FINANCIAL MANAGEMENT 1

J.A. SIMBILLO

TOPIC 1 – INTRODUCTION TO FINANCIAL MANAGEMENT

1. Which of the following is true of cash flows and risk?
a. Lower cash flow and lower risk result in an increase in share price.
b. Higher cash flow and lower risk result in an increase in share price.
c. Higher cash flow and higher risk result in an increase in share price.
d. Lower cash flow and higher risk result in an increase in share price.

2. The primary goal of a financial manager is ________.

a. minimizing risk
b. maximizing profit
c. maximizing wealth
d. minimizing return

3. Corporate owners earn a return ________.

a. by realizing gains through increases in share price and interest earnings
b. by realizing gains through increases in share price and cash dividends
c. through capital appreciation and retained earnings
d. through interest earnings and earnings per share

4. The wealth of the owners of a corporation is represented by ________.

a. profits
b. earnings per share
c. share value
d. cash flow

5. Wealth maximization as the goal of a firm implies enhancing the wealth of ________.
a. the auditors
b. the creditors
c. the federal reserve
d. the firm's stockholders

6. The amount earned during the accounting period on each outstanding share of common stock is called ________.
a. dividend per share
b. earnings per share
c. net profits after taxes
d. book value per share

7. Which of the following is NOT a reason that a firm that maximizes profits may fail to maximize shareholder
wealth.
a. The timing of profits matters. Shareholders might prefer lower profits that arrive sooner.
b. Risk matters. Shareholders are risk averse, so they prefer less risky investments that generate
lower profits.
c. Shareholder wealth depends on cash flow which is not the same as profit.
d. If a firm maximizes profits by engaging in unethical business practices, it's stock price may be adversely
affected.

8. Finance is ________.
a. the system of verifying, analyzing, and recording business transactions
b. the science of the production, distribution, and consumption of goods and services
c. the science and art of how individuals and businesses raise, allocate, and invest money
d. the art of merchandising products and services

9. ________ decisions focus on how a company will spend its financial resources on long-term projects that
ultimately determine whether the firm successfully creates value for its owners.
a. Investment
b. Financing
c. Working capital
d. Risk management

10. The principle of the time value of money basically says that ________.
a. because firms pay managers a great deal, managers need to use their time very effectively
b. money received today is more valuable than money received in the future because money in the
future is more risky
c. money received today is more valuable than money received in the future because firms and individuals
can invest money they have today and earn a return on that money
 d. because of the principal-agent problem, investors cannot trust that money firms promise to pay in the
future will ever arrive

11. The primary principle that finance borrows from economics is ________.
a. generally accepted accounting principles
b. cash is king
c. marginal cost-benefit analysis
d. shareholder value maximization

12. A treasurer is commonly responsible for handling ________.

a. tax management
b. corporate accounting
c. investing surplus funds
d. cost accounting

13. The principal-agent problem arises when ________.

a. the owners of the firm are not the people managing the firm
b. the owners of the firm also manage the firm
c. managers serve on a firm's board of directors
d. a firm is organized as a sole proprietorship

14. Which of the following works as a conduit of information between the firm and its investors?
a. the treasurer
b. the controller
c. the director of internal audit
d. the director of investor relations

15. ________ decisions refer to how a firm manages its short-term resources on a day-to-day basis.
a. Financing
b. Investment
c. Working capital
d. Managerial finance

16. There is a tradeoff between risk and return (i.e., to earn higher returns you generally have to take more risk)
because ________.
a. investors like risk and return and want more of both
b. investors are risk averse, so they will not accept riskier investments unless they offer higher returns
c. to earn higher returns you have to make bigger investments and bigger investments are always riskier
than smaller ones
d. investors care about returns but not about risks

17. A major weakness of a partnership is ________.

a. the difficulty in maintaining owners' control
b. the difficulty in liquidating or transferring ownership
c. the double taxation of income
d. its high organizational costs

18. Which of the following is true of a partnership and a corporation?

a. In a corporation, income is taxed at the corporate level; whereas, in a partnership, income is taxed twice.
b. In a partnership, income is taxed once at the individual level; whereas, in a corporation, income is
taxed twice.
c. Income from both forms of organizations are double-taxed.
d. In a partnership, income is exempted from tax up to $10 million; whereas, in a corporation, income is
taxed twice.

