short period of time. This strategy is known
as riding the yield curve.
False
Yield curves are always upward sloping.
In general, securities with favorable characteristics will offer higher yields to entice investors.
Which of the following statements is not true with respect to debt securities?
All effect debt yield: default risk, liquidity, tax status, term to maturity
Which of the following is not a characteristic affecting the yields on debt securities?
lower; higher
All other characteristics being equal, securities with __ liquidity would have to offer a __ yield to be
preferred.
longer; lower, shorter; higher
A downward-sloping yield curve indicates that Treasury securities with __ maturities offer __ annualized
yields.
increase; downward
Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of
T-bills. This action will __ the supply of T-bills in the market and place __ pressure on the yield of T-bills.
upward sloping.
If the liquidity premium theory completely describes the term structure of interest rates, then, on the
average, the yield curve should be
increase; downward
If interest rates are expected to decrease, the yield on new short-term securities may be expected to _,
and the yield curve should be ___ sloping.
upward; downward
According to segmented markets theory, if investors have mostly long-term funds available and
borrowers want short-term funds, this will place __ pressure on the demand for short- term funds by
borrowers and the yield curve will be __ sloping.
preferred habitat
The __ theory suggests that although investors and borrowers may normally concentrate on a
particular natural maturity market, certain events may cause them to wander from it.
long-term; upward
If the Treasury uses a relatively large proportion of __ debt to finance a budget deficit, this would place
__ pressure on long-term yields
Chapter 9
1. Mortgage backed securities are commonly contained within collateralized debt obligations.
true
2. Federally insured mortgages guarantee
loan repayment to the lending financial institution
3. At a given point in time, the interest rate offered on a new fixedrate mortgage is typically __ the initial
interest rate offered on a new adjustablerate mortgage.
above
4. An institution that originates and holds a fixedrate mortgage is adversely affected by __ interest rates;
the borrower who was provided the mortgage is adversely affected by __ interest rates.
increasing; decreasing
5. Rates for adjustablerate mortgages are commonly tied to the
average treasury bill rate over the previous year
6. Caps on mortgage rate fluctuations with adjustablerate mortgages (ARMs) are typically
2 percent per year and 5 percent for the mortgage lifetime
7. From the perspective of the lending financial institution, interest rate risk is
lower on a 15-year fixed-rate mortgage than on a 30 year fixed-rate mortgage
8. Mortgage companies specialize in
originating mortgages and selling those mortgages
9. For any given interest rate, the shorter the life of the mortgage, the __ the monthly payment and the
__ the total payments over the life of the mortgage.
greater; lower
10. A financial institution has a higher degree of interest rate risk on a __ than a __.
30-year fixed-rate mortgage; 15- year fixed-rate mortgage
11. A balloonpayment mortgage requires interest payments for a 10 to 20year period, at the end of
which the borrower must pay the full amount of the principal.
false
12. Use an amortization schedule. A 15year $100,000 mortgage has a fixed mortgage rate of 9 percent.
In the first month, the total mortgage payment is $_, and $_ of this amount represents payment of
interest.
1,014; 750
13. A mortgage that requires interest payments for a three to fiveyear period, then full payment of
principal, is a(n)
balloon payment mortgage
14. In an amortization schedule of monthly mortgage payments
interest payments exceeds principal payments early on

15. A mortgage with low initial payments that increase over time without ever leveling off is a
growingequity mortgage
16. The interest rate on a second mortgage is __ on a first mortgage created at the same time, because
the second mortgage is __ the existing first mortgage in priority claim against the property in the event
of default.
higher than; behind
17. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below
market interest rate throughout the life of the mortgage?
shared-appreciation mortgage
18. A __ mortgage allows the borrower to initially make small payments on the mortgage. The payments
then increase over the first 5 to 10 years and then level off.
graduated payment mortgage
19. Mortgage companies, commercial banks and savings institutions are the primary originators of
mortgages.
true
20. __ was created in 1968 as a corporation that is wholly owned by the federal government. It
guarantees payment on mortgages that meet specific criteria.
Ginnie Mae
21. "Securitization" refers to the private insurance of conventional mortgages.
false
22. A financial institution may service a mortgage even after selling it.
true
23. The difference between the 30year mortgages rate and the 30year Treasury bond rate is primarily
attributable to
credit risk
24. Mortgage prices would normally be expected to __ when the interest rates __, holding other factors
constant.
increase; decrease
25. Collateralized mortgage obligations (CMOs) are generally perceived to have
a high degree of prepayment risk
26. Mortgage prices are subject to
interest rate risk, credit risk, and prepayment risk
27. During a weak economy, the credit risk to a financial institution from investing in mortgage backed
securities representing subprime mortgages is __ than that of mortgage backed securities representing
prime mortgages.
more than
28. __ are backed by conventional mortgages.
private-label pass-through securities
29. Which of the following is not a guarantor of federally insured mortgages?
the Federal Deposit Insurance Corporation (FDIC)
30. __ economic growth will probably __ the risk premium on mortgages and __ the price of mortgages.
weak; decrease; increase
31. A __ mortgage allows borrowers to initially make small payments on the mortgage, which are then
increased on a graduated basis over the first five to ten years; payments then level off from there on.
graduated payment
32. The adjustable rate mortgage creates uncertainty for the __ profit margin, but reduces the
uncertainty for the __.
borrowers; originator
33. When financial institutions originate residential mortgages, the mortgage contract should not specify
the mortgage contract should specify all of the above
34. Which of the following is not a common type of mortgagebacked security according to your text?
balloon payment mortgage certificates
35. __ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.
prepayment
36. Mortgage backed securities are assigned ratings by:
rating agencies
37. In a collateralized mortgage obligation (CMO), mortgages are segmented into __ (or classes).
tranches
38. The credit crisis is mostly attributed to the use of:
liberal criteria applied by mortgage originators
39. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:
invested heavily in subprime mortgages
40. __ mortgages enabled more people with relatively lower income, or high existing debt, or a small
down payment to purchase homes.
subprime
41. The secondary mortgage market that accommodates originators of mortgages who desire to sell
their mortgages before maturity.
true
42. Regardless of what happens to market interest rates, most adjustablerate mortgages (ARMs) specify
a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.
true
43. Some adjustablerate mortgages (ARMs) contain an option clause that allows mortgage holders to
switch to a fixedrate mortgage within a specified period.
true
44. Mortgage lenders normally charge a higher initial interest rate on adjustable rate mortgages than on
fixedrate mortgages.
false
45. A balloonpayment mortgage requires interest payments for a three to fiveyear period. At the end of
this period, full payment of the principal (the balloon payment) is required.
true
46. During the early years of a mortgage, most of the monthly payment reflects principal.
false
47. Mortgages are rarely sold in the secondary market.
false
48. An increase in either the riskfree rate or the risk premium on a fixedrate mortgage results in a higher
required rate of return when investing in the mortgage and therefore causes mortgage prices to
decrease.
true
49. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on
its debt payments and therefore tends to decrease mortgage prices.
false
50. The higher the level of equity invested by the borrower, the higher the probability that the loan will
default.
false
51. Borrowers who have a lower level of income relative to the periodic loan payments are more likely
to default on their mortgages.
true
52. Non U.S. financial institutions never hold mortgages on U.S. property.
false
53. The __ market accommodates originators of mortgages that desire to sell their mortgages prior to
maturity.
secondary
54. Financial institutions that hold fixed rate mortgages in their asset portfolios are exposed to __ risk,
because they commonly use funds obtained from short term customer deposits to make long term
mortgage loans.
interest rate
55. From the perspective of the lending financial institution, there is a __ degree of interest rate risk for
__maturity mortgages.
higher; longer and lower; shorter
56. During the early years of a mortgage,

most of the monthly payment reflects interest
57. Which of the following will typically require homeowners to ultimately request a new mortgage?
balloonpayment mortgage
58. Which of the following is not true with respect to a growingequity mortgage?
it involves payment that level off after the first five to ten years of the mortgage
59. __ economic growth will probably __ the risk premium on mortgages and __ the price of mortgages.
weak; decrease; increase
60. The probability that a borrower will default (credit risk) is influenced by all of the following, except
credit risk is affected by all the above
61. In a short sale of a home:
the lender allows the homeowners to sell the home for less than what is owed on the mortgage; and the
lender does not recover the full amount on the mortgage
62. An investor in interestonly collateralized mortgage obligations (CMOs) would not be concerned that
homeowners will prepay the underlying mortgages.
false
63. The valuation of mortgagebacked securities is difficult because of limited transparency.
true
64. A(n) ___ problem occurs when a person or institution does not have to bear the full consequence of
its behavior and therefore assumes more risk than it otherwise would.
moral hazard
65. A ____ is a privately negotiated contract that protects investors against the risk of default on
particular debt securities such as mortgagebacked securities.
credit default swap
66. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.
False
1. The field of finance is closely related to the fields of:
A. statistics and economics

B. statistics and risk analysis
C. economics and accounting
D. accounting and comparative return analysis
View answer
Correct answer: (C)
economics and accounting
2. Which of the following properly lists balance sheet items in order of liquidity, from
most liquid to least liquid?
A. Accounts receivable, inventory, marketable securities, cash.

B. Cash, marketable securities, accounts receivable, inventory.
C. Inventory, marketable securities, cash, accounts receivable.
D. Cash, inventory, accounts receivable, marketable securities.
View answer
Correct answer: (B)
Cash, marketable securities, accounts receivable, inventory.
3. Amortization is considered a source of funds to the firm because:
A. it is purely an accounting entry and doesn't involve a direct disbursement of

funds, freeing up these funds for other investments
B. it represents a reduction in asset holdings
C. it represents an increase in an asset account
D. amortization is not a source of funds
View answer
Correct answer: (A)
it is purely an accounting entry and doesn't involve a direct disbursement of funds,
freeing up these funds for other investments
4. Profitability ratios measure:
A. the speed at which the firm is turning over its assets

B. the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
C. the firm's ability to pay off short term obligations as they are due
D. the debt position of the firm in light of its assets and earning power
View answer
Correct answer: (B)
the ability of the firm to earn an adequate return on sales, total assets, and invested
capital
5. Receivables turnover is:
A. a profitability ratio
B. a debt utilization ratio
C. an asset utilization ratio
D. a liquidity ratio
View answer
Correct answer: (C)
an asset utilization ratio
6. Financial ratios are used to:
A. weigh and evaluate the operating performance of the firm

B. provide an absolute benchmark of industry performance
C. determine which firm will provide the highest return to investors
D. None of the above are correct
View answer
Correct answer: (A)
weigh and evaluate the operating performance of the firm
7. The construction of the pro forma income statement is based on:
A. the prior year's income statement

B. sales projections and the production plan
C. the cash budget
D. the cash budget and prior year's income statement
View answer
Correct answer: (B)
sales projections and the production plan
8. The primary purpose of the cash budget is:
A. to break the income statement down into monthly periods

B. to determine monthly cash receipts
C. to determine the collection pattern
D. to allow the firm to anticipate the need for outside funding
View answer
Correct answer: (D)
to allow the firm to anticipate the need for outside funding
9. Operating leverage may be defined as:
A. the degree to which debt is used in financing the firm

B. the difference between price and variable costs
C. the extent to which capital assets and fixed costs are utilized
D. the difference between fixed costs and the contribution margin
View answer
Correct answer: (C)
the extent to which capital assets and fixed costs are utilized
10. Financial leverage:
A. reflects the firm's commitment to fixed, financial assets

B. has no impact on the earning of the firm
C. reflects the amount of debt used in the capital structure of the firm
D. primarily affects the left side of the balance sheet
View answer
Correct answer: (C)
reflects the amount of debt used in the capital structure of the firm
11. Most retail stores are mainly concerned with:

A. their buyers' forecasts for the coming season
B. matching sales and inventory levels
C. decreasing inventory turnover
D. their investment in capital assets
View answer
Correct answer: (B)
matching sales and inventory levels
12. The liquidity premium theory suggests that long-term interest rates are higher than
short-term interest rates because:
A. investors generally prefer to invest short periods of time

B. government policy maintains this relationship
C. there is greater risk in long-term bonds
D. exchange rate fluctuations establish this relationship
View answer
Correct answer: (C)
there is greater risk in long-term bonds
13. Using a lockbox system to improve collections:
A. is more expensive than the use of collection centers

B. utilizes local banks to clear local payments made to the collection center
C. provides more float than collection centers
D. results in checks being forward to a P.O. box and clearing through local banks
View answer
Correct answer: (D)
results in checks being forward to a P.O. box and clearing through local banks
14. All of the following are factors influencing the choice of marketable securities
except:
A. yield
B. maturity
C. marketability
D. maximum investment allowed
View answer
Correct answer: (D)
maximum investment allowed
15. In establishing credit standards, the firm must consider the nature of the credit risk
based on all of the following, except:
A. prior record of payment

B. terms of credit
C. financial stability
D. current net worth
View answer
Correct answer: (B)
terms of credit
16. A cash discount may best be defined as:
A. a reduction in price if payment is made within the specified time period

B. a discount offered to critical suppliers
C. a discount applied to volume sales
D. a discount or the repayment of the firm's debt
View answer
Correct answer: (A)
a reduction in price if payment is made within the specified time period
17. Commercial paper may best be defined as:
A. a short term obligation of the government issued to commercial investors

B. short term unsecured promissory notes issued by corporations
C. an insignificant source of funds to large corporations
D. the debt obligations of chartered banks
View answer
Correct answer: (B)
short term unsecured promissory notes issued by corporations
18. The extent to which inventory financing may be employed is based on all of the
following, except:
A. the marketability of the pledged goods

B. their associated price stability of the goods
C. the perishability of the goods
D. the control of the goods by the manufacturer
View answer
Correct answer: (D)
the control of the goods by the manufacturer
19. If interest or compounding is done on other than an annual basis, adjust by:
A. dividing the number of years by the number of compounding periods

B. multiplying the number of years by the number of compounding periods
C. dividing the interest rate by the number of compounding period
D. multiplying the years and dividing the interest rate by the number of
compounding periods
View answer
Correct answer: (D)
multiplying the years and dividing the interest rate by the number of compounding
periods
20. Annuity payments are generally assumed to occur:
A. during the period

B. at the beginning of the period
C. at the end of the period
D. it doesn't matter when they occur
View answer
Correct answer: (C)
at the end of the period
21. The valuation of a financial asset is based on determining:
A. the present value of future cash flows

B. the current yield to maturity on long term corporate bonds
C. the capital budgeting process
D. what the corporation is paying to attract preferred shareholders
View answer
Correct answer: (A)
the present value of future cash flows
22. When the coupon rate on a bond is equal to the yield to maturity, the price of the
bond will be:
A. par
B. above par
C. below par
D. more information is required
View answer
Correct answer: (A)
par
23. To determine the price of preferred stock:
A. divide the rate of return by the dividend amount

B. divide the dividend amount by the rate of return
C. divide the dividend amount by the rate of return minus the growth rate
D. divide the dividend amount by the growth rate
View answer
Correct answer: (B)
divide the dividend amount by the rate of return
24. One assumption underlying the use of the cost of capital to analyze capital projects
is that:
A. current costs will remain the same

B. capital structure will vary with the type of financing
C. different risk projects are required to diversify the firm
D. the analyzed projects are of comparable risk to existing projects
View answer
Correct answer: (D)
the analyzed projects are of comparable risk to existing projects
25. The cost of retained earnings is equal to:
A. the return on new common stock

B. the return on preferred stock
C. the return on existing common stock
D. It does not have a cost.
View answer
Correct answer: (C)
the return on existing common stock
26. The capital budgeting decision involves the planning of expenditures for projects
with a life of at least:
A. one year
B. five years
C. ten years
D. fifteen years
View answer
Correct answer: (A)
one year
27. Under the payback period:
A. we compute the time required to recoup the original investment

B. there is no consideration of inflows after the cutoff period
C. the time value of money is ignored
D. all of the above are correct
View answer
Correct answer: (D)
all of the above are correct
28. All of the following are true of capital cost allowance except:
A. it is a non-cash expense
B. it is not tax-deductible
C. it provides tax shield benefits
D. it should not be disregarded in capital budgeting decisions
View answer
Correct answer: (B)
it is not tax-deductible
29. The standard deviation:
A. is the square root of the variance

B. measures dispersion or variability around the expected value
C. may be used to compare investments with the same expected return
View answer
Correct answer: (D)
30. The efficient frontier represents:
A. the difference between investment returns

B. optimal risk-return tradeoffs
C. the correct investment for all firms to make
D. the correlation between profits and the portfolio effect
View answer
Correct answer: (B)
optimal risk-return tradeoffs
31. Which of the following constitutes an internal source of funds:
A. corporate bonds
B. common stock
C. commercial paper
D. retained earnings and amortization cash flow
View answer
Correct answer: (D)
retained earnings and amortization cash flow
32. It would be fair to say that securities markets in the future:
A. will become more competitive as an international market system develops

B. will be less efficient
C. will be more highly segregated than they are today
D. will be less automated than today's markets
View answer
Correct answer: (A)
will become more competitive as an international market system develops
33. The spread may best be defined as:

A. the compensation due the lead underwriter
B. the total compensation for those participating in the distribution process
C. the price finally paid by the public for the shares
D. the proceeds from the distribution received by the firm
View answer
Correct answer: (B)
the total compensation for those participating in the distribution process
34. Private placement involves selling securities directly to:
A. insurance companies
B. pension funds
C. wealthy individuals
View answer
Correct answer: (D)
35. Debt that is not secured by specific assets is called:
A. an indenture
B. a debenture
C. a mortgage agreement
D. common stock
View answer
Correct answer: (B)
a debenture
36. In a lease versus borrow to purchase decision the appropriate discount rate, except
for the salvage value, is:
A. the cost of capital

B. the aftertax cost of debt
C. the cost of equity capital
D. the cost of the debt
View answer
Correct answer: (B)
the aftertax cost of debt
37. Preferred equity has all of the following characteristics except:
A. fixed dividends
B. the cumulative right to annual dividends
C. precedence over common stock dividends
D. residual claim to income
View answer
Correct answer: (D)
residual claim to income
38. Under the marginal principle of retained earnings:
A. the firm must compare what it can earn with what shareholders could earn on
funds if they were distributed
B. all funds above and beyond retained earnings are paid to shareholders
C. funds not paid to creditors and preferred shareholders belong to common
shareholders
D. all projects are financed internally
View answer
Correct answer: (A)
the firm must compare what it can earn with what shareholders could earn on funds if
they were distributed
39. A stock dividend:
A. represents a distribution of additional shares to common shareholders

B. differs from a stock split largely in size
C. normally has no real value to the investor
View answer
Correct answer: (D)
40. A convertible security is:
A. convertible into cash at the option of the holder

B. a bond or share of preferred, convertible into common at the firm's option
C. a bond or share of preferred, convertible into common at the holders' option
D. a security convertible into a debenture at the holder's option
View answer
Correct answer: (C)
a bond or share of preferred, convertible into common at the holders' option
41. The first area of study to benefit from the focus in the 1950's to a more analytical,
decision oriented approach was:
A. cash and inventory management

B. capital budgeting (allocating financial capital to the purchase of plant and
equipment)
C. capital structure formulation (the balance between liabilities and equity)
D. dividend policy (the relationship between dividends and earnings)
View answer
Correct answer: (B)
capital budgeting (allocating financial capital to the purchase of plant and equipment)
42. Agency theory examines the:
A. relationship between the owners and managers of the firm

B. insurability of the firm's assets
C. relationship between dividend policy and firm value
D. value of the firm relative to other firms in the industry
View answer
Correct answer: (A)
relationship between the owners and managers of the firm
43. A corporation will typically pay moderate dividends in:
A. Development-Stage I
B. Growth-Stage II
C. Expansion-Stage III
D. Maturity-Stage IV
View answer
Correct answer: (C)
Expansion-Stage III
44. The balance sheet of the firm shows:
A. the profitability of the firm over time

B. the holdings and obligations of the firm
C. the assets of the firm on a current cost basis
D. the receipt and disbursement of corporate funds
View answer
Correct answer: (B)
the holdings and obligations of the firm
45. The statement of cash flows:
A. measures changes in net income over time

B. the receipt and disbursement of funds of the firm
C. the assets of the firm and the means by which they are financed
D. emphasizes the critical nature of the firm's cash flows
View answer
Correct answer: (D)
emphasizes the critical nature of the firm's cash flows
46. To an economist, the term income means:
A. sales-cost of goods sold

B. change in real worth taking place between the beginning and each of a period
C. operating profit-interest expense
D. earnings aftertaxes
View answer
Correct answer: (B)
change in real worth taking place between the beginning and each of a period
47. Under the Du Pont method of analysis, return on total assets is:
A. profit margin times assets turnover

B. net income/total assets
C. income before interest and taxes (EBIT)/total assets
D. net income/sales
View answer
Correct answer: (B)
net income/total assets
48. To the securities analyst, the most important ratio group is:
A. asset utilization
B. profitability
C. liquidity
D. debt utilization
View answer
Correct answer: (B)
profitability
49. Which of the following is not a step in the development of the pro forma income
statement?
A. Establish a sales projection.