19. Which of the following is true of sole proprietorships and corporations?

a. It is difficult to transfer ownership of corporations compared to that of sole proprietorships.
b. Income from both forms of organizations are taxed only at the corporate level.
c. Both sole proprietorships and corporations are equally scrutinized and regulated by government bodies.
d. In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners have
limited liability.

20. Agency costs are ________.

a. costs that managers bear when they do not act in the interests of shareholders
b. costs that firms must pay to comply with the regulations imposed by federal government agencies
c. costs that are exempt from taxation
d. costs that shareholders bear because managers pursue their own interests rather than acting in
the interests of shareholders
 21. Which of the following is an example of agency cost?
a. costs incurred for setting up an agency
b. failure to make an investment that would make shareholders wealthier
c. payment of income tax
d. payment of interest

22. Which of the following is a routine way that boards try to align the interests of managers and stockholders?
a. fire managers who are inefficient
b. remove management's perquisites
c. tie management compensation to the performance of the company's common stock price
d. tie management compensation to the level of dividend per share

23. If a corporation sells certain capital equipment for more than its initial purchase price, the difference between
the sale price and the purchase price is called a(n) ________.
a. ordinary gain
b. revenue gain
c. capital gain
d. abnormal gain

24. Government is typically a ________.

a. net provider of funds because it borrows more than it saves
b. net demander of funds because it borrows more than it saves
c. net provider of funds because it can print money at will
d. net demander of funds because it saves more than it borrows

25. Firms that require funds from external sources can obtain them ________.
a. through financial institutions
b. from central bank directly
c. through the foreign exchange market
d. by issuing T-bills

26. Which of the following provides savers with a secure place to invest funds and offer both individuals and
companies loans to finance investments?
a. investment banks
b. securities exchanges
c. mutual funds
d. commercial banks

27. Which of the following assists companies in raising capital, advise firms on major transactions such as mergers
or financial restructuring, and engage in trading and market making activities?
a. investment banks
b. securities exchanges
c. mutual funds
d. commercial banks

28. Which of the following is true of a secondary market?

a. It is a market for an unlisted company to raise equity capital.
b. It is a market where securities are issued through private placement.
c. It is a market in which short-term money market instruments such as Treasury bills are traded.
d. It is a market in which preowned securities are traded.

29. Which of the following is true of preferred stock?

a. It has features of bonds and a common stock.
b. It has a claim on assets prior to creditors in the event of liquidation.
c. Its dividends can be paid only after paying dividends to the common stockholders.
d. It usually has a maturity of thirty years.

30. Which of the following is true of a dealer market?

a. Buyers and sellers are never brought together directly.
b. Brokers execute the buy or sell orders in a dealer market.
c. It has centralized trading floors.
d. It is a part of the broker market.

TOPIC 2 – FINANCIAL STATEMENT ANALYSIS

1. Ratios provide a ________ measure of a company's performance and condition.
a. definitive
b. gross
 c. relative
d. absolute

2. Present and prospective shareholders are mainly concerned with a firm's ________.
a. risk and return
b. profitability
c. leverage
d. liquidity

3. ________ analysis involves the comparison of different firms' financial ratios at the same point in time.
a. Time-series
b. Cross-sectional
c. Marginal
d. Technical

4. Which of the following is used to analyze a firm's financial performance over different years?
a. time-series analysis
b. break-even analysis
c. gap analysis
d. marginal analysis

5. Which of the following is true of benchmarking?

a. It is an analysis in which a firm's ratio values are analyzed to project the fundamental values of the assets
for upcoming years or business cycle.
b. It is an analysis in which a firm's ratio values are compared with those of a key competitor or with
a group of competitors that it wishes to emulate.
c. It is an analysis in which a firm's financial performance over time is evaluated using financial ratio
analysis.
d. It is a financial statement analysis technique which is primarily used for forecasting future performance.

6. Which of the following is a limitation of ratio analysis?

a. Financial ratios cannot be used to assess a firm's profitability.
b. Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
c. It is difficult to access audited financial statements for ratio analysis.
d. Ratio analysis assumes that inflation has no effect on a firm's business.