B. Determine a production schedule and associated expenses to determine gross
profit.
C. Determine the cash receipts.
D. Determine profit by completing the actual pro forma statement.
View answer
Correct answer: (C)
Determine the cash receipts.
50. The first step in preparing the pro forma balance sheet is to:
A. prepare the pro forma income statement

B. prepare the cash budget
C. prepare the statement of cash flows
D. examine the prior period's balance sheet and translate the items through time
View answer
Correct answer: (D)
examine the prior period's balance sheet and translate the items through time
51. On the pro forma income statement, the increase in retained earnings is derived:
A. earnings before taxes - taxes

B. earnings aftertaxes - dividends
C. operating profit - taxes
D. operating profit - dividends
View answer
Correct answer: (B)
earnings aftertaxes - dividends
52. Most break-even analysis:
A. is conducted on the basis of cash flows

B. is theoretical only and has little impact on the firm
C. excludes fixed costs
D. is done on the basis of accounting flows
View answer
Correct answer: (D)
is done on the basis of accounting flows
53. The indifference point identifies:
A. equality of impact on eps between two financing plans

B. equality of impact on EBIT between two financing plans
C. equality of impact on revenue between two financing plans
D. equality of impact on number of shares between two financing plans
View answer
Correct answer: (A)
equality of impact on eps between two financing plans
54. The key to current asset planning is:
A. ensuring that the firm remains current on its obligation

B. maintaining an inventory surplus to ensure liquidity
C. forecasting sales accurately and matching production with the forecast
D. maintaining the proper rate of asset growth
View answer
Correct answer: (C)
forecasting sales accurately and matching production with the forecast
55. Which of the following would not be important in examining the firm's build-up of
accounts receivable/cash/current assets:
A. sales forecast
B. cash receipts and cash payments schedules
C. income statement
D. a brief cash budget
View answer
Correct answer: (C)
income statement
56. An inverted yield curve often foreshadows:
A. an inflationary period
B. a recessionary period
C. a large government bond issue
D. nothing at all
View answer
Correct answer: (B)
a recessionary period
57. If a firm has an average daily, remittance of $4,000,000 and 1.5 days in the collection
process may be saved through a lockbox system, has the firm freed up any real funds
for other investment?
A. No, these funds are theoretical in nature only

B. Yes, approximately $2,666,667 has been freed up
C. Yes, approximately $6,000,000 has been freed up
D. Cannot be determined from information provided
View answer
Correct answer: (C)
Yes, approximately $6,000,000 has been freed up
58. The level of accounts receivable for the firm:
A. should be judged based on historical standards of industry norms

B. should be judged as to whether the return earned on A/R equals or exceeds the
potential gain from other investments
C. is irrelevant as long as sales are increasing
D. is not the concern of the financial manager
View answer
Correct answer: (B)
should be judged as to whether the return earned on A/R equals or exceeds the
potential gain from other investments
59. The net credit position of the firm is defined as:
A. its credit rating

B. the extent to which the firm has utilized its credit line
C. the difference between short and long term debt
D. the difference between accounts receivable and accounts payable
View answer
Correct answer: (D)
the difference between accounts receivable and accounts payable
60. The major disadvantage of commercial paper is:
A. the continued availability of funds is less certain than with bank financing
B. that there is no secondary market for commercial paper
C. firms must maintain an account balance equal to the paper outstanding
D. commercial paper is normally issued with a floating interest rate
View answer
Correct answer: (A)
the continued availability of funds is less certain than with bank financing
61. The interest rate used in time value of money calculations is also referred to as:
A. a discount rate, rate of return or yield

B. a discount rate, accounting return or yield
C. a compound rate, rate of return or market return
D. a compound rate, accounting return, or yield
View answer
Correct answer: (A)
a discount rate, rate of return or yield
62. The value in five years of a stream of payments received over the five year period is
known as:
A. future value-annuity
B. present value-annuity
C. compound sum-single amount
D. present value-single amount
View answer
Correct answer: (A)
future value-annuity
63. A payoff schedule for a loan is known as:
A. a mortgage
B. an interest schedule
C. a principal
D. an amortization schedule
View answer
Correct answer: (D)
an amortization schedule
64. The interest rate used to discount the cash flows associated with a bond is:
A. the required rate of return on the firm's equity

B. the yield to maturity
C. the prime rate
D. the government T-bill rate
View answer
Correct answer: (B)
the yield to maturity
65. If the yield to maturity changes, the effect will be greatest on:
A. long term bonds

B. short term bonds
C. government bonds
D. the effect will be the same for all bonds
View answer
Correct answer: (A)
long term bonds
66. The value of a share of common stock may be thought of as:
A. a perpetuity
B. an annuity
C. the present value of a perpetuity
D. the present value of expected future dividends
View answer
Correct answer: (D)
the present value of expected future dividends
67. The cost of debt is measured by:
A. the yield to maturity on the firm's bonds

B. the coupon rate on the firm's bonds
C. the weighted average cost of capital
D. the marginal cost of capital
View answer
Correct answer: (A)
the yield to maturity on the firm's bonds
68. The least expensive form of financing for the firm is:
A. existing common stock

B. preferred stock
C. debt
D. new common stock
View answer
Correct answer: (C)
debt
69. As more and more funds are required by the firm, the cost of each component of
the capital structure may increase. These incremental changes are most correctly
referred to as:
A. the weighted average cost of capital

B. the marginal cost of capital
C. the cost of capital
D. the incremental cost of capital
View answer
Correct answer: (B)
the marginal cost of capital
70. All of the following are widely used methods for evaluating capital expenditures
except;
A. payback period
B. internal rate of return
C. net present value
D. weighted average cost of capital
View answer
Correct answer: (D)
weighted average cost of capital
71. All of the following are true regarding capital rationing except:
A. it places on artificial constraint on funds that many be invested

B. it may result out of a fear of growth
C. it may result out of a hesitation to use external sources of funds
D. it will help the overall profitability of the firms
View answer
Correct answer: (D)
it will help the overall profitability of the firms
72. The expected value may be defined as:
A. a weighted average of outcomes times their probability

B. the arithmetic average of the outcomes
C. the median value of the possible outcomes
D. a measure of dispersion or variability
View answer
Correct answer: (A)
a weighted average of outcomes times their probability
73. The key to simulation analysis has been:
A. statistical analysis
B. the development of the computer
C. risk adjusted interest rates
D. the ability to classify investments as to their risk class
View answer
Correct answer: (B)
the development of the computer
74. Markets comprised of securities with maturities of one year or less are generally
referred to as:
A. money markets
B. capital markets
C. stock markets
D. bond markets
View answer
Correct answer: (A)
money markets
75. A major disadvantage of preferred stock is:
A. common stock dividends have a higher order of precedence

B. dividends are not tax-deductible
C. there is no secondary market for preferred stock
D. the preferred dividend may vary greatly year to year
View answer
Correct answer: (B)
dividends are not tax-deductible
76. Organized securities markets exhibit all of the following characteristics except:
A. listings on national and regional exchanges are mutually exclusive

B. each exchange has a central location where buying and selling occurs
C. brokers represent the actual buyers and sellers
D. securities are listed and traded with the approval of the board of governors
View answer
Correct answer: (A)
listings on national and regional exchanges are mutually exclusive
77. All of the following influence the price of a stock for the firm going public by way of
an IPO except:
A. the previous share price

B. an in-depth company analysis
C. the P/E ratio for similar firms in the industry
D. anticipated public demand
View answer
Correct answer: (A)
the previous share price
78. Going public offers the firm many of the advantages listed below with the exception
of:
A. security markets may be tapped for a greater amount of funds

B. the prestige of a public security may help in bank negotiations
C. marketable securities may be used for acquisitions
D. there is less pressure for short-term profits
View answer
Correct answer: (D)
there is less pressure for short-term profits
79. With a secured claim:
A. specific assets are pledged in the event of default

B. a debenture exists
C. the lower the value of the initial security
D. pledged assets are often sold off and the proceeds distributed
View answer
Correct answer: (A)
specific assets are pledged in the event of default
80. Which of the following is a benefit of debt to the firm:
A. interest and principal obligations are contractually set

B. interest payments are tax deductible
C. indenture agreements provide the firm with no restrictions
D. used beyond a certain point, debt will decrease the cost of capital
View answer
Correct answer: (B)
interest payments are tax deductible
81. Under a pre-emptive right provision:
A. holders of common stock must be given the first option to purchase new shares
B. common shareholders have a pre-emptive right to dividends
C. preferred shareholders have the first option on new common shares
D. dilution of existing positions is encouraged
View answer
Correct answer: (A)
holders of common stock must be given the first option to purchase new shares
82. A preferred issue carrying a call provision will carry:
A. a higher yield than non-callable preferred

B. a lower yield than non-callable preferred
C. the same yield as non-callable preferred
D. the same yield as callable debt
View answer
Correct answer: (A)
a higher yield than non-callable preferred
83. Wealthier shareholders tend to prefer:
A. a high dividend payout ratio

B. short term capital gains
C. floating rate dividends
D. capital appreciation
View answer
Correct answer: (D)
capital appreciation
84. In chronological order, which of the following is correct:Refer to text page 703.
A. ex-dividend date, holder of record date, payment date

B. holder of record date, ex-dividend date, holder of record date
C. payment date, ex-dividend date, holder of record date
D. holder of record date, payment date, ex-dividend date
View answer
Correct answer: (A)
ex-dividend date, holder of record date, payment date
85. The conversion ratio indicates:

A. the number of shares of common to which the security may be converted
B. the conversion price of the security
C. the number of bonds the common share may be converted to
D. the number of bonds the preferred share may be converted to
View answer
Correct answer: (A)
the number of shares of common to which the security may be converted
86. A warrant may best be defined as:
A. an option to sell a specified number of shares at a stated price

B. an option to buy a stated number of shares at a stated price
C. a convertible security
D. a bond derivative
View answer
Correct answer: (B)
an option to buy a stated number of shares at a stated price
87. Which of the following is not a non-financial motive for merging:
A. the desire to expand management capabilities

B. the need to expand marketing capabilities
C. the desire for easier access to capital markets
D. the acquisition of new products
View answer
Correct answer: (C)
the desire for easier access to capital markets
88. If a firm acquires another firm with a higher P/E ratio:
A. postmerger earnings per share will be diluted

B. a cash acquisition is questionable
C. a stock-for-stock exchange should be pursued
D. none of the above are correct
View answer
Correct answer: (C)
a stock-for-stock exchange should be pursued
89. The arrangement preferred by most business firms and foreign government is:
A. the joint venture

B. the export arrangement
C. the licensing agreement
D. the fully owned foreign subsidiary
View answer
Correct answer: (A)
the joint venture
90. The spot rate is:
A. unrelated to the foreign exchange rate

B. the rate of exchange for future delivery
C. the rate of exchange for immediate delivery
D. the "black market" exchange rate
View answer
Correct answer: (C)
the rate of exchange for immediate delivery
91. To minimize transaction exposure, firms may pursue which of the following activities:
A. forward exchange market hedging

B. money market hedging
C. currency futures market hedging
D. all of the above are correct.
View answer
Correct answer: (D)
all of the above are correct.
92. The ultimate measure of performance is:
A. the amount of the firm's earnings

B. how the earnings are valued by the investor
C. the firm's profit margin
D. return on the firm's total assets
View answer
Correct answer: (B)
how the earnings are valued by the investor
93. Financial markets:
A. exist as a vast global network of individuals and financial institutions

B. include a broad group representing lenders, borrowers, owners, institutional
investors, corporations, government units and others
C. circulate information quickly that affects prices of securities
D. all of the above
View answer
Correct answer: (D)
all of the above
94. The income statement measures:
A. what the firm owns and how those assets are financed
B. the profitability of the firm at a given point in time
C. the profitability of the firm over a period of time
D. how changes in the balance sheet are financed over time
View answer
Correct answer: (C)
the profitability of the firm over a period of time
95. All of the following are examples of tax deductible expenses, except:
A. dividends on common shares

B. interest payments
C. amortization charges
D. sales and administrative expenses
View answer
Correct answer: (A)
dividends on common shares
96. Which of the following is not the responsibility of financial management?
A. allocation of funds to current and capital assets

B. obtaining the best mix of financing alternatives
C. preparation of the firm's accounting statements
D. development of an appropriate dividend policy
View answer
Correct answer: (C)
preparation of the firm's accounting statements
97. The allocation of capital is determined by:
A. expected rates of return

B. the Bank of Canada
C. the initial sale of securities in the primary market
D. the size of the federal debt
View answer
Correct answer: (A)
expected rates of return
98. All of the following are true of shareholders' equity except:
A. it represents the combined total of the firm's current and long term assets
B. it represents the total contribution and ownership interest of preferred and
common shareholders
C. the three basic components are preferred stock, common stock, and retained
earnings
D. it represents the difference between the firm's assets and liabilities
View answer
Correct answer: (A)
it represents the combined total of the firm's current and long term assets
99. Asset utilization ratios measure:

B. the ability of the firm to earn on adequate return on sales, total assets, and
invested capital
View answer
Correct answer: (A)
the speed at which the firm is turning over its assets
100. Among the liquidity ratios, one would include:
A. receivables turnover and inventory turnover

B. current ratio and quick ratio
C. capital asset turnover and total asset turnover
D. receivables turnover and total asset turnover
View answer
Correct answer: (B)
current ratio and quick ratio
101. To the bondholder, the most important ratio is:
A. profit margin
B. quick ratio
C. times interest earned
D. debt to total assets
View answer
Correct answer: (D)
debt to total assets
102. In preparing the pro forma balance sheet, all of the following will normally remain
unchanged from the prior period except:
A. accounts receivable
B. marketable securities
C. long term debt
D. common stock
View answer
Correct answer: (A)
accounts receivable
103. The conservative firm will utilize:
A. a high degree of operating leverage

B. a low degree of operating leverage
C. high fixed costs
D. a higher profit margin
View answer
Correct answer: (B)
a low degree of operating leverage
104. The degree of financial leverage may be defined as:
A. percent change in sales/percent change in volume

B. percent change in EPS/percent change in net income
C. percent change in EPS/percent change in EBIT
D. percent change in EPS/percent change in sales
View answer
Correct answer: (C)
percent change in EPS/percent change in EBIT
105. To enhance overall operating results, a firm should prudently use which of the
following:
A. operating leverage
B. financial leverage
C. combined leverage
D. conservative leverage
View answer
Correct answer: (C)
combined leverage
106. A major advantage of using short term funds is:
A. there is no advantage
B. there are always more easily obtained
C. there are no governmental procedures with which to comply
D. interest rates are normally lower
View answer
Correct answer: (D)
interest rates are normally lower
107. A collection center:
A. involves using geographically disbursed centers to collect from non-paying

customers
B. utilizes local banks to clear local payments made to the collection center
C. is lower in cost to the firm than a lockbox system
D. results in checks being forwarded to a P.O. box and clearing through local bank
branches
View answer
Correct answer: (B)
utilizes local banks to clear local payments made to the collection center
108. In monitoring collection policy, the firm should look at all of the following, except:
A. average collection period

B. ratio of bad debts to credit sales
C. aging of accounts receivable
D. terms of credit
View answer
Correct answer: (D)
terms of credit
109. In return for providing loans and other services, banks may require that business
customers maintain
A. a specified profit margin

B. a compensating balance
C. a sinking fund
D. a specified growth rate
View answer
Correct answer: (B)
a compensating balance
110. Characteristics of pledging accounts receivable include all of the following, except:
A. the sale of receivables to a finance company

B. the lender stipulates which accounts are of sufficient quality
C. 60-80% of the value of the acceptable collateral may be borrowed
D. the interest rate is normally well in excess of prime
View answer
Correct answer: (A)
the sale of receivables to a finance company
111. The value today of an amount to be received at some point in the future is known
as:
A. present value-annuity
B. future value-annuity
C. present value-single amount
D. future value-single amount
View answer
Correct answer: (C)
present value-single amount
112. A series of payments required to accumulate a given amount is known as:
A. future value-annuity
B. present value-annuity
C. annuity equalling a future amount
D. annuity equalling a present amount
View answer
Correct answer: (C)
annuity equalling a future amount
113. Financial risk relates to:
A. the ability of the firm to pay dividends

B. the ability of the firm to access capital markets for additional funds
C. the ability of the firm to meet debt obligations as they come due
D. the firm's financial risk premium
View answer
Correct answer: (C)
the ability of the firm to meet debt obligations as they come due
114. The beta coefficient measures:
A. the return relative to the risk-free rate

B. the return relative to the market return
C. the historical volatility relative to the market's volatility
D. the required return on a financial asset
View answer
Correct answer: (C)
the historical volatility relative to the market's volatility
115. All of the following are steps in the decision-making process of a good capital
budgeting process except:
A. obtaining the necessary financing

B. collection of data
C. evaluation and decision making
D. re-evaluation and adjustment
View answer
Correct answer: (A)
obtaining the necessary financing
116. Under the net present value method:
A. the interest rate is determined that equates inflows and outflows

B. the time value of money is not taken into account
C. inflows are discounted back to determine if they exceed outflows
D. the basic discount rate is the internal rate of return
View answer
Correct answer: (C)
inflows are discounted back to determine if they exceed outflows
117. Risk in capital budgeting may be defined as:
A. the chance the firm won't be able to meet its debt obligations
B. the possibility of the firm losing its competitive position
C. the variability of possible outcomes from a given investment
D. the possibility that the firm can't obtain funds needed to finance the desired
asset
View answer
Correct answer: (C)
the variability of possible outcomes from a given investment
118. All methods used in evaluating risk in capital budgeting have one thing in
common:
A. they use the coefficient of variation to determine the discount rate

B. risk classes are used to determine discount rates
C. they use computer-based statistical analysis
D. they recognize the differences in risk levels and adjust for them
View answer
Correct answer: (D)
they recognize the differences in risk levels and adjust for them
119. In recent years Government of Canada funding requirements have:
A. increased and become more short term

B. increased and become more long term
C. decreased and become more short term
D. decreased and become more long term
View answer
Correct answer: (D)
decreased and become more long term
120. Nonresident holdings of Canadian securities are most significant in the:
A. bond market
B. money market
C. stock market
D. mortgage market
View answer
Correct answer: (A)
bond market
121. The main function of the investment dealer is to serve as:
A. the middleperson between the firm in need of funds and investors

B. underwriter
C. an advisor to the firm
D. a market maker
View answer
Correct answer: (A)
the middleperson between the firm in need of funds and investors
122. All of the following are characteristics of private placements except:

A. there are no securities commission filing requirements
B. there is less flexibility for the firm
C. initial costs may be lower than with a public issue
D. the interest rate is usually higher due to lower liquidity
View answer
Correct answer: (B)
there is less flexibility for the firm
123. The coupon rate on a bond is:
A. the initial or face value of the bond

B. the yield to maturity
C. the rate at which the principal of the bond accrues
D. the stated interest rate of the bond
View answer
Correct answer: (D)
the stated interest rate of the bond
124. Bonds are rated based on all of the following criteria except:
A. ability to make interest payments

B. consistency of performance
C. debt-equity ratio
D. nominal yield
View answer
Correct answer: (D)
nominal yield
125. As the owners of the firm, common shareholders:
A. have a primary claim on earnings

B. have the right to vote on all important corporate issues
C. have a legally enforceable right to dividends
D. play a secondary role in financing the firm
View answer
Correct answer: (B)
have the right to vote on all important corporate issues
126. Dividends may be considered relevant because:
A. they increase the investor's overall return

B. a higher return will be earned than with retained earnings
C. they are preferred by investors in higher tax brackets
D. they resolve uncertainty in the minds of investors
View answer
Correct answer: (D)
they resolve uncertainty in the minds of investors
127. All of the following are characteristics of the expansion stage of corporate growth
except:
A. sales expansion continues, but at a decreasing rate

B. returns on investment decline
C. the asset expansion rate increases
D. the firm is better able to pay higher cash dividends
View answer
Correct answer: (C)
the asset expansion rate increases
128. The purchaser or holder of a call option has:
A. the obligation to sell the underlying security

B. the obligation to buy the underlying security
C. the right but not the obligation to sell the underlying security
D. the right but not the obligation to buy the underlying security
View answer
Correct answer: (D)
the right but not the obligation to buy the underlying security
129. If a bond with a face value of $1,000, coupon rate and yield to maturity of 8%, and
conversion ratio of 20, sees a drop in the common price to 25, the value of the security
will be:
A. $500
B. greater than $1,000
C. less than $1,000
D. $1,000
View answer
Correct answer: (D)
$1,000
130. All of the following are characteristics of the 1990s mergers and divestitures
except:
A. mergers between entertainment firms was popular

B. mergers between financial services firms was also common
C. the federal government was active in divesting crown corporations
D. high interest rates made mergers more costly than in the 1970s and 1980s
View answer
Correct answer: (D)
high interest rates made mergers more costly than in the 1970s and 1980s
131. The main focus of a stock-for-stock exchange is on:
A. the earnings per share impact of the exchange

B. the capital budgeting implications
C. the shareholders of the acquired firms
D. the growth opportunities
View answer
Correct answer: (A)
the earnings per share impact of the exchange
132. On the books of the acquiring firm, a merger may be treated as:
A. a cash purchase or a pooling of interests

B. a stock-for-stock exchange
C. a purchase of assets
D. a pooling of interests or a purchase of assets
View answer
Correct answer: (D)
a pooling of interests or a purchase of assets
133. Fundamental factors influencing exchange rates include:
A. inflation, government policies, translation exposure

B. interest rates, government policies, and expropriation
C. balance of payments, spot rates, and expropriation
D. government policies, balance of payments, inflation
View answer
Correct answer: (D)
government policies, balance of payments, inflation
134. Foreign exchange risk may be best defined as:
A. the chance of value change in foreign exchange rates

B. the chance that the demand for your currency will drop
C. the chance that exchange rates will be fixed
D. the political risk posed by foreign governments
View answer
Correct answer: (A)
the chance of value change in foreign exchange rates
135. Which of the following are not among the daily activities of financial management?
A. sale of stocks and bonds

B. credit management
C. inventory control
D. the receipt and disbursement of funds
View answer
Correct answer: (A)
sale of stocks and bonds
136. The mix of debt and equity in a firm is referred to as the firm's:
A. primary capital
B. capital composition
C. cost of capital
D. capital structure
View answer
Correct answer: (D)
capital structure
137. All of the following are decisions heavily impacted by federal income tax
considerations except:
A. lease versus purchase decisions
B. the issuance of common shares versus debt
C. cash budgeting and dividend policy decisions
D. the decision to replace on asset
View answer
Correct answer: (C)
cash budgeting and dividend policy decisions
138. Debt utilization ratios measure:

B. the ability of the firm to earn an adequate return on sales, total assets, and
invested capital
View answer
Correct answer: (D)
the debt position of the firm in light of its assets and earning power
139. Analyzing the performance of the firm through ratios over a number of years is
referred to as:
A. financial analysis
B. ratio analysis
C. trend analysis
D. operations analysis
View answer
Correct answer: (C)
trend analysis
140. In order to determine cash receipts, the financial manager must know:
A. projected sales and the collection pattern

B. projected sales and the profit margin
C. gross profit and the collection pattern
D. gross profit and taxes
View answer
Correct answer: (A)
projected sales and the collection pattern
141. Under the percent of sales method, the relationship between sales and what type
accounts are assumed to maintain or constant relationship:
A. income statement
B. cash budget
C. balance sheet
D. cash flows.
View answer
Correct answer: (C)
balance sheet
142. A higher degree of financial leverage may be desirable for:
A. a stable firm, with positive growth, under favorable economic conditions

B. an unstable firm operating in an uncertain environment
C. a stable firm operating in an uncertain environment
D. neither the stable nor unstable firm under any circumstances
View answer
Correct answer: (A)
a stable firm, with positive growth, under favorable economic conditions
143. In designing working capital policy, the financial manager is concerned with yield
curve and:
A. dividend policy
B. balance of trade figures
C. the relative volatility of short and long term rates
D. the term structure of interest rates
View answer
Correct answer: (C)
the relative volatility of short and long term rates
144. Treasury bills are:
A. government obligations with a maturity of 3-5 years

B. sold at a discount to face value
C. the only government security that pays cash dividends
D. extremely illiquid, although extremely safe
View answer
Correct answer: (B)
sold at a discount to face value
145. As the least liquid of the current assets, inventory:
A. could technically be classified as a capital asset and amortized

B. should be managed using level production
C. should be managed using seasonal production
D. should provide the highest yield to justify investment
View answer
Correct answer: (D)
should provide the highest yield to justify investment
146. All of the following are characteristics of the term loan, except:
A. credit is extended for one to seven years

B. the loan is repaid in one lump sum at maturity
C. only superior credit applicants qualify
D. interest rates may commonly change with market conditions
View answer
Correct answer: (B)
the loan is repaid in one lump sum at maturity
147. Future value of an amount allowed to grow at a given interest rate over a period of
time is known as the:
A. future value-single amount

B. present value-single amount
C. future value-annuity
D. present value-annuity
View answer
Correct answer: (A)
future value-single amount
148. Canadian mortgages have interest compounded:

A. annually
B. semiannually
C. monthly
D. it depends on the payment period
View answer
Correct answer: (B)
semiannually
149. Business risk relates to:
A. the ability of the firm to hold its competitive position

B. the ability of the firm to maintain growth in its earnings
C. the ability of the firm to maintain stability in the earnings
View answer
Correct answer: (D)
150. The required rate of return on an equity investment can be determined by:
A. the P/E yield plus the growth rate

B. the dividend yield plus the growth rate
C. the earnings yield
D. the revenue growth rate
View answer
Correct answer: (B)
the dividend yield plus the growth rate
151. In determining the appropriate capital mix, the starting point for the firm is:
A. the cost of common equity

B. the optimum capital structure
C. the present capital structure
D. the after-tax cost of debt
View answer
Correct answer: (C)
the present capital structure
152. In most capital budgeting decisions, the emphasis is on:
A. reported income
B. cash flows
C. short-term profits
D. maximization of shareholder wealth
View answer
Correct answer: (B)
cash flows
153. The basic discount rate used in net present value analysis is:
A. the internal rate of return

B. the cost of common equity
C. the net discount rate
D. the cost of capital to the firm
View answer
Correct answer: (D)
the cost of capital to the firm
154. In a replacement decision, all of the following should be considered except:
A. the cost of the new equipment

B. interest costs
C. the capital loss or gain on the sale of the old equipment
D. the difference in capital cost allowance tax shields between the old and new
equipment
View answer
Correct answer: (B)
interest costs
155. All of the following are true regarding beta except:
A. it is widely used with portfolios of common stock

B. it measures the volatility of returns relative to the expected value
C. it is an important component of the Capital Asset Pricing Model (CAPM)
D. the higher the beta, the greater the risk level
View answer
Correct answer: (B)
it measures the volatility of returns relative to the expected value
156. A decision tree analysis:
A. lays out the sequence of decisions and presents a graphical comparison

B. is a form of simulation analysis
C. tends to be more accurate than simulation techniques
D. should be utilized as the sole input for the decision making process
View answer
Correct answer: (A)
lays out the sequence of decisions and presents a graphical comparison
157. Markets comprised of securities with maturities greater than one year are generally
referred to as:
A. money markets
B. capital markets
C. stock markets
D. bond market
View answer
Correct answer: (B)
capital markets
158. Markets may be said to be efficient when:
A. prices adjust rapidly to new information

B. there is a continuous market with successive trade at widely varying prices
C. the market absorbs only small dollar amounts without destabilizing prices
View answer
Correct answer: (D)
159. The main organization used in distributing securities is:
A. the stock market

B. the underwriting syndicate
C. the primary market
D. the secondary market
View answer
Correct answer: (B)
the underwriting syndicate
160. The major problem when a public firm issues new stock is:
A. pricing the security

B. underwriting the issue
C. determining the spread
D. the dilution of existing stock
View answer
Correct answer: (D)
the dilution of existing stock
161. The main pressure on Canadian corporations to raise capital has come from:
A. shareholder pressure
B. securities analysts
C. the expansion of the economy
D. institutional pressure
View answer
Correct answer: (C)
the expansion of the economy
162. A call provision allows the firm to:
A. call the bond and common stock

B. redeem bonds prior to the call date
C. pay a discount 5-10% below par
D. redeem the bond prior to maturity
View answer
Correct answer: (D)
redeem the bond prior to maturity
163. Preferred shareholders:
A. play a primary role in the financing of the firm

B. have a subordinated claim to dividends
C. possess an ownership interest in the firm
D. normally have no vote on corporate issues
View answer
Correct answer: (D)
normally have no vote on corporate issues
164. When a rights offering is announced:
A. common shareholders may purchase one new share for each share owned
B. a stock will initially trade rights-on
C. the share price increases when the stock goes ex-rights
D. the shareholder increases the value of his holdings by exercising the rights
View answer
Correct answer: (B)
a stock will initially trade rights-on
165. To institutional investors, preferred stock may be very attractive because:
A. dividend payments are assured

B. dividends from another corporation are usually tax-exempt
C. the preferred yield is normally higher than that of debt
D. it provides balance to the issuing firm's capital structure
View answer
Correct answer: (B)
dividends from another corporation are usually tax-exempt
166. By maintaining a relatively stable dividend level, the firm:
A. hopes to increase holdings of its common shares

B. hopes to decrease holdings of its common shares
C. hopes to increase the discount rate applied to future dividends
D. hopes to decrease the discount rate applied to future dividends
View answer
Correct answer: (D)
hopes to decrease the discount rate applied to future dividends
167. If investors are optimistic about expectations for the future performance of the
underlying stock of a convertible security:
A. the conversion premium will be large

B. the conversion premium will be small
C. the bond is overpriced
D. the bond is underpriced
View answer
Correct answer: (A)
the conversion premium will be large
168. Convertible securities are subject to all of the following disadvantages except:
A. interest rates are normally below market rates

B. the convertible is purchased at a premium
C. the holder has no downside protection
D. the convertible may be subject to a call provision
View answer
Correct answer: (C)
the holder has no downside protection
169. All of the following are financial motives for mergers except:
A. the portfolio effect

B. the dividend effect
C. improved financing posture
D. tax loss carry-forwards
View answer
Correct answer: (B)
the dividend effect
170. If the acquiring firm has a higher P/E ratio than the acquired firm, the resulting
earnings per share will be:
A. the same as pre-merger

B. lower
C. higher
D. cannot be determined
View answer
Correct answer: (C)
higher
171. Canadian exporters accounted for what percentage of Canada's total production of

goods and services in 1997:
A. 15%
B. 25%
C. 35%
D. 50%
View answer
Correct answer: (C)
35%
172. The forward rate is:
A. unrelated to the foreign exchange rate

B. the rate of exchange for future delivery
C. the rate of exchange for immediate delivery
D. the "black market" exchange rate
View answer
Correct answer: (B)
the rate of exchange for future delivery
173. Political risk exposure may be minimized through all of the following except:
A. joint ventures with local entrepreneurs

B. joint ventures with firms from the countries
C. fully owned foreign subsidiaries
D. obtaining insurance in advance
View answer
Correct answer: (C)
fully owned foreign subsidiaries
174. A main benefit to the corporate form of organization is:
A. double taxation of corporate income

B. simplicity of decision making and low organizational complexity
C. limited liability for the corporate shareholders
D. a major management role exists for the firm's owners
View answer
Correct answer: (D)
limited liability for the corporate shareholders
175. The statement of cash flows:
A. measures changes in net income over time

B. the receipt and disbursement of funds of the firm
C. the assets of the firm and the means by which they are financed
D. emphasizes the critical nature of the firm's cash flows
View answer
Correct answer: (D)
emphasizes the critical nature of the firm's cash flows
176. The current cost method of financial reporting takes inflation into account and has
the greatest impact on:
A. the valuation of accounts receivable and marketable securities

B. inventory and plant and equipment
C. current assets
D. the determination of dividend policy
View answer
Correct answer: (B)
inventory and plant and equipment
177. To the banker/creditor, the most important ratio group is:
A. asset utilization
B. profitability
C. liquidity
D. debt utilization
View answer
Correct answer: (C)
liquidity
178. All of the following are primary considerations for cash payments except:
A. material costs
B. labour and overhead costs
C. receivable receipts
D. disbursements for general & administrative expenses
View answer
Correct answer: (C)
receivable receipts
179. If management of an aggressive firm is apprehensive about economic conditions:
A. a highly leveraged approach should be maintained

B. a conservative approach should be implemented
C. the use of leverage should be tailored to the desired level of risk
D. the attitude of the firm has no impact
View answer
Correct answer: (B)
a conservative approach should be implemented
180. A high degree of financial leverage:
A. is a sign of astute financial management

B. will always decrease the cost of financing for the firm
C. will result in an increase of the firm's overall value in all cases
D. may increase the firm's risk and drive the price of the shares down
View answer
Correct answer: (D)
may increase the firm's risk and drive the price of the shares down
181. The cost of capital is:
A. used as an evaluation tool

B. based on the present cost obligation's of the firm
C. the cost of long-term investment
D. the cost of maintaining the bureaucrats in Ottawa
View answer
Correct answer: (A)
used as an evaluation tool
182. A growth firm in a stable industry can normally afford to absorb how much debt
relative to a firm in a cyclical industry:
A. more debt
B. less debt
C. about the same amount of debt
D. cannot be determined
View answer
Correct answer: (A)
more debt
183. Financial capital:
A. appears under liabilities and equity on the corporate income statement

B. and the optimum capital structure are the same
C. consists of common stock, preferred stock and retained earnings only
D. consists of stocks, bonds and retained earnings
View answer
Correct answer: (D)
consists of stocks, bonds and retained earnings
184. Perhaps the most important step in the decision making process is:
A. collection of data
B. search and discovery of investment opportunities
C. evaluation and decision making
D. re-evaluation and adjustment
View answer
Correct answer: (B)
search and discovery of investment opportunities
185. The main difficulty in the capital budgeting process is:
A. determining where we want to be on the risk-return scale

B. finding viable investment opportunities
C. determining the appropriate discount rate
D. maximizing shareholder value
View answer
Correct answer: (A)
determining where we want to be on the risk-return scale
186. All of the following are true regarding the use of simulation techniques except:
A. the computer randomly selects inputs from probability distributions

B. sensitivity testing allows for the asking of "what if" questions
C. its applications are limited in the area of capital budgeting
D. they generate a range of outcomes with standard deviations
View answer
Correct answer: (C)
its applications are limited in the area of capital budgeting
187. The major supplier of funds for investment is:
A. the federal government

B. provincial and local governments
C. corporations and other business entities
D. households
View answer
Correct answer: (D)
households
188. The strong form of the efficient market hypothesis states that:
A. past price information is unrelated to future prices

B. prices reflect all public information
C. both public and private information is reflected in security prices
D. prices reflect all private or inside information
View answer
Correct answer: (C)
both public and private information is reflected in security prices
189. When new shares in a public firm are to be issued, the price will normally be
established:
A. at the current market price

B. slightly above the current market price
C. slightly below the current market price
D. at whatever price the market will bear.
View answer
Correct answer: (C)
slightly below the current market price
190. Payment to subordinated debenture holders takes place:
A. prior to payment to secured debt holders

B. prior to payment to senior debenture holders
C. after payment of preferred shareholders
D. after payment to senior debenture holders
View answer
Correct answer: (D)
after payment to senior debenture holders
191. In most firms:
capital assets grow at a constant rate
the rate of growth for fixed and current assets remains constant
there is no relationship between the growth rates for fixed and current assets
capital assets grow slowly, while current assets fluctuate
Correct answer: (D)
capital assets grow slowly, while current assets fluctuate
192. The term structure of interest rates:
shows the interest rate pattern for securities of different risks but equal maturities
shows the interest rate patterns for securities of equal risk with different maturities
is normally based on corporate securities
remains constant over time
Correct answer: (B)
shows the interest rate patterns for securities of equal risk with different maturities
193. A firm with heavy risk exposure due to short term borrowing should:
carry a large amount of fixed assets
carry more highly liquid assets
increase production to avoid inventory
prosper in the event of a credit crunch
Correct answer: (B)
carry more highly liquid assets
194. Internationally, a company may primarily prefer to hold cash balances in one currency over another
for which of the following reasons:
higher interest rates and a stronger currency relative to others
the firm is headquartered in a particular country
twenty-four hour a day access may be available
there is no real reason to favor one currency over another
Correct answer: (A)
higher interest rates and a stronger currency relative to others
195. The conditions of the terms of credit will have the greatest impact in which area:
the balance sheet
financing costs
accounts receivable
profit margin
Correct answer: (C)
accounts receivable
196. Prime rate may best be defined as:
the rate the bank charges its most credit-worthy customers
the rate charged by the Bank of Canada to chartered banks
the rate paid by Canadian firms for eurodollar funds
the rate paid by firms on long term debt

Correct answer: (A)
the rate the bank charges its most credit-worthy customers
197. A secured credit arrangement:
is never used with short-term funds
is always used with short-term funds
may help a borrower obtain otherwise unavailable funds
is a primary factor in the lender's decision
Correct answer: (C)
may help a borrower obtain otherwise unavailable funds
198. The value today of a stream of payments received over the five year period is known as:
present value-annuity
compound sum-single amount
present value-single amount
Correct answer: (B)
199. All of the following factors influence the investor's required rate of return except:
the real required rate of return
the inflation premium
the risk premium
the risk aversion factor
Correct answer: (D)
the risk aversion factor
200. In the "real world," corporate bonds usually pay interest:
continuously
quarterly
semiannually
annually
Correct answer: (C)
Semiannually
[7:50 am, 07/01/2021] Numl ARSAL: 201. Long term lease obligations are treated as:
items in the footnotes of the financial statements
solely as an expense items on the income statement
in a manner similar to debt on the balance sheet
as an asset to the firm
Correct answer: (C)
in a manner similar to debt on the balance sheet
202. All of the following are advantages of rights offerings except:
the position of current shareholders is protected
a rights offering provides the firm with a built-in securities market
more interest may be generated in the market
the dollar value of rights traded on exchanges is very high
Correct answer: (D)
the dollar value of rights traded on exchanges is very high
203. In terms of increasing risk to the investor, the proper ranking would be:
common stock, prefe…
[7:51 am, 07/01/2021] Numl ARSAL: 211. The relationship between the values of the two currencies is
known as:
the currency rate
the conversion rate

the forward rate
the foreign exchange rate
Correct answer: (D)
the foreign exchange rate
212. Forward and spot transactions take place:
over-the-counter
in the foreign currency exchange
between domestic and foreign governments
between individuals and foreign governments
Correct answer: (A)
over-the-counter
213. Which of the following is not a primary source of international business financing?
The Export Development Bank
The eurobond market
International equity markets
Domestic bond and equity markets
Correct answer: (D)
Domestic bond and equity markets
214. In analyzing the firm, the investor should consider:
the risk inherent in the firm's operation
the time patterns over which the firm's earnings increase/decrease
the quality and reliability of the firm's reported earnings
all of the above should be considered
Correct answer: (D)
215. The main focus of finance for the last 40 years has been:
mergers and acquisitions
conglomerate firms
inflation
risk-return relationships
Correct answer: (D)
risk-return relationships
216. Which of the following is not true regarding the P/E ratio?
It is the multiplier applied to earnings per share to determine current value
P/E ratios allow comparison of the relative market values of many companies based on $1 of earnings
per share.
It indicates expectations about the future of a company.
Firms expected to provide returns greater than those of the market with equal or less risk normally have
P/E ratios lower than the market P/E.
Correct answer: (D)
Firms expected to provide returns greater than those of the market with equal or less risk normally have
P/E ratios lower than the market P/E.
217. The aftertax cost of a tax deductible expense is:
cost times the tax rate
cost times (1-tax rate)
the cost of the expense
the cost divided by the tax rate
Correct answer: (B)
cost times (1-tax rate)
218. Liquidity ratios measure:
the speed at which the firm is turning over its assets
the ability of the firm to earn an adequate return on sales, total assets, and invested capital
the firm's ability to pay off short term obligations as they are due
the debt position of the firm in light of its assets and earning power.
Correct answer: (C)
the firm's ability to pay off short term obligations as they are due
219. All of the following are debt utilization ratios except:
debt to total assets
times interest earned
fixed charge coverage
debt to sales
Correct answer: (D)
debt to sales
220. The most comprehensive means of financial forecasting is:
through the use of securities analysts forecasts for the firm
done with a short term time horizon
done with a long term time horizon
through the use of pro forma financial statements
Correct answer: (D)
through the use of pro forma financial statements
221. In general, the cost of producing a product is based on material, labor, and:
profit margin
cost of goods sold
overhead costs
shipping costs
Correct answer: (C)
overhead costs
222. On the pro forma balance sheet, changes in the level of accounts payable will be determined from:
the prior balance sheet
the cash budget
the pro forma income statement
the monthly cash payments schedule
Correct answer: (D)
the monthly cash payments schedule
223. LThe more aggressive firm:
substitutes higher fixed costs for variable costs
substitutes lower fixed costs for variable costs
has lower potential profit above the break-even point
is normally more effectively managed
Correct answer: (A)
substitutes higher fixed costs for variable costs
224. The highly financially leverage firm will typically:
has a higher EPS figure than the conservative firm
has a lower EPS figure than the conservative firm
uses less debt than the conservative firm
will produce the same EPS figure as the conservative firm
Correct answer: (A)
has a higher EPS figure than the conservative firm
225. Degree of combined leverage:
should be minimized by the financial manager
affects only balance sheet items
decreases the firm's operating profit
shows the impact of sales or volume changes on bottom line EPS

Correct answer: (D)
shows the impact of sales or volume changes on bottom line EPS
226. The cash conversion cycle equals:
inventory period + collection period-payables period
payables period-inventory period-collection period
payables period + inventory period-collection period
inventory period-collection period + payables period
Correct answer: (A)
inventory period + collection period-payables period
227. Under normal conditions:
long term rates are lower than short term rates
the yield curve is downward sloping, or inverted
intermediate rates are higher than long or short term rates
short term rates are lower than long term rates
Correct answer: (D)
short term rates are lower than long term rates
228. The concept of float is best defined as:
cheques written by the corporation that are still outstanding
cheques written to the corporation that are still outstanding
the difference between the firm's recorded cash balance and the amount credited to the firm's account
by the bank
what a boat does in water
Correct answer: (C)
the difference between the firm's recorded cash balance and the amount credited to the firm's account
by the bank
229. Under normal conditions, the longer the maturity of the security:
the higher the yield
the lower the yield
the greater the possibility of the yield curve changing
the lower the level of interest rate risk
Correct answer: (A)
the higher the yield
230. The largest provider of short-term credit to the firm is:
banks
bondholders
manufacturers or sellers of goods or services
shareholders
Correct answer: (C)
manufacturers or sellers of goods or services
231. Banks will most likely provide funds for all of the following activities:
financing of seasonal needs
product line expansion
long term growth
marketing campaign
Correct answer: (D)
marketing campaign
232. All of the following are characteristics of a credit shortage, except:
the Bank of Canada tightens growth in money supply to fight inflation
business needs more funds to carry inflation-laden receivables and inventory
restrictive usury regulations are normally imposed
savings withdrawals occur, with higher rates sought by investors

Correct answer: (C)
restrictive usury regulations are normally imposed
233. A eurodollar loan may be defined as:
a loan by Canadian banks to European corporations
a loan from a foreign bank denominated in dollars
the borrowing of foreign currencies and conversion into dollars
a foreign currency loan repaid in dollars
Correct answer: (B)
a loan from a foreign bank denominated in dollars
234. Asset-backed securities
are issued by financially shaky firms
usually trade at a yield below bankers acceptances
provide the issuer with immediate cash
rarely experience losses on the assets held
Correct answer: (C)
provide the issuer with immediate cash
235. An effective rate of return captures:
the time period
present values
compounding effects
tax consequences
Correct answer: (C)
compounding effects
236. A series of payments that can be drawn from a given amount is known as:
annuity equalling a future amount
annuity equalling a present amount
Correct answer: (D)
annuity equalling a present amount
237. The time value of money plays an important role in which of the following:
understanding the effective rate on a business loan
understanding the composition of a mortgage payment
determining the true rate of return on an investment
all of the above
Correct answer: (D)
all of the above
238. If there is an increase in the inflation premium:
the yield to maturity will decrease
the price of the bond will decrease
the maturity of the bond will change proportionally
there will be no effect on the price of the bond
Correct answer: (B)
the price of the bond will decrease
239. The price-earnings ratio is affected by:
the earnings and sales growth of the firm
the volatility of the firm's performance
the debt-equity structure of the firm
Correct answer: (D)

240. The cost of capital is best calculated with:
market value weightings
book value weightings
Modigliani and Miller weightings
It doesn't matter.
Correct answer: (A)
market value weightings
241. Regardless of the type of asset being acquired, the appropriate discount rate is:
the aftertax cost of debt
the required rate of return
the weighted average cost of capital
the cost of equity capital
Correct answer: (C)
the weighted average cost of capital
242. The biggest problem facing a manager is:
the cost of financing
competitive pressures
the farther out the time horizon moves, the greater the uncertainty
changing economic conditions
Correct answer: (C)
the farther out the time horizon moves, the greater the uncertainty
243. One of the main advantages of the payback period is:
it is easy to use and places a premium on liquidity
it ignores the time value of money
all inflows related to the decision are considered

outflows are equated with inflows using the rate of return
Correct answer: (A)
it is easy to use and places a premium on liquidity
244. The internal rate of return method:
does not consider inflows after the cutoff period
calculates the interest rate that equates outflows with subsequent inflows
determines the time required to recoup the initial investment
determines whether future benefits justify current expenditures
Correct answer: (B)
calculates the interest rate that equates outflows with subsequent inflows
245. With mutually exclusive projects:
both projects can be accepted
the project with the higher NPV is accepted
both projects are rejected
only one project is accepted
Correct answer: (D)
only one project is accepted
246. All of the following are true of the coefficient of variation except:
it eliminates the size difficulty resulting from standard deviation
it is computed by dividing the standard deviation by the expected value
it measures the volatility of returns relative to the market
the larger the coefficient of variation, the greater the risk
Correct answer: (C)
it measures the volatility of returns relative to the market
247. Projects that increase the overall risk level of the firm:
should not be undertaken
should be discounted at the firm's cost of capital
should be discounted at a rate higher than the cost of capital
will have a low standard deviation
Correct answer: (C)
should be discounted at a rate higher than the cost of capital
248. The extent of correlation among projects is represented by:
the coefficient of correlation
the coefficient of variation
the standard correlation coefficient
the variance
Correct answer: (A)
the coefficient of correlation
249. One of the main purposes of the capital markets is:
to provide access to short-term funds
to provide access to long term funds
to allocate capital to the most efficient user
to set various interest rates
Correct answer: (C)
to allocate capital to the most efficient user
250. Which of the following characteristics of financial intermediaries is incorrect:
they are the interface between suppliers and demanders of funds
they increase the cost of funds to corporation and governments
they help make the flow of funds efficient and competitive
they include banks, mutual funds, and credit unions
Correct answer: (B)

they increase the cost of funds to corporation and governments
251. All of the following are typically key roles of the investment dealer except:
underwriter
market maker
broker
advisor to the firm
Correct answer: (C)
broker
252. The main function of syndicate members is:
acting as the agent of the firm
selling shares to the public
determining the spread
wholesaling shares to brokers and dealers
Correct answer: (D)
wholesaling shares to brokers and dealers
253. One of the main reasons an initial public offering (IPO) may do well in the after market is:
stabilization by the underwriters
stabilization by the firm
public misconceptions of the firm's value
the security was underpriced
Correct answer: (D)
the security was underpriced
254. New equity financing is primarily done by way of a:
public offering
private offering
rights offering
leveraged offering
Correct answer: (A)
public offering
255. The par value of a bond is:
the initial or face value of the bond
the stated interest payment
the value of the bond as traded on security markets.
Correct answer: (A)
the initial or face value of the bond
256. Bond yields are quoted in all of the following ways except:
coupon rate
current yield
yield to maturity
debt yield
Correct answer: (D)
debt yield
257. Leasing offers all of the following advantages except:
leases are an expense item that cannot be capitalized
the provisions of a lease may be less restrictive than a bond indenture
there may be no down payment requirement
creditor claims may be restricted on real property
Correct answer: (A)
leases are an expense item that cannot be capitalized
258. The ultimate ownership of the firm resides:

with management
with common shareholders
with preferred shareholders
with bondholders
Correct answer: (B)
with common shareholders
259. The most important voting issue for common shareholders is:
election of the board of directors
dividend policy
proxy assignment
adoption of the annual report
Correct answer: (A)
election of the board of directors
260. With cumulative dividends:
preferred stock may participate over and above the quoted yields
the preferred shareholder is assured of receiving a dividend every year
preferred dividends accumulate and must be paid in full
the firm's obligation to its shareholders is lessened
Correct answer: (C)
preferred dividends accumulate and must be paid in full
261. In terms of decreasing return to the investor, the proper ranking would be:
common stock, long-term government debt, preferred stock
long-term government debt, common stock, preferred stock
preferred stock, common stock, secured debt
common stock, secured debt, treasury bills

Correct answer: (D)
common stock, secured debt, treasury bills
262. Most of the firm's shareholders will prefer:
floating dividends that vary with the firm's performance
stable dividends over time
that funds be reinvested as retained earnings
stock dividends
Correct answer: (B)
stable dividends over time
263. A corporation will typically pay moderate dividends in:
Development-Stage I
Growth-Stage II
Expansion-Stage III
Maturity-Stage IV
Correct answer: (C)
Expansion-Stage III
264. Dividends are quoted –––––––––, but paid ––––––––– :
quarterly, annually
annually, quarterly
annually, semi-annually
annually, monthly
Correct answer: (B)
annually, quarterly
265. The difference between futures and forwards is:
that forwards are standardized and futures customized contracts

that most forwards are exercised and most futures closed out before expiry
that futures predetermine the price of an underlying commodity, but a forward price is flexible
that forwards are on currencies, and futures on interest rates
Correct answer: (B)
that most forwards are exercised and most futures closed out before expiry
266. The conversion price is equal to:
the conversion ratio/face value of the bond
the conversion ratio times the face value of the bond
the common share price/conversion ratio
face value of the bond/conversion ratio
Correct answer: (C)
the common share price/conversion ratio
267. One of the main ways of forcing conversion is:
calling the bond
offering bonus shares of stock as an incentive
decreasing the conversion price over time
none of the above are correct
Correct answer: (A)
calling the bond
268. The takeover tender offer could have at least one of the following occur:
Turn to a white knight
Sell the crown jewels
Adopt a shareholders rights plan
All of the above
Correct answer: (D)
All of the above

269. In determining the price to be paid for an acquisition, management should consider:
earnings
dividends
growth potential
Correct answer: (D)
270. In a stock-for-stock exchange, shareholders of the acquired firm are most concerned with:
earnings
dividends
book value exchanged
market value exchanged
Correct answer: (D)
market value exchanged
271. The portfolio effect, with respect to the P/E ratio:
has less of an influence than the projected growth rate
may have as much of an effect as the projected growth rate
has more of an effect than the projected growth rate
should not be a consideration
Correct answer: (B)
may have as much of an effect as the projected growth rate
272. When an independent local producer uses a firm's technology in return for a royalty fee, the
arrangement is called:
a joint venture
a licensing agreement
an export arrangement
a foreign subsidiary
Correct answer: (B)
a licensing agreement
273. The idea that the differences in returns earned in different countries affects exchange rates is
referred to as:
the interest rate parity theory
the purchasing power parity theory
the balance of payments parity theory
Correct answer: (A)
the interest rate parity theory
274. Translation or accounting exposure primarily affects:
foreign assets and liabilities
domestic assets and liabilities
reported earnings
the repatriation of earnings.
Correct answer: (A)
foreign assets and liabilities
275. Capital is allocated by financial markets by:
a lottery system between investment dealers
pricing securities based on their risk and expected future cash flows
by pricing risky securities higher than low-risk securities
by a government risk-rating system based on AAA for low risk and CCC for high risk
Correct answer: (B)
pricing securities based on their risk and expected future cash flows
276. The three primary sources of capital to the firm are:
net income, retained earnings, and bank loans
bondholders, preferred shareholders, and common shareholders
operating profits, extraordinary gains, dividends
amortization cash flow, net income, and retained earnings
Correct answer: (B)
bondholders, preferred shareholders, and common shareholders
277. Net worth or the book value of the firm is computed:
total assets minus shareholders' equity
total assets minus the firm's liabilities
preferred stock plus common stock plus retained earnings
shareholders equity minus preferred stock
Correct answer: (D)
shareholders equity minus preferred stock
278. All of the following areas of cash flows are analyzed except:
operations activities
uses of funds
investing activities
financing activities
Correct answer: (B)
uses of funds
279. Return on assets is computed:
net income/sales
net income/current assets

income before interest and taxes (EBIT)/total assets
Correct answer: (B)
280. Which of the following does not cause a distortion in the reporting of income?
The reporting of revenue.
The treatment of non-recurring items.
The tax-write off policy.
The firm's dividend policy.
Correct answer: (D)
The firm's dividend policy.
281. If there is one talent essential to the financial manager, it is:
the ability to plan ahead and make necessary adjustments before actual events occur
the ability to accurately determine the firm's earnings
the ability to prepare the firm's financial statements
the ability to effectively factor the firm's receivables
Correct answer: (A)
the ability to plan ahead and make necessary adjustments before actual events occur
282. In a cash budget, net cash flow for the month is defined as:
revenues minus cost of goods sold
monthly receipts minus monthly payments
earning before taxes minus income taxes
operating profit minus interest expense and income taxes
Correct answer: (B)
monthly receipts minus monthly payments
283. To determine production requirements, which of the following would be appropriate?

Beginning inventory-ending inventory.
Sales + beginning inventory-ending inventory.
Sales - ending inventory
Projected sales + desired ending inventory - beginning inventory.
Correct answer: (D)
Projected sales + desired ending inventory - beginning inventory.
284. Degree of operating leverage may be defined as:
the extent to which the firm utilizes debt in its financing plan
the percent change in operating income/percent change in unit volume
the percent change in operating income/percent change in sales
the percent change in net income/percent change in unit volume
Correct answer: (B)
the percent change in operating income/percent change in unit volume
285. The degree of financial leverage for the conservative firm:
is higher than the DFL for the highly leveraged firm
is the same as the DFL for the highly leveraged firm
is lower than the DFL for the highly leveraged firm
cannot be compared to the DFL for the highly leveraged firm
Correct answer: (C)
is lower than the DFL for the highly leveraged firm
286. Working capital management is mainly concerned with:
the placement of the firm's debt and equity issues
the financing and management of the firm's current assets
inventory management
management of the firm's capital assets
Correct answer: (B)

the financing and management of the firm's current assets
287. Level production methods tend to:
use manpower and equipment efficiently at a lower cost
be more difficult to manage than those matching sales and productions
result in a more stable value for current assets
eliminate seasonal bulges or reductions in current assets
Correct answer: (A)
use manpower and equipment efficiently at a lower cost
288. The belief that current assets should always be financed by current liabilities:
is sound financial practice and should always be followed
doesn't necessarily hold true
is grounded in the belief that a permanent building of current assets occurs
will often result in bankruptcy for the firm
Correct answer: (B)
doesn't necessarily hold true
289. Before establishing a collection center or lockbox system, the firm must:
obtain regulatory approval
establish that the benefits outweigh the substantial costs
survey its customers to determine if they are agreeable
set up an electronic funds transfer (EFT) system
Correct answer: (B)
establish that the benefits outweigh the substantial costs
290. The primary focus of the Bank of Canada's short-term money policy is now
the overnight rate
the treasury bill rate

the prime rate
the bank rate
Correct answer: (A)
the overnight rate
291. A series of consecutive cash flows of equal amounts is known as:
a present value
a compound sum
a present sum
an annuity
Correct answer: (D)
an annuity
292. To an investor, the most desirable compounding period is:
Annually
semi-annually
monthly
daily
Correct answer: (D)
daily
293. The market required rate of return depends on:
the present value of future cash flows
the market's perceived level of risk associated with the individual security
the valuation of the financial asset
Correct answer: (B)
the market's perceived level of risk associated with the individual security
294. The yield to maturity on a bond:

is determined by government regulations
equates principal and interest payments to the price of the bond
is constant with varying maturities
tends to move inversely with share prices
Correct answer: (B)
equates principal and interest payments to the price of the bond
295. The two most important measures of risk are:
the variance and standard deviation
the expected value and standard deviation
the arithmetic mean and variance
the arithmetic mean and standard deviation
Correct answer: (B)
the expected value and standard deviation
296. The portfolio effect analyzes:
the return on the portfolio
the risk of the portfolio
the impact of a given investment on the overall risk level
Correct answer: (C)
the impact of a given investment on the overall risk level
297. With respect to corporate bonds, all of the following are true except:
the market for corporate bonds dwarfs the market for stock
the percentage of bond financing is affected by common share prices
interest rate levels are less significant than common share prices
corporate bond markets are dominated in size by the stock market

Correct answer: (D)
corporate bond markets are dominated in size by the stock market
298. Which of the following statements about securities markets is incorrect:
they aid in the allocation of capital
they provide liquidity to investors
securities are initially placed in the secondary market
the keep prices competitive among alternative security investments
Correct answer: (C)
securities are initially placed in the secondary market
299. Perhaps the biggest change of all in the investment industry has been:
the consolidation of financial resources among a few large firms
the acquisition of retail brokerage firms
the increase in bond underwriting
the increasing generalization of investment firms
Correct answer: (A)
the consolidation of financial resources among a few large firms
300. Under a leveraged buy-out scenario, all of the following are true except:
a public firm is taken private
cash is borrowed to finance the purchase
equity is usually sold to pay off the debt
a corporate restructuring normally follows
Correct answer: (C)
equity is usually sold to pay off the debt
301. The document containing all of the legal details of the bond is:
the debenture
the indenture
the bond agreement
the debt agreement
View answer
Correct answer: (B)
the indenture
302. A bond issue should be refunded when:
bondholders desire the return of their funds
it is too expensive to issue additional common stock
interest rates drop and you believe they will increase again
the existing bonds contain no call provision
View answer
Correct answer: (C)
interest rates drop and you believe they will increase again
303. All income not paid out to creditors or preferred shareholders:
is paid out as common stock dividends
is distributed as interest to bondholders
automatically belongs to common shareholders
is subject to a higher federal income tax rate
View answer
Correct answer: (C)
automatically belongs to common shareholders
304. Preferred stock may be justified in that it:
expands the capital base without diluting common equity
it is lower cost source of financing than debt
dividends are tax-deductible

really has no justification
View answer
Correct answer: (A)
expands the capital base without diluting common equity
305. Which of the following statements is correct:
Dividend amounts are first determined, and the residual retained
In achieving the highest overall return, dividends are irrelevant
Most shareholders prefer retained earnings over dividends
There is conclusive proof that investors prefer dividends over retained earnings
View answer
Correct answer: (B)
In achieving the highest overall return, dividends are irrelevant
306. All of the following are key dates associated with the declaration of a dividend except:
the ex-dividend date
the holder of record date
the payment date
the dividend receipt date
View answer
Correct answer: (D)
the dividend receipt date
307. If a firm repurchases it own stock:
in theory, the action is equivalent to paying cash dividends
the price of the stock is lowered into a more popular trading range
shareholders benefit less than with a stock split
shareholders benefit less than with a stock dividend
View answer
Correct answer: (A)
in theory, the action is equivalent to paying cash dividends
308. Rights, warrants and convertible securities behave like call options but are different from call
options because:
they do not trade in a financial market
they are used by the firm to raise money
they do not trade at a speculative premium
they are less risky
View answer
Correct answer: (B)
they are used by the firm to raise money
309. The speculative premium of a warrant is equal to
warrant price-intrinsic value
intrinsic value-warrant price
(Market Value of Common Stock-Warrant Option Price) X Number of Shares per warrant
the minimum value
View answer
Correct answer: (A)
warrant price-intrinsic value
310. A firm with a tax loss carryforward:
is able to reduce their taxes for previous years
provides a tax motive and a cash flow opportunity for an acquiring firm
allows tax payments to be carried forward to the next year
is not a good merger target because they are unprofitable
View answer
Correct answer: (B)

provides a tax motive and a cash flow opportunity for an acquiring firm
311. The cash purchase of another company may best be viewed as:
a necessary growth strategy
a capital budgeting problem
a cash budgeting problem
an undesirable alternative
View answer
Correct answer: (B)
a capital budgeting problem
312. The main factor influencing foreign exchange rates is:
the supply and demand relationship
domestic policies
foreign government policies
banking activities
View answer
Correct answer: (A)
the supply and demand relationship
313. The appropriate objective of an enterprise is;
Maximisation of sale
Maximisation of owners wealth
Maximisation of profits.
None of these
View answer
Correct answer: (B)
314. Return on Investment may be improved by:

Increasing Turnover
Reducing Expenses
Increasing Capital Utilization
All of the above
View answer
Correct answer: (D)
All of the above
315. A firm has Capital of 10,00,000; Sales of 5,00,000; Gross Profit of. 2,00,000 and Expenses of.
1,00,000. What is the Net Profit Ratio?
20%
50%
10%
40%
View answer
Correct answer: (A)
20%
316. Which of the following helps analysing return to equity Shareholders?
Return on Assets
Earnings Per Share
Net Profit Ratio
Return on Investment
View answer
Correct answer: (B)
Earnings Per Share
317. Which of the following is not used in Capital Budgeting?

Time Value of Money
Sensitivity Analysis
Net Assets Method
Cash Flows
View answer
Correct answer: (C)
Net Assets Method
318. Which of the following does not effect cash flows proposal?
Salvage Value
Depreciation Amount
Tax Rate Change
Method of Project Financing
View answer
Correct answer: (D)
Method of Project Financing
319. Which of the following is not applied in capital budgeting?
Cash flows be calculated in incremental terms
All costs and benefits are measured on cash basis
All accrued costs and revenues be incorporated
All benefits are measured on after-tax basis
View answer
Correct answer: (C)
All accrued costs and revenues be incorporated
320. In capital budgeting, the term Capital Rationing implies:
That no retained earnings available
That limited funds are available for investment

That no external funds can be raised
That no fresh investment is required in current year
View answer
Correct answer: (B)
That limited funds are available for investment
321. If there is no inflation during a period, then the Money Cashflow would be equal to:
Present Value
Real Cash flow
Real Cash flow + Present Value
Real Cash flow - Present Value
View answer
Correct answer: (B)
Real Cash flow
322. Money Discount Rate if equal to:
(1 + Inflation Rate) (1 + Real Rate)-1
(1 + Inflation Rate) 4- (1 + Real Rate)-1
(1 + Real Rate) 4- (1 + Inflation Rate)-1
(1 + Real Rate) + (1 + Inflation Rate)-1
View answer
Correct answer: (A)
(1 + Inflation Rate) (1 + Real Rate)-1
323. Which of the following is a risk factor in capital budgeting?
Industry specific risk factors
Competition risk factors
Project specific risk factors
All of the above

View answer
Correct answer: (D)
All of the above
324. Which of the following sources of funds has an Implicit Cost of Capital?
Equity Share Capital
Preference Share Capital
Debentures
Retained earnings
View answer
Correct answer: (D)
Retained earnings
325. Marginal cost of capital is the cost of:
Additional Sales
Additional Funds
Additional Interests
None of the above
View answer
Correct answer: (B)
Additional Funds
326. Cost of Redeemable Preference Share Capital is:
Rate of Dividend
After Tax Rate of Dividend
Discount Rate that equates PV of inflows and out-flows relating to capital
None of the above
View answer
Correct answer: (C)

Discount Rate that equates PV of inflows and out-flows relating to capital
327. Debt Financing is a cheaper source of finance because of:
Time Value of Money
Rate of Interest
Tax-deductibility of Interest
Dividends not Payable to lenders
View answer
Correct answer: (C)
Tax-deductibility of Interest
328. Cost of Equity Share Capital is more than cost of debt because:
Face value of debentures is more than face value of shares
Equity shares have higher risk than debt
Equity shares are easily saleable
All of the three above
View answer
Correct answer: (B)
Equity shares have higher risk than debt
329. Financial Leverage arises because of:
Fixed cost of production
Variable Cost
Interest Cost
None of the above
View answer
Correct answer: (C)
Interest Cost
330. FL is zero if:

EBIT = Interest
EBIT = Zero
EBIT = Fixed Cost
EBIT = Pref. Dividend
View answer
Correct answer: (B)
EBIT = Zero
331. Operating leverage works when:
Sales Increases
Sales Decreases
Both (a) and (b)
None of (a) and (b)
View answer
Correct answer: (C)
Both (a) and (b)
332. Higher OL is related to the use of higher:
Debt
Equity
Fixed Cost
Variable Cost
View answer
Correct answer: (C)
Fixed Cost
333. Indifference Level of EBIT is one at which:
EPS is zero
EPS is Minimum
EPS is highest
None of these
View answer
Correct answer: (D)
None of these
334. Which of the following is not a relevant factor m EPS Analysis of capital structure?
Rate of Interest on Debt
Tax Rate
Amount of Preference Share Capital
Dividend paid last year
View answer
Correct answer: (D)
Dividend paid last year
335. In case of Net Income Approach, when the debt proportion is increased, the cost of debt:
Increases
Decreases
Constant
None of the above
View answer
Correct answer: (C)
Constant
336. 'Judicious use of leverage' is suggested by:
Net Income Approach
Net Operating Income Approach
Traditional Approach
All of the above
View answer
Correct answer: (C)
337. Which of the following argues that the value of levered firm is higher than that of the unlevered
firm?
Net Income Approach
MM Model with taxes
Both (a) and (c)
View answer
Correct answer: (D)
Both (a) and (c)
338. A firm has EBIT of. 50,000. Market value of debt is. 80,000 and overall capitalization rate is 20%.
Market value of firm under NOI Approach is:
2,50,000
1,70,000
30,000
1,30,000
View answer
Correct answer: (B)
1,70,000
339. Walter’s Model suggests for 100% DP Ratio when
ke = r
ke < r
ke > r
ke = 0
View answer
Correct answer: (C)
ke > r
340. Which of the following is not true for MM Model?
Share price goes up if dividend is paid
Share price goes down if dividend is not paid
Market value is unaffected by Dividend policy
All of the above
View answer
Correct answer: (C)
Market value is unaffected by Dividend policy
341. Which of the following represents passive dividend policy?
that dividend is paid as a % of EPS
that dividend is paid as a constant amount
that dividend is paid after retaining profits for reinvestment
all of the above
View answer
Correct answer: (C)
that dividend is paid after retaining profits for reinvestment
342. Dividend Distribution Tax is payable by
Shareholders to Government
Shareholders to Company
Company to Government
Holding to Subsidiary Company
View answer
Correct answer: (C)
Company to Government
343. 'Constant Dividend Per Share' Policy is considered as:
Increasing Dividend Policy
Decreasing Dividend Policy
Stable Dividend Policy
None of the above
View answer
Correct answer: (C)
Stable Dividend Policy
344. Which of the following is not relevant for dividend payment for a year ?
Cash flow position
Profit position
Paid up capital
Retained Earnings
View answer
Correct answer: (D)
Retained Earnings
345. Concentration Banking helps in
Reducing Idle Bank Balance
Increasing Collection
Increasing Creditors
Reducing Bank Transactions
View answer
Correct answer: (B)
Increasing Collection
346. Baumol's Model of Cash Management attempts to:
Minimise the holding cost
Minimization of transaction cost
Minimization of total cost
Minimization of cash balance
View answer
Correct answer: (C)
Minimization of total cost
347. Ageing schedule incorporates the relationship between
Creditors and Days Outstanding
Debtors and Days Outstanding
Average Age of Directors
Average Age of All Employees
View answer
Correct answer: (B)
Debtors and Days Outstanding
348. Out of the following, what is not true in respect of factoring?
Continuous Arrangement between Factor and Seller
Sale of Receivables to the factor
Factor provides cost free finance to seller
None of the above
View answer
Correct answer: (C)
Factor provides cost free finance to seller
349. In response to market expectations, the credit pence r j been increased from 45 days to 60 days.
This would result in
Decrease in Sales
Decrease in Debtors
Increase in Bad Debts
Increase in Average Collection Period
View answer
Correct answer: (D)
Increase in Average Collection Period
350. Which of the following is related to Receivables Management?
Cash Budget
Economic Order Quantity
Ageing schedule
All of the above
View answer
Correct answer: (C)
Ageing schedule
351. In ABC inventory management system, class A items may require
Higher Safety Stock
Frequent Deliveries
Periodic Inventory system
Updating of inventory records
View answer
Correct answer: (A)
Higher Safety Stock
352. If A = Annual Requirement, O = Order Cost and C = Carrying Cost per unit per annum, then EOQ
(2AO/C) 2
2AO/C
2A÷OC
2AOC
View answer
Correct answer: (B)
2AO/C
353. System of procuring goods when required, is known as,
Free on Board (FOB)
always Butter Control (ABC)
Jest in Time (JIT)
Economic Order Quantity
View answer
Correct answer: (C)
Jest in Time (JIT)
354. Commercial paper is a type of
Fixed coupon Bond
Unsecured short-term debt
Equity share capital
Government Bond
View answer
Correct answer: (B)
Unsecured short-term debt
355. Cash discount terms offered by trade creditors never be accepted because
Benefit in very small
Cost is very high
No sense to pay earlier

None of the above
View answer
Correct answer: (D)
No sense to pay earlier
356. A lease which is generally not cancellable and covers full economic life of the asset is known as
Sale and leaseback
Operating Lease
Finance Lease
Economic Lease
View answer
Correct answer: (C)
Finance Lease
357. Which of the following is not true for a "Lease decision for the lessee?
Helps in project selection
Helps in project financing
Helps in project location
All of the above
View answer
Correct answer: (B)
Helps in project financing
358. If the intrinsic value of a share is less than the market price, which of the most reasonable?
That shares have lesser degree of risk
That market is over valuing the shares
That the company is high dividend paying
That market is undervaluing the share
View answer
Correct answer: (B)
That market is over valuing the shares
359. Net Profit Ratio Signifies:
Operational Profitability
Liquidity Position
Solvency
Profit
View answer
Correct answer: (A)
360. Debt to Total Assets Ratio can be improved by:
Borrowing More
Issue of Debentures
Issue of Equity Shares
Redemption of Debt
View answer
Correct answer: (D)
Redemption of Debt
361. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason for
such behavior could be:
Increase in Costs of Goods Sold
If Increase in Expense
Increase in Dividend
Decrease in Sales
View answer
Correct answer: (B)

If Increase in Expense
362. Financial planning starts with the preparation of:
Master Budget
Cash Budget
Balance Sheet
None of the above
View answer
Correct answer: (D)
None of the above
363. Which of the following is not a capital budgeting decision?
Expansion Programme
Merger
Replacement of an Asset
Inventory Level
View answer
Correct answer: (D)
Inventory Level
364. Which of the following is not true with reference capital budgeting?
Capital budgeting is related to asset replacement decisions
Cost of capital is equal to minimum required return
Existing investment in a project is not treated as sunk cost
Timing of cash flows is relevant
View answer
Correct answer: (C)
Existing investment in a project is not treated as sunk cost
365. Which of the following is not included in incremental A flows?

Opportunity Costs
Sunk Costs
Change in Working Capital
Inflation effect
View answer
Correct answer: (B)
Sunk Costs
366. In case of the indivisible projects, which of the following may not give the optimum result?
Internal Rate of Return
Profitability Index
Feasibility Set Approach
All of the above
View answer
Correct answer: (C)
367. Two mutually exclusive projects with different economic lives can be compared on the basis of
Profitability Index
Net Present Value
Equivalent Annuity Value
View answer
Correct answer: (D)
Equivalent Annuity Value
368. In Risk-Adjusted Discount Rate method, which one is adjusted?
Cash flows
Life of the proposal
Rate of discount
Salvage value
View answer
Correct answer: (C)
Rate of discount
369. Cost of Capital for Government securities is also known as:
Risk-free Rate of Interest
Maximum Rate of Return
Rate of Interest on Fixed Deposits
None of the above
View answer
Correct answer: (A)
370. In case of partially debt-financed firm, k0 is less
Kd
Ke
Both (a) and (b)
None of the above
View answer
Correct answer: (B)
Ke
371. Cost of capital may be defined as:
Weighted Average cost of all debts
Rate of Return expected by Equity Shareholders
Average IRR of the Projects of the firm

Minimum Rate of Return that the firm should earn
View answer
Correct answer: (D)
Minimum Rate of Return that the firm should earn
372. Tax-rate is relevant and important for calculation of specific cost of capital of:
Debentures
(a) and (b) above
View answer
Correct answer: (C)
Debentures
373. Which of the following is studied with the help of financial leverage?
Marketing Risk
Interest Rate Risk
Foreign Exchange Risk
Financing risk
View answer
Correct answer: (D)
Financing risk
374. Financial Leverage is calculated as:
EBIT÷ Contribution
EBIT÷ PBT
EBIT÷ Sales
EBIT ÷ Variable Cost
View answer
Correct answer: (B)
EBIT÷ PBT
375. If the fixed cost of production is zero, which one of the following is correct?
OL is zero
FL is zero
CL is zero
None of the above
View answer
Correct answer: (D)
None of the above
376. In order to calculate EPS, Profit after Tax and Preference Dividend is divided by:
MP of Equity Shares
Number of Equity Shares
Face Value of Equity Shares
None of the above
View answer
Correct answer: (B)
Number of Equity Shares
377. There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
That the Capital Employed has reduced
That the Profitability has gone up
That debtors collection period has increased
That Sales has decreased
View answer
Correct answer: (C)

378. Financial Planning deals with:
Preparation of Financial Statements
Planning for a Capital Issue
Preparing Budgets
All of the above
View answer
Correct answer: (C)
Preparing Budgets
379. Which of the following is not a relevant cost in Capital Budgeting?
Sunk Cost
Opportunity Cost
Allocated Overheads
Both (a) and (c) above
View answer
Correct answer: (D)
Both (a) and (c) above
380. Depreciation is incorporated in cash flows because it:
Is unavoidable cost
Is a cash flow
Reduces Tax liability
Involves an outflow
View answer
Correct answer: (C)
Reduces Tax liability
381. In case of divisible projects, which of the following can be used to attain maximum NPV?
Profitability Index Approach
Any of the above
View answer
Correct answer: (C)
Profitability Index Approach
382. If the Real rate of return is 10% and Inflation s Money Discount Rate is:
14.4%
2.5%
25%
14%
View answer
Correct answer: (A)
14.4%
383. Risk of a Capital budgeting can be incorporated
Adjusting the Cash flows
Adjusting the Discount Rate
Adjusting the life
All of the above
View answer
Correct answer: (D)
All of the above
384. Which of the following cost of capital require tax adjustment?
Cost of Equity Shares
Cost of Preference Shares

Cost of Debentures
Cost of Retained Earnings
View answer
Correct answer: (C)
Cost of Debentures
385. Firm's Cost of Capital is the average cost of:
All sources
All borrowings
Share capital
Share Bonds & Debentures
View answer
Correct answer: (A)
All sources
386. In order to calculate the proportion of equity financing used by the company, the following should
be used:
Authorised Share Capital
Equity Share Capital plus Reserves and Surplus
Equity Share Capital plus Preference Share Capital
Equity Share Capital plus Long-term Debt
View answer
Correct answer: (B)
Equity Share Capital plus Reserves and Surplus
387. Operating leverage helps in analysis of:
Business Risk
Financing Risk
Production Risk
Credit Risk
View answer
Correct answer: (A)
Business Risk
388. Combined leverage can be used to measure the relationship between:
EBIT and EPS
PAT and EPS
Sales and EPS
Sales and EBIT
View answer
Correct answer: (C)
Sales and EPS
389. Use of Preference Share Capital in Capital structure
Increases OL
Increases FL
Decreases OL
Decreases FL
View answer
Correct answer: (B)
Increases FL
390. If a company issues new share capital to redeem debentures, then:
OL will increase
FL will increase
OL will decrease
FL will decrease
View answer
Correct answer: (D)
FL will decrease
[8:11 am, 07/01/2021] Numl Butt: 391. Relationship between change in Sales and d Operating Profit is
known as:
Financial Leverage
Operating Leverage
Net Profit Ratio
Gross Profit Ratio
View answer
Correct answer: (B)
Operating Leverage
392. Financial break-even level of EBIT is:
Intercept at Y-axis
Intercept at X-axis
Slope of EBIT-EPS line
None of the above
View answer
Correct answer: (B)
Intercept at X-axis
393. Net Operating Income Approach, which one of the lowing is constant?
Cost of Equity
Cost of Debt
WACC & kd
Ke and Kd
View answer
Correct answer: (C)

WACC & kd
394. 'That there is no corporate tax' is assumed by:
Net Income Approach
All of these
View answer
Correct answer: (D)
All of these
395. Which of the following is true?
Under Traditional Approach, overall cost of capital remains same
Under NI Approach, overall cost of capital remains same
Under NOI Approach, overall cost of capital remains same
None of the above
View answer
Correct answer: (C)
Under NOI Approach, overall cost of capital remains same
396. Which of the following appearing in the balance! generates tax advantage and hence affects the c,
structure decision ?
Reserves and Surplus
Long-term debt
View answer
Correct answer: (B)
Long-term debt
397. 'Bird in hand' argument is given by
Walker's Model
Gordon's Model
MM Mode
Residuals Theory
View answer
Correct answer: (B)
Gordon's Model
398. If ke = r, then under Walter's Model, which of the following is irrelevant?
Earnings per share
Dividend per share
DP Ratio
None of the above
View answer
Correct answer: (C)
DP Ratio
399. If 'r' = 'ke', than MP by Walter's Model and Gordon's Model for different payout ratios would be
Unequal
Zero
Equal
Negative
View answer
Correct answer: (C)
Equal
400. Dividends are paid out of

Accumulated Profits
Gross Profit
Profit after Tax
General Reserve
View answer
Correct answer: (C)
Profit after Tax
[8:14 am, 07/01/2021] Numl Butt: 401. If the following is an element of dividend policy?
Production capacity
Change in Management
Informational content
Debt service capacity
View answer
Correct answer: (C)
Informational content
402. In stock dividend:
Authorized capital always increases
Paid up capital always increases
Face value per share decreases
Market price for share decreases
View answer
Correct answer: (D)
Market price for share decreases
403. Cheques deposited in bank may not be available for immediate use due to
Payment Float
Recceipt Float
Net Float
Playing the Float
View answer
Correct answer: (B)
Recceipt Float
404. Float management is related to
Cash Management
Inventory Management
Receivables Management
Raw Materials Management
View answer
Correct answer: (A)
Cash Management
405. 5Cs of the credit does not include
Collateral
Character
Conditions
None of the above
View answer
Correct answer: (D)
None of the above
406. Which of the following is not a part of credit policy?
Collection Effort
Cash Discount
Credit Standard
Paying Practices of debtors

View answer
Correct answer: (D)
Paying Practices of debtors
407. If the closing balance of receivables is less than the opening balance for a month then which one is
true out of
Collections>Current Purchases
Collections>Current Sales
Collections<Current Purchases
Collections < Current Sales
View answer
Correct answer: (B)
Collections>Current Sales
408. 80% of sales of 10,00,000 of a firm are on credit. It has a Receivable Turnover of 8. What is the
Average collection period (360 days a year) and Average Debtors of the firm?
45 days and 1,00,000
360 days and 1,00,000
45 days and 8,00,000
360 days and 1,25,000
View answer
Correct answer: (A)
45 days and 1,00,000
409. If cash discount is offered to customers, then which of the following would increase?
Sales
Debtors
Debt collection period
All of the above

View answer
Correct answer: (A)
Sales
410. ABC Analysis is used in
Receivables Management
Accounting Policies
Corporate Governance
View answer
Correct answer: (A)
[8:15 am, 07/01/2021] Numl Butt: 411. Which of the following is true for a company which uses
continuous review inventory system
Order Interval is fixed
Order Interval varies
Order Quantity is fixed
Both (a) and (c)
View answer
Correct answer: (B)
Order Interval varies
412. Which of the following is not included in cost of inventory?
Purchase cost
Transport in Cost
Import Duty
Selling Costs
View answer
Correct answer: (D)
Selling Costs
413. What is Economic Order Quantity?
Cost of an Order
Cost of Stock
Reorder level
Optimum order size
View answer
Correct answer: (D)
Optimum order size
414. Concept of Maximum Permissible Bank finance was introduced by
Kannan Committee
Chore Committee
Nayak Committee
Tandon Committee
View answer
Correct answer: (D)
Tandon Committee
415. A short-term lease which is often cancellable is known as
Finance Lease
Net Lease
Operating Lease
Leverage Lease
View answer
Correct answer: (C)
Operating Lease
416. One difference between Operating and Financial lease is:
There is often an option to buy in operating lease
There is often a call option in financial lease
An operating lease is generally cancelable by lease
A financial lease in generally cancelable by lease
View answer
Correct answer: (C)
An operating lease is generally cancelable by lease
417. Basic objective of diversification is
Increasing Return
Maximising Return
Decreasing Risk
Maximizing Risk
View answer
Correct answer: (C)
Decreasing Risk
418. The job of a finance manager is confined to
Raising funds
Management of cash
Raising of funds and their effective utilization
None of these
View answer
Correct answer: (C)
419. Inventory Turnover measures the relationship of inventory with:

Average Sales
Cost of Goods Sold
Total Purchases
Total Assets
View answer
Correct answer: (B)
Cost of Goods Sold
420. Debt to Total Assets of a firm is.2. The Debt to Equity boo would be:
0.80
0.25
1.00
0.75
View answer
Correct answer: (B)
0.25
[8:17 am, 07/01/2021] Numl Butt: 421. Capital Budgeting is a part of:
Investment Decision
Working Capital Management
Marketing Management
Capital Structure
View answer
Correct answer: (A)
Investment Decision
422. Cash Inflows from a project include:
Tax Shield of Depreciation
After-tax Operating Profits

Raising of Funds
Both (a) and (b)
View answer
Correct answer: (D)
Both (a) and (b)
423. In Capital Budgeting, Sunk cost is excluded because it is:
of small amount
not incremental
not reversible
All of the above
View answer
Correct answer: (B)
not incremental
424. In Certainty-equivalent approach, adjusted cash flows are discounted at:
Accounting Rate of Return
Hurdle Rate
Risk-free Rate
View answer
Correct answer: (D)
Risk-free Rate
425. Cost of Capital refers to:
Flotation Cost
Dividend
Required Rate of Return
None of the above

View answer
Correct answer: (C)
426. Weighted Average Cost of Capital is generally denoted by:
kA
kw
k0
kc
View answer
Correct answer: (C)
k0
427. An implicit cost of increasing proportion of debt is:
Tax should would not be available on new debt
P.E. Ratio would increase
Equity shareholders would demand higher return
Rate of Return of the company would decrease
View answer
Correct answer: (C)
Equity shareholders would demand higher return
428. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:
Average Return on Investment
Weighted Average Cost of Capital
Net Profit Ratio
Average Cost of borrowing
View answer
Correct answer: (B)

Weighted Average Cost of Capital
429. Cost of issuing new shares to the public is known as:
Cost of Equity
Cost of Capital
Flotation Cost
Marginal Cost of Capital
View answer
Correct answer: (C)
Flotation Cost
430. High degree of financial leverage means:
High debt proportion
Lower debt proportion
Equal debt and equity
No debt
View answer
Correct answer: (A)
High debt proportion
[8:18 am, 07/01/2021] Numl Butt: 431. Financial Leverage measures relationship between
EBIT and PBT
EBIT and EPS
Sales and PBT
Sales and EPS
View answer
Correct answer: (B)
EBIT and EPS
432. If a firm has a DOL of 2.8, it means:

If sales increase by 2.8%, the EBIT will increase by 1%
If EBIT increase by 2.896, the EPS will increase by 1 %
If sales rise by 1%, EBIT will rise by 2.8%
None of the above
View answer
Correct answer: (C)
If sales rise by 1%, EBIT will rise by 2.8%
433. Benefit of 'Trading on Equity' is available only if:
Rate of Interest < Rate of Return
Rate of Interest > Rate of Return
Both (a) and (b)
None of (d) and (b)
View answer
Correct answer: (A)
Rate of Interest < Rate of Return
434. Between two capital plans, if expected EBIT is more than indifference level of EBIT, then
Both plans be rejected
Both plans are good
One is better than other
None of the above
View answer
Correct answer: (C)
One is better than other
435. In the Traditional Approach, which one of the following remains constant?
Cost of Equity
Cost of Debt
WACC
None of the above
View answer
Correct answer: (D)
None of the above
436. In Traditional Approach, which one is correct?
ke rises constantly
kd decreases constantly
k0 decreases constantly
None of the above
View answer
Correct answer: (D)
None of the above
437. Which of the following is incorrect for value of the firm?
In the initial preposition, MM Model argues that value is independent of the financing mix
Total value of levered and unlevered firms is otherwise arbitrage will take place
Total value incorporates borrowings by firm but excludes personal borrowing
Total value does not change because underlying does not change with financing mix
View answer
Correct answer: (D)
Total value does not change because underlying does not change with financing mix
438. Walter’s Model suggests that a firm can always increase i.e. of the share by
Increasing Dividend
Decreasing Dividend
Constant Dividend
None of the above
View answer
Correct answer: (D)
None of the above
439. Which of the following stresses on investor's preference reorient dividend than higher future
capital gains ?
Walter's Model
Residuals Theory
Gordon's Model
MM Model
View answer
Correct answer: (C)
Gordon's Model
440. Gordon's Model of dividend relevance is same as
No-growth Model of equity valuation
Constant growth Model of equity valuation
Price-Earning Ratio
Inverse of Price Earnings Ratio
View answer
Correct answer: (B)
Constant growth Model of equity valuation
[8:19 am, 07/01/2021] Numl Butt: 441. Dividend declared by a company must be paid in
20 days
30 days
32 days
42 days
View answer
Correct answer: (B)
30 days
442. In India, Dividend Distribution tax is paid on
Equity Share
Preference Share
Debenture
Both (a) and (b)
View answer
Correct answer: (D)
Both (a) and (b)
443. Which of the following is not considered in Lintner's Model ?
Dividend payout ratio
Current EPS
Speed of Adjustment
Preceding year EPS
View answer
Correct answer: (D)
Preceding year EPS
444. The Transaction Motive for holding cash is for
Safety Cushion
Daily Operations
Purchase of Assets
Payment of Dividends
View answer
Correct answer: (B)

Daily Operations
445. Which of the following is not considered by Miller-Orr Model?
Variability in cash requirement
Cost of transa…
[8:20 am, 07/01/2021] Numl Butt: 451. Which of the following is not a benefit of carrying inventories
Reduction in ordering cost
Avoiding lost sales
Reducing carrying cost
Avoiding Production Shortages
View answer
Correct answer: (C)
Reducing carrying cost
452. Which of the following is a liability of a bank?
Treasury Bills
Commercial papers
Certificate of Deposits
Junk Bonds
View answer
Correct answer: (C)
Certificate of Deposits
453. Commercial paper are generally issued at a pries
Equal to face value
More than face value
Less than face value
Equal to redemption value

View answer
Correct answer: (C)
Less than face value
454. Under income-tax provisions, depreciation on lease asset is allowed to
Lessor
Lessee
Any of the two
None of the two
View answer
Correct answer: (A)
Lessor
455…
[8:21 am, 07/01/2021] Numl Butt: 461. Which of the following is not incorporated in Capital Budgeting?
Tax-Effect
Time Value of Money
Rate of Cash Discount
View answer
Correct answer: (D)
Rate of Cash Discount
462. Which of the following is not true for capital budgeting?
Sunk costs are ignored
Opportunity costs are excluded
Incremental cash flows are considered
Relevant cash flows are considered
View answer
Correct answer: (B)
Opportunity costs are excluded
463. Savings in respect of a cost is treated in capital budgeting as:
An Inflow
An Outflow
Nil
None of the above
View answer
Correct answer: (A)
An Inflow
464. Real rate of return is equal to:
Nominal Rate × Inflation Rate
Nominal Rate ÷ Inflation Rate
Nominal Rate - Inflation Rate
Nominal Rate + Inflation Rate
View answer
Correct answer: (B)
Nominal Rate ÷ Inflation Rate
465. Nominal Rate ÷ Inflation Rate
(1 + Inf. Rate) (1 + Money D Rate)-1
(1 + Money D Rate) + (1 + Inf. Rate)-1
(1 + Money D Rate) 4- (1 + Inf. Rate)-1
(1 + Money D Rate) - (1 + Inf. Rate)-1
View answer
Correct answer: (C)
(1 + Money D Rate) 4- (1 + Inf. Rate)-1

466. Which is the most expensive source of funds?
New Equity Shares
New Preference Shares
New Debts
Retained Earnings
View answer
Correct answer: (A)
New Equity Shares
467. Cost Capital for Equity Share Capital does not imply that:
Market Price is equal to Book Value of share
Shareholders are ready to subscribe to right issue
Market Price is more than Issue Price
AC of the three above
View answer
Correct answer: (D)
AC of the three above
468. Advantage of Debt financing is
Interest is tax-deductible
It reduces WACC
Does not dilute owners control
All of the above
View answer
Correct answer: (D)
All of the above
469. Operating leverage arises because of:

Fixed Cost of Production
Fixed Interest Cost
Variable Cost
None of the above
View answer
Correct answer: (A)
Fixed Cost of Production
470. Business risk can be measured by:
Financial leverage
Operating leverage
Combined leverage
None of the above
View answer
Correct answer: (B)
Operating leverage
[8:22 am, 07/01/2021] Numl Butt: 471. If a firm has no debt, which one is correct?
OL is one
FL is one
OL is zero
FL is zero
View answer
Correct answer: (B)
FL is one
472. If a firm has no Preference share capital, Financial Break even level is defined as equal to -
EBIT
Interest liability
Equity Dividend
Tax Liability
View answer
Correct answer: (B)
Interest liability
473. In case of Net Income Approach, the Cost of equity is:
Constant
Increasing
Decreasing
None of the above
View answer
Correct answer: (A)
Constant
474. Which one is true for Net Operating Income Approach?
VD = VF - VE
VE = VF + VD
VE = VF - VD
VD = VF + VE
View answer
Correct answer: (C)
VE = VF - VD
475. Which of the following assumes constant kd and ke?
Net Income Approach
MM Model
View answer
Correct answer: (A)
Net Income Approach
476. Which of the following is incorrect for NOI?
k0 is constant
kd is constant
ke is constant
kd & k0 are constant
View answer
Correct answer: (C)
ke is constant
477. Dividend irrelevance argument of MM Model is based on:
Issue of Debentures
Issue of Bonus Share
Arbitrage
Hedging
View answer
Correct answer: (C)
Arbitrage
478. In case of Gordon's Model, the MP for zero payout is zero. It means that
Shares are not traded
Shares available free of cost
Investors are not ready to offer any price
None of the above
View answer
Correct answer: (C)

Investors are not ready to offer any price
479. Which of the following generally not result in increase in total dividend liability ?
Share-split
Right Issue
Bonus Issue
All of the above
View answer
Correct answer: (A)
Share-split
480. Stock split is a form of
Dividend Payment
Bonus Issue
Financial restructuring
Dividend in kind
View answer
Correct answer: (C)
Financial restructuring
[8:23 am, 07/01/2021] Numl Butt: 481. Which of the following is not a motive to hold cash?
Transactionary Motive
Pre-scautionary Motive
Captal Investment
None of the above
View answer
Correct answer: (C)
Captal Investment
482. Which of the following is not an objective of cash management ?

Maximization of cash balance
Minimization of cash balance
Optimization of cash balance
Zero cash balance
View answer
Correct answer: (C)
Optimization of cash balance
483. Which of the following is not an element of credit policy?
Credit Terms
Collection Policy
Cash Discount Terms
Sales Price
View answer
Correct answer: (D)
Sales Price
484. Credit Policy of a firm should involve a trade-off between increased
Sales and Increased Profit
Profit and Increased Costs of Receivables
Sales and Cost of goods sold
None of the above
View answer
Correct answer: (B)
Profit and Increased Costs of Receivables
485. If the average balance of debtors has increased, which of the following might not show a change in
general?
Total Sales
Average Payables
Current Ratio
Bad Debt loss
View answer
Correct answer: (B)
Average Payables
486. Receivables Management deals with
Receipts of raw materials
Debtors collection
Creditors Management
View answer
Correct answer: (B)
Debtors collection
487. Inventory holding cost may include
Material Purchase Cost
Penalty charge for default
Interest on loan
None of the above
View answer
Correct answer: (D)
None of the above
488. Cost of not carrying sufficient inventory is known as
Carrying Cost
Holding Cost
Total Cost
Stock-out Cost
View answer
Correct answer: (D)
Stock-out Cost
489. A firm has inventory turnover of 6 and cost of goods sold is 7,50,000. With better inventory
management, the inventory turnover is increased to 10. This would result in:
Increase in inventory by 50,000
Decrease in inventory by. 50,000
Decrease in cost of goods sold
Increase in cost of goods sold
View answer
Correct answer: (B)
Decrease in inventory by. 50,000
490. In India, Commercial Papers are issued as per the guidelines issued by
Securities and Exchange Board of India
Reserve Bank of India
Forward Market Commission
None of the above
View answer
Correct answer: (B)
Reserve Bank of India
[8:24 am, 07/01/2021] Numl Butt: 491. The basic objective of Tandon Committee recommendations is
that the dependence of'industry on bank should gradually
Increase
Remain Stable
Decrease
None of the above
View answer
Correct answer: (C)
Decrease
492. Under the provisions of AS-19 'Leases', a leased asset is shown is the balance sheet of
Manufacturer
Lessor
Lessee
Financing bank
View answer
Correct answer: (C)
Lessee
493. For a lesser, a lease is a
Investment decision
Financing decision
Dividend decision
None of the above
View answer
Correct answer: (A)
Investment decision
494. Financial decision involve;
Investment, financing and dividend decision
Investment, financing and sales decision
Financing, dividend and cash decision
None of these
View answer
Correct answer: (A)
495. Ratio of Net Income to Number of Equity Shares known as:
Price Earnings Ratio
Net Profit Ratio
Earnings per Share
Dividend per Share
View answer
Correct answer: (C)
Earnings per Share
496. Which of the following statements is correct?
A Higher Receivable Turnover is not desirable
Interest Coverage Ratio depends upon Tax Rate
Increase in Net Profit Ratio means increase in Sales
Lower Debt-Equity Ratio means lower Financial Risk
View answer
Correct answer: (D)
497. Capital Budgeting deals with:
Long-term Decisions
Short-term Decisions
Both (a) and (b)
Neither (a) nor (b)
View answer
Correct answer: (A)

Long-term Decisions
498. Capital Budgeting Decisions are based on:
Incremental Profit
Incremental Cash Flows
Incremental Assets
Incremental Capital
View answer
Correct answer: (B)
Incremental Cash Flows
499. Evaluation of Capital Budgeting Proposals is based on Cash Flows because:
Cash Flows are easy to calculate
Cash Flows are suggested by SEBI
Cash is more important than profit
None of the above
View answer
Correct answer: (C)
Cash is more important than profit
500. Profitability Index, when applied to Divisible Projects, impliedly assumes that:
Project cannot be taken in parts
NPV is linearly proportionate to part of the project taken up
NPV is additive in nature
Both (b) and (c)
View answer
Correct answer: (D)
Both (b) and (c)

[8:17 am, 07/01/2021] Numl Salman: 501. The Real Cashflows must be discounted to get the present
value at a rate equal to:
Money Discount Rate
Inflation Rate
Real Discount Rate
Risk free rate of interest
Correct answer: (C)
Real Discount Rate
502. Risk in Capital budgeting is same as:
Uncertainty of Cash flows
Probability of Cash flows
Certainty of Cash flows
Variability of Cash flows
Correct answer: (D)
Variability of Cash flows
503. NPV of a proposal, as calculated by RADR real CE Approach will be:
Same
Unequal
Both (a) and
(d) None of (a) and (b)
Correct answer: (B)
Unequal
504. Cost of Capital for Bonds and Debentures is calculated on:
Before Tax basis
After Tax basis

Risk-free Rate of Interest basis
None of the above
Correct answer: (B)
After Tax basis
505. In order to calculate Weighted Average Cost of weights may be based on:
Market Values
Target Values
Book Values
All of the above
Correct answer: (D)
All of the above
506. In order to find out cost of equity capital under CAPM, which of the following is not required:
Beta Factor
Market Rate of Return
Market Price of Equity Share
Correct answer: (C)
Market Price of Equity Share
507. Which of the following is not a generally accepted approach for Calculation of Cost of Equity?
CAPM
Dividend Discount Model
Rate of Pref. Dividend Plus Risk
Price-Earnings Ratio
Correct answer: (C)
Rate of Pref. Dividend Plus Risk
508. Operating Leverage is calculated as:

Contribution ÷ EBIT
EBIT÷PBT
EBIT ÷Interest
EBIT ÷Tax
Correct answer: (A)
Contribution ÷ EBIT
509. Relationship between change in sales and change m is measured by:
Financial leverage
Combined leverage
Operating leverage
None of the above
Correct answer: (B)
Combined leverage
510. Higher FL is related the use of:
Higher Equity
Higher Debt
Lower Debt
None of the above
Correct answer: (B)
Higher Debt
[8:18 am, 07/01/2021] Numl Salman: 511. At Indifference level of EBIT, different capital have
Same EBIT
Same EPS
Same PAT
Same PBT
Correct answer: (B)
Same EPS
512. Which of the following is true for Net Income Approach?
Higher Equity is better
Higher Debt is better
Debt Ratio is irrelevant
None of the above
Correct answer: (B)
Higher Debt is better
513. In MM-Model, irrelevance of capital structure is based on:
Cost of Debt and Equity
Arbitrage Process
Decreasing k0
All of the above
Correct answer: (B)
Arbitrage Process
514. The Traditional Approach to Value of the firm m that:
There is no optimal capital structure
Value can be increased by judicious use of leverage
Cost of Capital and Capital structure are m dent
Risk of the firm is independent of capital structure
Correct answer: (B)
Value can be increased by judicious use of leverage
515. If a firm has ke > r the Walter's Model suggests for
0% payout
100% Payout
50% Payout
25% Payout
Correct answer: (A)
0% payout
516. MM Model of Dividend irrelevance uses arbitrage between
Dividend and Bonus
Dividend and Capital Issue
Profit and Investment
None of the above
Correct answer: (B)
Dividend and Capital Issue
517. Shares of face value of 10 are 80% paid up. The company declares a dividend of 50%. Amount of
dividend per share is
80
50
Correct answer: (B)
518. Which of the following is not a type of dividend payment?
Bonus Issue
Right Issue
Share Split
Both (B) and (C)
Correct answer: (C)

Share Split
519. Difference between between the bank balance as per Cash Book and Pass Book may be due to:
Overdraft
Float
Factoring
None of the above
Correct answer: (B)
Float
520. Which of the following is not true of cash budget ?
Cash budget indicates timings of short-term borrowing
Cash budget is based on accrual concept
Cash budget is based on cash flow concept
Repayment of principal amount of law is shown in cash budget
Correct answer: (B)
Cash budget is based on accrual concept
[8:19 am, 07/01/2021] Numl Salman: 521. Which is not a service of a factor?
Administrating Sales Ledger
Advancing against Credit Sales
Assuming bad debt losses
None of the above
Correct answer: (D)
None of the above
522. If the sales of the firm are. 60,00,000 and the average debtors are. 15,00,000 then the receivables
turnover is
4 times
25%
400%
0.25 times
Correct answer: (A)
4 times
523. If no information is available, the General Rule for valuation of stock for balance sheet is
Replacement Cost
Realizable Value
Historical Cost
Standard Cost
Correct answer: (C)
Historical Cost
524. Inventory is generally valued as lower of
Market Price and Replacement Cost
Cost and Net Realizable Value
Cost and Sales Value
Sales Value and Profit
Correct answer: (B)
Cost and Net Realizable Value
525. The type of collateral (security) used for short-term loan is
Real estate
Plant & Machinery
Stock of good
Equity share capital
Correct answer: (C)
Stock of good
526. Which of the following is not applicable to commercial paper
Face Value
Issue Price
Coupon Rate
None of the above
Correct answer: (D)
None of the above
527. Which of the following is not a usual type of lease arrangement?
Sale & leaseback
Goods on Approval
Leverage Lease
Direct Lease
Correct answer: (B)
Goods on Approval
528. Risk-Return trade off implies
Minimization of Risk
Maximization of Risk
Ignorance of Risk
Optimization of Risk
Correct answer: (D)
Optimization of Risk
529. Dividend Payout Ratio is:
PAT Capital
DPS ÷ EPS
Pref. Dividend ÷ PAT

Pref. Dividend ÷ Equity Dividend
Correct answer: (B)
DPS ÷ EPS
530. In Current Ratio, Current Assets are compared with:
Current Profit
Current Liabilities
Fixed Assets
Correct answer: (B)
Current Liabilities
[8:20 am, 07/01/2021] Numl Salman: 531. Process of Financial Planning ends with:
Preparation of Projected Statements
Preparation of Actual Statements
Comparison of Actual with Projected
Ordering the employees that projected figures m come true
Correct answer: (C)
Comparison of Actual with Projected
532. A sound Capital Budgeting technique is based on:
Cash Flows
Accounting Profit
Interest Rate on Borrowings
Last Dividend Paid
Correct answer: (A)
Cash Flows
533. Which of the following is not followed in capital budgeting?

Cash flows Principle
Interest Exclusion Principle
Accrual Principle
Post-tax Principle
Correct answer: (C)
Accrual Principle
534. A proposal is not a Capital Budgeting proposal if it:
is related to Fixed Assets
brings long-term benefits
brings short-term benefits only
has very large investment
Correct answer: (C)
brings short-term benefits only
535. Feasibility Set Approach to Capital Rationing can be applied in:
Accept-Reject Situations
Divisible Projects
Mutually Exclusive Projects
None of the above
Correct answer: (A)
Accept-Reject Situations
536. If the Money Discount Rate is 19% and Inflation Rate is 12%, then the Real Discount Rate is:
7%
5%
5.70%
6.25%
Correct answer: (D)

6.25%
537. Risk in Capital budgeting implies that the decision-maker knows ______ of the cash flows.
Variability
Probability
Certainty
None of the above
Correct answer: (B)
Probability
538. Which element of the basic NPV equation is adjusted by the RADR?
Denominator
Numerator
Both
None
Correct answer: (A)
Denominator
539. Which of the following has the highest cost of capital?
Equity shares
Loans
Bonds
Preference shares
Correct answer: (A)
Equity shares
540. In case the firm is all-equity financed, WACC would be equal to
Cost of Debt
Cost of Equity
Neither (a) nor
(d) Both (a) and (b)
Correct answer: (B)
Cost of Equity
[8:21 am, 07/01/2021] Numl Salman: 541. Which of the following is true?
Retained earnings are cost free
External Equity is cheaper than Internal Equity
Retained Earnings are cheaper than External Equity
Retained Earnings are costlier than External Equity
Correct answer: (C)
Retained Earnings are cheaper than External Equity
542. The term capital structure denotes:
Total of Liability side of Balance Sheet
Equity Funds, Preference Capital and Long term Debt
Total Shareholders Equity
Types of Capital Issued by a Company
Correct answer: (B)
Equity Funds, Preference Capital and Long term Debt
543. Combined Leverage is obtained from OL and FL by their:
Addition
Subtraction
Multiplication
Any of these
Correct answer: (C)
Multiplication
544. Which combination is generally good for firms

High OL, High FL
Low OL, Low FL
High OL, Low FL
None of these
Correct answer: (C)
High OL, Low FL
545. Which of the following is correct?
CL= OL + FL
CL=OL-FL
OL= OL × FL
OL=OL÷FL
Correct answer: (C)
OL= OL × FL
546. Trading on Equity is
Always beneficial
May be beneficial
Never beneficial
None of the above
Correct answer: (B)
May be beneficial
547. For a constant EBIT, if the debt level is further increased then
EPS will always increase
EPS may increase
EPS will never increase
None of the above

Correct answer: (B)
EPS may increase
548. Which of the following is true of Net Income Approach?
VF = VE+VD
VE = VF+VD
VD = VF+VE
VF = VE-VE
Correct answer: (A)
VF = VE+VD
549. 'That personal leverage can replace corporate leverage' is assumed by:
MM Model
Net Income Approach
Correct answer: (B)
MM Model
550. In MM Model with taxes, where 'r' is the interest rate, ‘D’ is the total debt and 't' is tax rate, then
present valued shields would be:
r×D×t
r×D
D×t
(D× r)/(l-t)
Correct answer: (C)
D×t
[8:24 am, 07/01/2021] Numl Salman: 551. Residuals Theory argues that dividend is a
Relevant Decision
Active Decision
Passive Decision
Irrelevant Decision
Correct answer: (C)
Passive Decision
552. MM Model argues that dividend is irrelevant as
the value of the firm depends upon earning power
the investors buy shares for capital gain
dividend is payable after deciding the retained earnings
dividend is a small amount
Correct answer: (A)
the value of the firm depends upon earning power
553. Dividend Payout Ratio is
PAT÷ Capital
DPS ÷ EPS
Correct answer: (B)
DPS ÷ EPS
554. Every company should follow
High Dividend Payment
Low Dividend Payment
Stable Dividend Payment
Fixed Dividend Payment
Correct answer: (C)

Stable Dividend Payment
555. Cash Budget does not include
Dividend Payable
Postal Expenditure
Issue of Capital
Total Sales Figure
Correct answer: (D)
Total Sales Figure
556. Miller-Orr Model deals with
Optimum Cash Balance
Optimum Finished goods
Optimum Receivables
All of the above
Correct answer: (A)
Optimum Cash Balance
557. Marketable securities are primarily
Equity shares,'
Preference shares
Fixed deposits with companies
Short-term debt investments
Correct answer: (D)
Short-term debt investments
558. Bad debt cost is not borne by factor in case of
Pure Factoring
Without Recourse Factoring

With Recourse Factoring
None of the above
Correct answer: (C)
With Recourse Factoring
559. Payment to creditors is a manifestation of cash held for:
Transactionery Motive
Precautionary Motive
Speculative Motive
All of the above
Correct answer: (A)
Transactionery Motive
560. If a company sells its receivable to another party to raise funds, it is known as
Securitization
Factoring
Pledging
None of the above
Correct answer: (B)
Factoring
[8:25 am, 07/01/2021] Numl Salman: 561. EOQ is the quantity that minimizes
Total Ordering Cost
Total Inventory Cost
Total Interest Cost
Safety Stock Level
Correct answer: (A)
Total Ordering Cost
562. EOQ determines the order size when

Total Order cost is Minimum
Total Number of order is least
Total inventory costs are minimum
None of the above
Correct answer: (C)
563. Which of the following is not a standard method of inventory valuation?
First in First out
Standard Cost
Average Pricing
Realizable Value
Correct answer: (C)
Average Pricing
564. Which of the following is not a spontaneous source of short-term funds?
Trade credit
Accrued expenses
Provision for dividend
All of the above
Correct answer: (C)
565. In lease system, interest is calculated on
Cash down payment
Cash price outstanding
Hire purchase price
None of the above

Correct answer: (B)
566. Lease which includes a third party (a lender) is known as
Sale and leaseback
Direct Lease
Inverse Lease
Leveraged Lease
Correct answer: (D)
Leveraged Lease
567. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
Increased
Decreased
Unchanged
None of the above
Correct answer: (A)
Increased
568. The term 'EVA' is used for:
Extra Value Analysis
Economic Value Added
Expected Value Analysis
Engineering Value Analysis
Correct answer: (B)
569. Suppliers and Creditors of a firm are interested in
Profitability Position
Liquidity Position
Market Share Position
Debt Position
Correct answer: (B)
Liquidity Position
570. Capital Budgeting Decisions are:
Reversible
Irreversible
Unimportant
All of the above
Correct answer: (B)
Irreversible
[8:27 am, 07/01/2021] Numl Salman: 561. EOQ is the quantity that minimizes
Total Ordering Cost
Total Inventory Cost
Total Interest Cost
Safety Stock Level
Correct answer: (A)
Total Ordering Cost
562. EOQ determines the order size when
Total Order cost is Minimum
Total Number of order is least
None of the above
Correct answer: (C)

563. Which of the following is not a standard method of inventory valuation?
First in First out
Standard Cost
Average Pricing
Realizable Value
Correct answer: (C)
Average Pricing
564. Which of the following is not a spontaneous source of short-term funds?
Trade credit
Accrued expenses
All of the above
Correct answer: (C)
565. In lease system, interest is calculated on
Cash down payment
Hire purchase price
None of the above
Correct answer: (B)
566. Lease which includes a third party (a lender) is known as
Sale and leaseback
Direct Lease
Inverse Lease
Leveraged Lease
Correct answer: (D)
Leveraged Lease
567. In Risk-Adjusted Discount Rate method, the normal rate of discount is:
Increased
Decreased
Unchanged
None of the above
Correct answer: (A)
Increased
568. The term 'EVA' is used for:
Extra Value Analysis
Expected Value Analysis
Engineering Value Analysis
Correct answer: (B)
Liquidity Position
Debt Position
Correct answer: (B)
Liquidity Position
570. Capital Budgeting Decisions are:

Reversible
Irreversible
Unimportant
All of the above
Correct answer: (B)
Irreversible
[8:29 am, 07/01/2021] Numl Salman: 571. Financial Break-even level of EBIT is one at which:
EPS is one
EPS is zero
EPS is Infinite
EPS is Negative
Correct answer: (B)
EPS is zero
572. NOI Approach advocates that the degree of debt financing is:
Relevant
May be relevant
Irrelevant
May be irrelevant
Correct answer: (C)
Irrelevant
573. The aftertax cost of debt is expressed:
Kd = Y/k(1-T)
Kd = Y(1-T)
K = (1-t)/Y
K=Y
Correct answer: (B)

Kd = Y(1-T)
574. The formula for the Capital Asset Pricing Model (CAPM) is:
Kj = Rf + β (Rf – Rm)
Kj = Rf + β (Rm – Rf)
K = R + β (R – M)
K = R + β (R – R)
Correct answer: (B)
Kj = Rf + β (Rm – Rf)
575. ______ is concerned with the acquisition, financing and management of assets with some overall
goal in mind.
Financial Management
Profit Maximisation
Agency Theory
Social Responsibility
Correct answer: (A)
Financial Management
576. Balance Sheet shows the:
Profit earned by the business
Total capital employed
Financial position of the business
Trading results of the business
Correct answer: (C)
Financial position of the business
577. Financial management deals with two things:

Operations management and procurement
Warehousing and managing a company's finances
Raising money and managing a company's finances
Marketing and production management
Correct answer: (C)
Raising money and managing a company's finances
578. A company's ability to meet its short-term financial obligations is referred to as:
Stability
Efficiency
Effectiveness
Liquidity
Profitability
Correct answer: (D)
Liquidity
579. A company's ______ is its merchandise, raw materials, and products waiting to be sold.
Inventory
Liquidity
Accounts Receivable
Accounts Payable
Owners' Equity
Correct answer: (A)
Inventory
580. Which of the following selections correctly matches the financial statement with its description?
Income statement/tells how much a firm is making or losing
Income statement/depicts the structure of a firm's assets and liabilities

Balance sheet/tells how much a firm is making or losing
Statement of cash flows/depicts the structure of a firm's assets and liabilities
Correct answer: (A)
Income statement/tells how much a firm is making or losing
[8:30 am, 07/01/2021] Numl Salman: 581. A firm's working capital consists of investment in
Current assets
Current Liabilities
Short term assets
Both (a) and (c)
Correct answer: (D)
Both (a) and (c)
582. Financial management deals with two things -- raising money and:
Operations management
Production management
Warehousing
Managing a company's finances
Correct answer: (D)
Managing a company's finances
583. The most important item that can be extracted from financial statements is the actual ______ of
the firm.
Net Working Capital
Cash Flow
Net Present Value
None of the given options
Correct answer: (B)
Cash Flow
584. One of the limitations of the ______ is that it is based on historical costs.
Income statement
Statement of cash flows
Balance sheet
none of the above
Correct answer: (C)
Balance sheet
585. Short - term interest rates, in a normal economy, are generally ______ than long - term rates.
Higher
The same
Lower
None of the above
Correct answer: (C)
Lower
586. A firm's working capital consists of investment in
Current Assets
Current liabilities
Short term assets
Both a & c
Correct answer: (D)
Both a & c
587. An example of current liability
Creditors
Outstanding expenses
Provisions for depreciation

All
Correct answer: (D)
All
588. A series of activities in an organization related to production is known as
Operating cycle
Working cycle
Current cycle
Fixed cycle
Correct answer: (A)
Operating cycle
589. Long term sources are
Retained earnings
Debentures
Share capital
All of the above
Correct answer: (D)
All of the above
590. Finance function is one of the most important functions of ______ management.
business
marketing
financial
debt
Correct answer: (C)
financial
[8:31 am, 07/01/2021] Numl Salman: 591. The volume of sales is influenced by ______ of a firm.
finance policy
credit policy
profit policy
fund policy
Correct answer: (D)
fund policy
592. Inventory management is essential because investments in stock are ______.
high
low
medium
fixed
Correct answer: (A)
high
593. The difference between selling price and present book value of machinery is called
Capital income
Revenue income
Revenue Receipt
Capital Receipt
Correct answer: (A)
Capital income
594. The primary purpose of the statement of cash flows is to
provide information about the investing and financing activities during a period
prove that revenues exceed expenses if there is a net income
provide information about the cash receipts and cash payments during a period
facilitate banking relationships
Correct answer: (C)

provide information about the cash receipts and cash payments during a period
595. The category that is generally considered to be the best measure of a company's ability tocontinue
as a going concern is
cash flows from operating activities
cash flows from investing activities
cash flows from financing activities
usually different from year to year
Correct answer: (A)
cash flows from operating activities
596. Which of the following would be subtracted from net income using the indirect'method?
Depreciation expense
An increase in accounts receivable
An increase in accounts payable
A decrease in prepaid expenses
Correct answer: (B)
597. An asset is a
Source of fund
Use of fund
Inflow of funds
none of the above
Correct answer: (B)
Use of fund
598. Properietory ratio is calculated by
Total assets/Total outside liability

Total outside liability/Total tangible assets
Fixed assets/Long term source of fund
Properietor'sFunds/TotalTangible Assets
Correct answer: (D)
Properietor'sFunds/TotalTangible Assets
599. Financial leverage means
Use of more debt capital to increase profit
High degree of solvency
Low bank finance
None of the above
Correct answer: (A)
600. What relationship exists between the average collection period and accounts receivable turnover?
Both ratios are expressed in number of days
Both ratios are expressed in number of times receivables are collected per year
As average collection period increases (decreases) the accounts receivable turnover decreases
(increases)
There is a direct and proportional relationship
Correct answer: (C)
As average collection period increases (decreases) the accounts receivable turnover decreases
(increases)
[8:32 am, 07/01/2021] Numl Salman: 601. Net Profit Ratio Signifies:
Liquidity Position
Big-term Solvency
Profit for Lenders

Correct answer: (D)
Profit for Lenders
602. ABC Ltd. has a Current Ratio of 1.5: 1 and Net Current Assets of Rs. 5,00,000. What are the Current
Assets?
Rs. 5,00,000
Rs. 10,00,000
Rs. 15,00,000
Rs. 25,00,000
Correct answer: (C)
Rs. 15,00,000
Liquidity Position
Debt Position
Correct answer: (B)
Liquidity Position
604. XYZ Ltd. has a Debt Equity Ratio of 1.5 as compared to 1.3 Industry average. It means that the firm
has:
Higher Liquidity
Higher Financial Risk
Higher Profitability
Higher Capital Employed
Correct answer: (B)
Higher Financial Risk
605. Debt Equity Ratio is 3:1,the amount of total assets Rs.20 lac, current ratio is 1.5:1 and owned funds
Rs.3 lac. What is the amount of current asset?
Rs.5 lac
Rs.3 lac
Rs.12 lac
none of the above
Correct answer: (C)
Rs.12 lac
606. Which one of the following is NOT a tool of financial forecasting ?
Cash budget
Capital budget
Pro forma Balance sheet
Pro forma Income statement
Correct answer: (B)
Capital budget
607. The transaction motive for holding cash is for
A safety cushion
Daily operating requirements
Compensating Balance requirements
None of the above
Correct answer: (B)
Daily operating requirements
608. Adequate working capital means
Sufficient funds
Insufficient funds
Lack of funds
All of the above

Correct answer: (A)
Sufficient funds
609. The net working capital measures
Ability
Liquidity
Credibility
None
Correct answer: (B)
Liquidity
610. A level of working capital which is required by the firm always is knows as
Gross working capital
Permanent working capital
Temporary working capital
Net working capital
Correct answer: (B)
[8:33 am, 07/01/2021] Numl Salman: 611. Financial decisions involve ______.
Investment, financing and dividend decisions
Investment sales decisions
Financing cash decisions
Investment dividend decisions
Correct answer: (C)
Financing cash decisions
612. Greater the size of a business unit ______ will be the requirements of working capital
larger
lower
no change
fixed
Correct answer: (B)
lower
613. Financial risk arises due to the
variability of returns due to fluctuations in the securities market
changes in prevailing interest rates in the market
leverage used by the company
liquidity of the assets of the company
Correct answer: (D)
liquidity of the assets of the company
614. Retained earnings are
An indication of a company's liquidity
The same as cash in the bank
Not important when determining dividends
The cumulative earnings of the company after dividends
Correct answer: (D)
The cumulative earnings of the company after dividends
615. Traditional approach confines finance function only to ______ funds.
Raising
Mobilising
Utilising
Financing
Correct answer: (A)
Raising
616. The statement of cash flows will not report the
amount of checks outstanding at the end of the period
sources of cash in the current period
uses of cash in the current period
change in the cash balance for the current period
Correct answer: (A)
amount of checks outstanding at the end of the period
617. Investing activities include
collecting cash on loans made
obtaining cash from creditors
obtaining capital from owners
repaying money previously borrowed
Correct answer: (A)
collecting cash on loans made
618. Of the items below, the one that appears first on the statement of cash flows is
Non cash investing and financing activities
net increase (decrease) in cash
cash at the end of the period
cash at the beginning of the period
Correct answer: (B)
net increase (decrease) in cash
619. Which of the following would not be an adjustment to net income using the indirect method?
Depreciation Expense
An increase in Prepaid Insurance
Amortization Expense
An increase in Land
Correct answer: (D)
An increase in Land
620. Banks generally prefer Debt Equity Ratio at:
1:1
1:3
2:1
3:1
Correct answer: (C)
2:1
[8:34 am, 07/01/2021] Numl Salman: 621. The long term use is 120% of long term source. This indicates
the unit has
current ratio 1.2:1
Negative TNW
Low capitalization
Negative NWC
Correct answer: (D)
Negative NWC
622. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of currentAssets.
Rs. 10,000
Rs. 40,000
Rs.24,000
Rs.6,000
Correct answer: (B)
Rs. 40,000
623. What type of ratios measure the liquidity of specific assets and the efficiency of managing assets?
Leverage ratios
Profitability ratios
Liquidity ratios
Activity ratios
Correct answer: (D)
Activity ratios
624. What is the net trade cycle?
The amount of time needed to complete the normal operating cycle of a firm
The amount of time it takes to manufacture or buy inventory
The amount of time it takes to sell inventory
None of the above
Correct answer: (A)
The amount of time needed to complete the normal operating cycle of a firm
625. Return on Investment may be improved by:
Increasing Turnover
Reducing Expenses
Increasing Capital Utilization
All of the above
Correct answer: (D)
All of the above
626. Which of the following does not help to increase Current Ratio?
Issue of Debentures to buy Stock
Issue of Debentures to pay Creditors
Sale of Investment to pay Creditors
Avail Bank Overdraft to buy Machine

Correct answer: (D)
Avail Bank Overdraft to buy Machine
627. A firm has Capital of Rs. 10,00,000; Sales of Rs. 5,00,000; Gross Profit of Rs. 2,00,000 and Expenses
of Rs. 1,00,000. What is the Net Profit Ratio?
20%
50%
10%
40%
Correct answer: (A)
20%
628. Gross Profit Ratio for a firm remains same but the Net Profit Ratio is decreasing. The reason for
such behavior could be:
Increase in Costs of Goods Sold
Increase in Expense
Increase in Dividend
Decrease in Sales
Correct answer: (B)
Increase in Expense
629. In Inventory Turnover calculation, what is taken in the numerator?
Sales
Cost of Goods Sold
Opening Stock
Closing Stock
Correct answer: (B)
Cost of Goods Sold
630. If a company revalues its assets, its networth:

Will improve
Will remain same
Will be positively affected
None of the above
Correct answer: (A)
Will improve
[8:35 am, 07/01/2021] Numl Salman: 631. The degree of solvency of two firms can be compared by
measuring
Net worth
Tangible Net Worth
Asset coverage ratio
Solvency Ratio
Correct answer: (D)
Solvency Ratio
632. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is
Rs.18,000
Rs.45,000
Rs.(-) 45,000
Rs.(-)18000
Correct answer: (D)
Rs.(-)18000
633. Stock is not included in the current assets when calculating the acid test ratio because:
Stock is not a liquid asset
Only debtors can be included, as they will be converted into cash shortly
It makes comparison easier as only two current liabilities are included in the acid test ratio
Banks only recognize cash and debtors as liquid assets
Correct answer: (A)
Stock is not a liquid asset
634. Which of the following is not an efficiency ratio?
Asset turnover
Stock Turnover
Debtor days
Interest cover
Correct answer: (D)
Interest cover
635. The objective of financial management is to maximize ______ wealth.
Select correct option:
Stakeholders
Shareholders
Bondholders
Directors
Correct answer: (C)
Shareholders
636. The four main financial objectives of a firm are:
Efficiency, effectiveness, strength, and flexibility
Power, success, efficiency, and effectiveness
Control, effectiveness, liquidity, and power
Success, strength, liquidity, and profitability
Profitability, liquidity, efficiency, and stability
Correct answer: (E)
Profitability, liquidity, efficiency, and stability

637. The job of a finance manager is confined to
Raising funds
Management of cash
None of these
Correct answer: (C)
638. The strength and vigor of a firm's overall financial posture is referred to as:
Liquidity
Stability
Effectiveness
Profitability
Efficiency
Correct answer: (B)
Stability
639. ______ reflect past performance and are usually prepared on a quarterly and annual basis
Chronological financial statements
Ad-hoc financial statements
Historical financial statements
Concurrent financial statement
Correct answer: (C)
Historical financial statements
640. A source of funds is a:
Decrease in a current asset
Decrease in a current liability

Increase in a current liability
a and c above
Correct answer: (D)
a and c above
[8:36 am, 07/01/2021] Numl Salman: 641. Financial management involves decisions about which of the
following:
Which projects to fund
How to minimize taxation
What type of capital should be raised
All of these
Correct answer: (D)
All of these
642. The money markets deal with ______.
securities with a life of more than one year
short-term securities
securities such as common stock
none of the above
Correct answer: (B)
short-term securities
643. If interest expenses for a firm rise, we know that the firm has taken on more ______
Financial Leverage
Operating Leverage
Fixed Assets
None of the above
Correct answer: (A)
Financial Leverage
644. Insufficient working capital results in
Block of cash
Loosing interests
Lack of production
Lack of smooth flow of production
Correct answer: (D)
645. The investment in total current assets is known as
Net working capital
Correct answer: (A)
646. The time period required for the conversion of raw materials into finished goods
Operating cycle period
Inventory conversion period
Receivable conversion period
None
Correct answer: (B)
647. Financial Management is mainly concerned with ______.
arrangement of funds
all aspects of acquiring and utilizing financial resources for firm's activities
efficient Management of every business

profit maximization
Correct answer: (B)
all aspects of acquiring and utilizing financial resources for firm's activities
648. The gross working capital is a ______ concern concept.
Going
money measurement
revenue concept
cost concept
Correct answer: (B)
money measurement
649. Which of the following is not a function performed by a financial system?
Savings function
Liquidity function
Risk function
Social function
Correct answer: (D)
Social function
650. The policy concerning quarters of profit to be distributed as dividend is termed as ______.
Profit policy
Dividend policy
Credit policy
Reserving policy
Correct answer: (B)
Dividend policy
[8:37 am, 07/01/2021] Numl Salman: 651. Capital Budgeting is related to

Long term assets
Short term assets
Long term and short term assets
Fixed assets
Correct answer: (A)
Long term assets
652. Which one of the following items is not generally used in preparing a statement of cash flows?
Adjusted trial balance
Comparative balance sheets
Current income statement
Additional information
Correct answer: (A)
Adjusted trial balance
653. The order of presentation of activities on the statement of cash flows is
operating, investing, and financing
operating, financing, and investing
financing, operating, and investing
financing, investing, and operating
Correct answer: (A)
operating, investing, and financing
654. Significant noncash transactions would not include
conversion of bonds into common stock
asset acquisition through bond issuance
treasury stock acquisition
exchange of plant assets
Correct answer: (C)

treasury stock acquisition
655. In the Balance sheet of a firm, the debt equity ratio is 2:1. The amount of long term sources is Rs.12
lac. What is the amount of tangible net worth of the firm?
Rs.12 lac
Rs.8 lac
Rs.4 lac
Rs.2 lac
Correct answer: (B)
Rs.8 lac
656. Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred during the year is
Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a Tangible Net Worth of
Nil
Rs.2.50 lac
(-) Rs.50,000
Rs.1 lac
Correct answer: (C)
(-) Rs.50,000
657. Quick assets do not include
Govt. bond
Book debts
Advance for supply of raw materials
Inventories
Correct answer: (D)
Inventories
658. Which of the following ratios would be useful in assessing short-term liquidity?
Current ratio, inventory turnover, fixed asset turnover
Average collection period, debt ratio, return on assets
Current ratio, quick ratio, cash-flow liquidity ratio
Quick ratio, accounts receivable turnover, returns on assets
Correct answer: (C)
Current ratio, quick ratio, cash-flow liquidity ratio
659. Accounting Ratios are important tools used by
Managers
Researchers
Investors
All of the above
Correct answer: (D)
All of the above
660. Ratio of Net Income to Number of Equity Shares known as?
Price Earnings Ratio
Net Profit Ratio
Earnings per Share
Dividend per Share
Correct answer: (C)
Earnings per Share
[8:38 am, 07/01/2021] Numl Salman: 661. Debt to Total Assets of a firm is .2. The Debt to Equity ratio
would be:
0.80
0.25
1.00
0.75
Correct answer: (B)
0.25
662. An asset is a
Source of fund
Use of fund
Inflow of funds
none of the above
Correct answer: (B)
Use of fund
663. Current ratio of a concern is 1,its net working capital will be
Positive
Negative
Nil
None of the above
Correct answer: (C)
Nil
664. A very high current ratio indicates
High efficiency
flabby inventory
position of more long term funds
b or c
Correct answer: (D)
b or c
665. Which of the following is not a category of ratios?
Profitability
Management
Efficiency
Solvency
Correct answer: (B)
Management
666. Which of the following are microeconomic variables that help define and explain the discipline of
finance?
risk and return
capital structure
inflation
All of the above
Correct answer: (D)
All of the above
667. Which of the following is not identified as one of the four main financial objectives of a firm?
Profitability
Liquidity
Efficiency
Timeliness
Correct answer: (D)
Efficiency
668. A company's ______ is money owned to it by its customers.
Liquidity
Accounts Receivable
Accounts Payable
Inventory
Owners' Equity
Correct answer: (B)
Accounts Receivable
669. ______ depict relationships between items on a firm's financial statements.
Financial proportions
Fiscal relations
Financial ratios
Fiscal proportions
Correct answer: (C)
Financial ratios
670. "Share holder 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
Correct answer: (D)
The market price per share of the firm's common stock
[8:42 am, 07/01/2021] Numl Butt: 671. Who of the following make a broader use of accounting
information?
Accountants
Financial Analysts
Auditors
Marketers
Correct answer: (B)
Financial Analysts
672. Working capital management involves the financing and management of the assets of the firm.
Fixed
Total
Current
None of the above
Correct answer: (C)
Current
673. Excess working capital results in
Block of cash
Loosing interests
Lack of production
Correct answer: (A)
Block of cash
674. The excess of current assets over current liabilities is known as
Net working capital
Correct answer: (D)
Net working capital
675. The time period required to convert the credit sales into cash
None
Correct answer: (C)

676. Working capital is also known as ______ capital.
circulating
fluctuating
fixed
going
Correct answer: (B)
fluctuating
677. Factoring is a form of financing ______.
payable
receivables
borrowings
debts
Correct answer: (C)
borrowings
678. Ordering cost is the cost of ______ materials.
selling
purchasing
stocking
financing
Correct answer: (B)
purchasing
679. Which one of the following is capital expenditure:
Capital invested by owner
Selling expense for machine

Machine purchased
Daily expense to operate business
Correct answer: (C)
Machine purchased
680. The statement of cash flows
must be prepared on a daily basis
summarizes the operating, financing, and investing activities of an entity
is another name for the income statement
is a special section of the income statement
Correct answer: (B)
summarizes the operating, financing, and investing activities of an entity
[8:43 am, 07/01/2021] Numl Butt: [1/7, 8:42 PM] Khan Numl: 681. Financing activities involve
lending money
acquiring investments
issuing debt
acquiring long-lived assets
Correct answer: (C)
issuing debt
682. Which of the following transactions does not affect cash during a period?
Write-off of an uncollectible account
Collection of an accounts receivable
Sale of treasury stock
Exercise of the call option on bonds payable
Correct answer: (A)
Write-off of an uncollectible account

683. In calculating cash flows from operating activities using the indirect method, a loss on the sale of
equipment will appear as.
subtraction from net income
an addition to net income
an addition to cash flow from investing activities
a subtraction from cash flow from investing activities
Correct answer: (B)
an addition to net income
684. If a company issues bonus shares the debt equity ratio will
Remain unaffected
Will be affected
Will improve
none of the above
Correct answer: (C)
Will improve
685. Current ratio of a concern is 1,its net working capital will be
Positive
Negative
Nil
None of the above
Correct answer: (C)
Nil
686. A very high current ratio indicates
High efficiency
flabby inventory
position of more long term funds
b or c
Correct answer: (D)
b or c
687. Why is it important to calculate cash flow ratios?
Firms need cash to service debt, dividends and expenses
Companies that generate healthy profit may be unable to convert profits into cash
Cash flow ratios help the analyst assess the long-term profitability of a firm
Both (a) and (b)
Correct answer: (D)
Both (a) and (b)
688. Dividend Payout Ratio is:
PAT Capital
DPS ÷ EPS
Correct answer: (B)
DPS ÷ EPS
689. In Current Ratio, Current Assets are compared with:
Current Profit
Current Liabilities
Fixed Assets
690. A Current Ratio of Less than One means:
Current Liabilities < Current Assets

Fixed Assets > Current Assets
Current Assets < Current Liabilities
Share Capital > Current Assets
Correct answer: (C)
Current Assets < Current Liabilities
[1/7, 8:42 PM] Khan Numl: 691. Which of the following helps analysing return to equity Shareholders?
Return on Assets
Earnings Per Share
Net Profit Ratio
Return on Investment
Correct answer: (B)
Earnings Per Share
692. In the Balance sheet of a firm,the debt equity ratio is 2:1.The amount of long term sources is Rs.12
lac.What is the amount of tangible net worth of the firm?
Rs.12 lac
Rs.8 lac
Rs.4 lac
Rs.2 lac
Correct answer: (B)
Rs.8 lac
693. In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is 3:1 but quick
ratio is 1:1.This indicates comparably
high liquidity
higher stock
lower stock
low liquidity
Correct answer: (B)
higher stock
694. Properietory ratio is calculated by
Total assets/Total outside liability
Total outside liability/Total tangible assets
Fixed assets/Long term source of fund
Properietors'Funds/TotalTangible Assets
Correct answer: (D)
Properietors'Funds/TotalTangible Assets
695. If a firm sold stock on credit then which of the following would be the result ?
Acid Test Ratio increases
Acid test ratio decreases
Current ratio decreases
Current ratio increases
Correct answer: (B)
Acid test ratio decreases
696. The ability of a firm to convert an asset to cash is called ______.
Liquidity
Solvency
Return
Marketability
Correct answer: (A)
Liquidity
697. ______ capital structure means an ideal combination of borrowed and owned capital that may
attain the marginal goal.
Preference share
Optimum
Equity
Debt
Correct answer: (B)
Optimum
698. The appropriate objective of an enterprise is:
Maximisation of sale
Maximisation of profits
None of these
Correct answer: (B)
699. A financial statement is an:
Written report that quantitatively describes a firm's financial health
Set of ratios which depict relationships between a firm's financial Items
Itemized forecast of a company's income, expenses, and capital Needs
Estimate of a firm's future income and expenses
Correct answer: (A)
Written report that quantitatively describes a firm's financial health
700. A firm's ______ reflects the results of its operations over a specified period and shows whether it is
making a profit or is experiencing a loss
Statement of cash flows
Balance sheet
Statement of owners' equity
Income statement
Correct answer: (D)
Income statement
701. The most practical way to interpret or make sense of a firm's historical financial statements is
through:
Profit analysis
Ratio analysis
Estimate statement
Forecast Hypothesis
Assumption sheet
Correct answer: (B)
Ratio analysis
702. Finance is vital for which of the following business activity (activities) ?
Marketing Research
Product Pricing
Design of marketing and distribution channels
All of the given options
703. Maximising shareholders wealth means maximizing the
Value of the firm's assets
Amount of the firm's cash
Value of the firm's investments
Total market value of the firm's common stock
Correct answer: (D)
Total market value of the firm's common stock
704. Long-term financing plans with low liquidity have:
High return and high risk

Moderate return and Moderate risk
Low return and low risk
None of the above
Correct answer: (B)
Moderate return and Moderate risk
705. Which of the following is not a current asset
Cash in hand
Cash at bank
Debtors
Creditors
Correct answer: (D)
Creditors
706. The liability which should be paid within a period of one year is known as
Current asset
Current liability
Fixed asset
Variable asset
Correct answer: (B)
Current liability
707. The length or time period of the operating cycle of any firm can be defined as
None
Correct answer: (A)

708. Short term sources are
Bank credit
Public deposit
Commercial papers
All of the above
Correct answer: (D)
All of the above
709. ______ management is the important task of the finance manager.
Debt
Equity
Profit
Cash
Correct answer: (D)
Cash
710. The fixed proportion of working capital should be generally financed from the ______ capital
sources.
fixed
variable
semi-variable
borrowed
Correct answer: (B)
Variable
[8:30 am, 07/01/2021] Numl ARSAL: 711. The time required to process and execute an order is called
______.
allowed time
lead time
accepted time
fixed time
Correct answer: (B)
lead time
712. The dividend-pay out ration is equal to
The dividend yield plus the capital gains yield
Dividends per share divided by earnings per share
Dividends per share divided by par value per share
Dividends per share divided by current price per share
Correct answer: (B)
Dividends per share divided by earnings per share
713. Working Capital management is managing
Long term assets
Short term assets and liabilities
Long term liabilities
Only short term assets
Correct answer: (B)
Short term assets and liabilities
714. The acquisition of land by issuing common stock is
a noncash transaction that is not reported in the body of a statement of cash flows
a cash transaction and would be reported in the body of a statement of cash flows
a noncash transaction and would be reported in the body of a statement of cash flows
only reported if the statement of cash flows is prepared using the direct method
Correct answer: (A)
a noncash transaction that is not reported in the body of a statement of cash flows
715. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the
two cash effects can be netted and presented as one item in the investing activities section
cash inflow and cash outflow should be reported separately in the investing activities section
two cash effects can be netted and presented as one item in the financing activities section
cash inflow and cash outflow should be reported separately in the financing activities section
Correct answer: (B)
cash inflow and cash outflow should be reported separately in the investing activities section
716. A company would be expected to generate small amounts of cash provided by operating activities
during the
introductory phase
growth phase
maturity phase
decline phase
Correct answer: (B)
growth phase
717. Debt Equity Ratio is 3:1, the amount of total assets Rs.20 lac,current ratio is 1.5:1 and owned funds
Rs.3 lac. What is the amount of current asset?
Rs.5 lac
Rs.3 lac
Rs.12 lac
none of the above
Correct answer: (C)
Rs.12 lac
718. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital &
reserves are Rs.2 lac .What is the debt equity ratio?
1;1
1.5:1
2:1
none of the above
Correct answer: (D)
none of the above
719. Current ratio is 2:5. Current liability is Rs.30000. The Net working capital is
Rs.18,000
Rs.45,000
Rs.(-) 45,000
Rs.(-)18000
Correct answer: (D)
Rs.(-)18000
720. Which of the following statements is false?
No rules of thumb apply to the interpretation of financial ratios
Financial ratios can indicate areas of potential strength and weakness
Financial ratios are predictive
Financial ratios can serve as screening devices
Correct answer: (C)
Financial ratios are predictive
[8:33 am, 07/01/2021] Numl ARSAL: 721. Working Capital Turnover measures the relationship of
Working Capital with:
Fixed Assets
Sales
Purchases
Stock
Correct answer: (A)

Fixed Assets
722. In Net Profit Ratio, the denominator is:
Net Purchases
Net Sales
Credit Sales
Cost of goods sold
Correct answer: (B)
Net Sales
723. Debt to Total Assets Ratio can be improved by:
Borrowing More
Issue of Debenture
Issue of Equity Shares
Redemption of Debt
Correct answer: (D)
Redemption of Debt
724. Which of the following is a measure of Debt Service capacity of a firm?
Current Ratio
Acid Test Ratio
Interest Coverage Ratio
Debtors Turnover
Correct answer: (C)
Interest Coverage Ratio
725. Return on Assets and Return on Investment Ratios belong to:
Liquidity Ratios
Profitability Ratios
Solvency Ratios
Turnover
Correct answer: (B)
Profitability Ratios
726. If a company issues bonus shares the debt equity ratio will
Remain unaffected
Will be affected
Will improve
none of the above
Correct answer: (C)
Will improve
727. Authorised capital of a company is Rs.5 lac,40% of it is paid up.Loss incurred during the year is
Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The company has a Tangible Net Worth of
Nil
Rs.2.50 lac
(-)Rs.50,000
Rs.1 lac
Correct answer: (C)
(-)Rs.50,000
728. Quick assets do not include
Govt.bond
Book debts
Advance for supply of raw materials
Inventories
Correct answer: (D)
Inventories
729. Financial leverage means
High degree of solvency
Low bank finance
None of the above
Correct answer: (A)
730. Creditors would not be interested in which group of ratios ?
Solvency
Shareholder
Profitability
Capital Structure
Correct answer: (B)
Shareholder
[8:36 am, 07/01/2021] Numl ARSAL: 731. The balance sheet is alternately known as:
Assets statement
Statement of financial position
Statement of profit and loss
Correct answer: (B)
Statement of financial position
732. ______ of a firm refers to the composition of its long -term funds and its capital structure:
Capitalisation
Over Capitalisation
Under Capitalisation
Market Capitalisation
Correct answer: (A)
Capitalisation
733. ______ is the ability of a firm to earn a profit.
Profitability
Liquidity
Efficiency
Effectiveness
Stability
Correct answer: (A)
Profitability
734. ______ is how productively a firm utilizes its assets relative to its revenue and its profits.
Efficiency
Effectiveness
Stability
Liquidity
Profitability
Correct answer: (A)
Efficiency
735. ______ are itemized forecasts of a company's income, expenses, and capital needs and are also an
important tool for financial planning and control.
Profitability statements
Budgets
Owners' equity statements
Statements of cash flows
Correct answer: (B)

Budgets
736. Ratio analysis allows a firm to compare its performance to:
Other firms in the industry
Other time periods within the firm
Other industries
None of the above
Correct answer: (A)
Other firms in the industry
737. Which of the following statement is considered as the accountant's snapshot of firm's accounting
value as of a particular date?
Income Statement
Balance Sheet
Cash Flow Statement
Retained Earnings Statement
Correct answer: (B)
Balance Sheet
738. The ability of a firm to convert an asset to cash is called ______.
Liquidity
Solvency
Return
Marketability
Correct answer: (A)
Liquidity
739. The ______ is the percentage change in operating income that results from a percentage change in
sales.
Degree of financial leverage
Breakeven point
Degree of operating Leverage
Degree of combined leverage
Correct answer: (C)
Degree of operating Leverage
740. The management of current assets is known as
Current asset management
working capital management
Both a & b
None
Correct answer: (C)
Both a & b
[8:38 am, 07/01/2021] Numl ARSAL: 741. The asset which can be converted into cash when ever
required with out loosing its value is
Current asset
Current liability
Fixed asset
Variable asset
Correct answer: (A)
Current asset
742. The regular funds invested in the working capital known as
Net working capital
Fixed working capital

Correct answer: (D)
743. Above permanent working capital which is required by the firm is knows as
Net working capital
Correct answer: (C)
744. In his traditional role the finance manager is responsible for ______.
arrange of utilization of funds
arrangement of financial resources
acquiring capital assets of the organization
effective management of capital
Correct answer: (D)
effective management of capital
745. The rate of return on investment ______ with the shortage of working capital.
falls
going
constant
change
Correct answer: (B)
going
746. Which of the following is/are the problem(s) encountered in financial statement analysis?
Development of benchmarks
Window dressing
Interpretation of results
All of the above
Correct answer: (D)
All of the above
747. The overall financial condition of the organization is listed in the
income statement
profit and loss statement
balance sheet
statement of cash flows
Correct answer: (C)
balance sheet
748. If capital expense is recorded as revenue expense then which calculation will be wrong ?
Bank Balance
Debtors
Creditors
Net profit
Correct answer: (D)
Net profit
749. The Company's cost of capital is called
Leverage rate
Hurdle rate
Risk rate
Return rate
Correct answer: (A)
Leverage rate
750. If a company reports a net loss, it
may still have a net increase in cash
will not be able to pay cash dividends
will not be able to get a loan
will not be able to make capital expenditures
Correct answer: (A)
may still have a net increase in cash
[8:40 am, 07/01/2021] Numl ARSAL: 751. Cash receipts from interest and dividends are classified as
operating activities
either financing or investing activities
Correct answer: (C)
752. In preparing a statement of cash flows, a conversion of bonds into common stock will bereported in
the financing section
the "extraordinary" section
a separate schedule or note to the financial statements
the stockholders' equity section
Correct answer: (C)
a separate schedule or note to the financial statements
753. If a company revalues its assets,its net worth:
Will improve
Will remain same
Will be positively affected

None of the above
Correct answer: (A)
Will improve
754. In last year the current ratio was 3:1 and quick ratio was 2:1. Presently current ratio is 3:1 but quick
ratio is 1:1. This indicates comparably
high liquidity
higher stock
lower stock
low liquidity
Correct answer: (B)
higher stock
755. The ideal quick ratio is
2:1
1:1
5:1
None of the above
Correct answer: (B)
1:1
756. What does a decreasing inventory turnover ratio usually indicate about a rirm?
The firm is selling more inventory
The firm is managing its inventory we//
The firm is inefficient in the management of inventory
Both (a) and (b)
Correct answer: (C)
The firm is inefficient in the management of inventory

757. If a firm is using financial/ leverage successfully what would be the impact of doubling operating
earnings?
The returns on equity will more than double
The return on equity will decline by half
The return on equity will double
The return on equity will increase, but not double
Correct answer: (A)
The returns on equity will more than double
758. In Ratio Analysis, the term Capital Employed refers to:
Net worth
Shareholders' Funds
None of the above
Correct answer: (D)
None of the above
759. There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?
That the Capital Employed has reduced
That the Profitability has gone up
That Sales has decreased
Correct answer: (C)
760. XYZ Ltd. has earned 8% Return on Total Assets of Rs. 50,00,000 and has a Net Profit Ratio of 5%.
Find out the Sales of the firm
Rs. 4,00,000
Rs. 2,50,000
Rs. 80,00,000
Rs. 83,33,333
Correct answer: (C)
Rs. 80,00,000
[8:41 am, 07/01/2021] Numl ARSAL: 761. Banks generally prefer Debt Equity Ratio at:
1:1
1:3
2:1
3:1
Correct answer: (C)
2:1
762. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital &
reserves are Rs.2 lac .What is the debt equity ratio?
1;1
1.5:1
2:1
none of the above
Correct answer: (D)
none of the above
763. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of current Assets.
Rs.10,000
Rs.40,000
Rs.24,000
Rs.6,000
Correct answer: (B)

Rs.40,000
764. The ideal quick ratio is
2:1
1:1
5:1
None of the above
Correct answer: (B)
1:1
765. Trading & Profit & loss account and balance sheet is prepared from
Ledger balance
Cash and bank balances
Cash book and bank book
Trial Balance
Correct answer: (D)
Trial Balance
766. Financial decision involve;
Investment, financing and sales decision
Financing, dividend and cash decision
None of these
Correct answer: (A)
767. ______ are an estimate of a firm's future income and expenses, based on its past performance, its
current circumstances, and its future plans.
Financial statements
Profitability statements
Statements of cash flow
Forecasts
Correct answer: (D)
Forecasts
768. Which of the followings is return paid to shareholders out of profit of a company?
Profit
Dividend
Bonus shares
Ex-gratia
Correct answer: (B)
Dividend
769. A portion of profits, which a company distributes among its shareholders, is known as:
Dividends
Retained Earnings
Capital Gain
Correct answer: (A)
Dividends
770. Planning for future growth is called:
Capital Budgeting
Working Capital Management
Financial Forecasting
None of the above
Correct answer: (C)
Financial Forecasting
[8:42 am, 07/01/2021] Numl ARSAL: 771. Short- term financing plans with high liquidity have:
High return and high risk
Moderate return and moderate risk
Low profit and low risk
None of the above
Correct answer: (B)
Moderate return and moderate risk
772. An example of current asset
Cash
Debtors
Marketable securities
All
Correct answer: (D)
All
773. Generally, the most important category on the statement of cash flows is cash flows from
significant noncash activities
Correct answer: (A)
774. Which of the following would be added to net income using the indirect method?
An increase in prepaid expenses
A decrease in accounts payable
Correct answer: (C)
775. The degree of solvency of two firms can be compared by measuring
Net worth
Tangible Net Worth
Asset coverage ratio
Solvency Ratio
Correct answer: (D)
Solvency Ratio
776. Which of the following tools and techniques are the most useful to the financial statement analyst?
Public relations material and pro forma statements prepared by the firm
Common size financial statements and financial ratios
The letter to the shareholders and a map
None of the above
Correct answer: (B)
Common size financial statements and financial ratios
777. Inventory Turnover measures the relationship of inventory with:
Average Sales
Cost of Goods Sold
Total Purchases
Total Assets
Correct answer: (B)
Cost of Goods Sold
778. Which of the following statements is correct?

A Higher Receivable Turnover is not desirable
Interest Coverage Ratio depends upon Tax Rate
Increase in Net Profit Ratio means increase in Sales
Correct answer: (D)
779. Ratio Analysis can be used to study liquidity, turnover, profitability, etc. of a firm. What does Debt-
Equity Ratio help to study?
Solvency
Liquidity
Profitability
Turnover
Correct answer: (A)
Solvency

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Maimonna exam

1) At its most basic level, the function of financial intermediaries is to ____.

A) track and report interest rates

B) move money from lenders to borrowers and back again

C) report all financial transactions to the federal government

D) effect a transfer of wealth in society

2) Which of the following is NOT an example of a financial transaction?

D) All of the above are financial transactions.

A) the circle of life

C) the cycle of money

4) The common objective of borrowing and lending is to ____.

A) make all parties better off

B) gain a profit at the other's expense

D) thwart regulatory authority

A) To help establish terms of the lending/borrowing agreement

B) To match the borrower and the lender

C) To bear the risk that the borrower will not repay

D) All of the above are functions of the financial intermediary.

A) Exchange rate management, investments, financial institutions and markets, international

B) Corporate, investments, capital structure, international

C) Corporate, investments, financial institutions and markets, international

D) Corporate, capital budgeting, financial institutions and markets, regulation

D) All are considered main areas of finance.

C) Financial institutions and markets

A) Working capital management

D) Financial markets and institutions

7) Which of the following is NOT typically thought of as an investment activity?

A) Accurately pricing financial assets

B) The process of buying and selling financial assets

C) Repaying borrowed funds

D) Negotiating the rules and regulations of financial transactions

C) Financial institutions and markets

9) Financial institutions and markets

10) Of the following, which is NOT an example of a financial intermediary?

D) All of the above are financial intermediaries.

11) Of the following, which is NOT an activity engaged in by a financial intermediary?

A) Matching borrowers and lenders

C) Managing retirement portfolios for large classes of employees

D) All of the above are activities of financial intermediaries.

D) Financial institutions and markets

A) Bringing together buyers and sellers of financial assets

B) Providing a market for the transaction of financial assets

C) Providing information to buyers and/or sellers of financial assets

D) All are activities of financial institutions.

B) Federal Reserve banks

2) Financial markets can be classified by which of the following?

A) Type of asset traded

B) Maturity of the financial asset

C) Owner of the financial asset

D) All of the above can be classified as financial markets.

3) Stocks are bought and sold in ____ markets.

4) Bonds are bought and sold in ____ markets.

5) Options are bought and sold in ____ markets.

6) Currencies are bought and sold in ____ markets.

7) Which of the following is NOT an example of an equity market transaction?

A) Mary sells her shares of Apple stock.

B) Mark contacts his broker and requests a purchase of IBM bonds.

C) Sahid buys shares of a small company stock traded on the NASDAQ.

D) All of the above are equity market transactions.