7. An analyst should be careful when conducting ratio analysis to ensure that ________.
a. the overall performance of a firm is not judged on a single ratio
b. the role of inflation is ignored
c. ratios being compared should be calculated using financial statements dated at different points in time
during the year
d. different accounting procedures are used

8. Which of the following groups of ratios primarily measure risk?

a. liquidity, activity, and profitability
b. liquidity, profitability, and market
c. liquidity, activity, and debt
d. activity, debt, and profitability

9. A firm has a current ratio of 1. To increase that ratio the firm might ________.
a. develop a better inventory management system so the firm doesn't have to hold as many items in
inventory at one time
b. hold lower cash balances at the bank and increase holdings of interest-earning marketable securities
c. take out a long-term bank loan and simultaneously offer customers better credit terms, allowing
them to pay their bills more slowly
d. issue bonds and use the proceeds to purchase new equipment

10. Which of the following is true of the current ratio?

a. The more predictable a firm's cash flows, the higher the acceptable current ratio.
b. A higher current ratio indicates a higher return on equity.
c. The more predictable a firm's current ratio, the higher the current liabilities.
d. A higher current ratio indicates a greater degree of liquidity.

11. The ________ measures the activity, or liquidity, of a firm's stock of goods.
a. average collection period
b. inventory turnover ratio
c. average payment period
d. total asset turnover ratio
 12. A firm with a total asset turnover lower than industry standard may have ________.
a. excessive debt
b. excessive interest costs
c. insufficient sales
d. insufficient fixed assets

13. A firm's total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data?
a. The firm is generating more dollars of sales per dollar of assets now than it was before.
b. The firm is generating fewer dollars of sales per dollar of assets now than it was before.
c. By cutting back on assets, the firm runs the risk of creating problems like inventory stockouts and
production delays.
d. The firm's stock price will go up because it is using asset more efficiently.

14. The higher, the value of the ________ ratio, the better able a firm is to fulfill its interest obligations.
a. dividend payout
b. average collection period
c. times interest earned
d. average payment period

15. Two frequently cited ratios of profitability that can be read directly from the common-size income statement
are ________.
a. the earnings per share and the return on total assets
b. the gross profit margin and the earnings per share
c. the gross profit margin and the return on total assets
d. the gross profit margin and the net profit margin

FOR 16-30
Dana Dairy Products Key Ratios

Income Statement
Dana Dairy Products
For the Year Ended December 31, 2019

Balance Sheet
Dana Dairy Products
December 31, 2019
16. The current ratio for Dana Dairy Products in 2019 was ________. (See Table 3.2)
a. 1.58
b. 0.63
c. 1.10
d. 0.91

17. Since 2018, the liquidity of Dana Dairy Products ________. (See Table 3.2)
a. has deteriorated
b. has remained the same
c. has improved
d. is not determinable

18. The net working capital for Dana Dairy Products in 2019 was ________. (See Table 3.2)
a. $10,325
b. -$10,325
c. -$1,425
d. $14,250

19. The inventory turnover for Dana Dairy Products in 2019 was ________. (See Table 3.2)
a. 43
b. 5
c. 20
d. 25

20. The inventory management at Dana Dairy Products ________ since 2018. (See Table 3.2)
a. has deteriorated
b. has remained the same
c. has improved slightly
d. cannot be determined

21. The average collection period for Dana Dairy Products in 2019 was ________. (See Table 3.2)
a. 32.5 days
b. 11.8 days
c. 25.3 days
d. 35.9 days

22. If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25 days, the
average collection period ________ since 2018. (See Table 3.2)
a. has deteriorated
b. has remained the same
c. has improved
d. cannot be determined

23. Dana Dairy Products had a ________ degree of financial leverage than the industry standard, resulting in ________.
(See Table 3.2)
a. lower; lower return on total assets
b. lower; lower return on equity
 c. higher; higher return on equity
d. higher; higher return on total assets

24. The debt ratio for Dana Dairy Products in 2019 was ________. (See Table 3.2)
a. 50 percent
b. 11 percent
c. 55 percent
d. 44 percent

25. Dana Dairy Products' gross profit margin was inferior to the industry standard. This may have resulted from
________. (See Table 3.2)
a. a high sales price
b. the high cost of goods sold
c. excessive selling and administrative expenses
d. excessive interest expense

26. The gross profit margin and net profit margin for Dana Dairy Products in 2019 were ________. (See Table 3.2)
a. 13 percent and 0.9 percent, respectively
b. 13 percent and 1.5 percent, respectively
c. 2 percent and 0.9 percent, respectively
d. 2 percent and 1.5 percent, respectively

27. The return on total assets for Dana Dairy Products for 2019 was ________. (See Table 3.2)
a. 0.9 percent
b. 5.5 percent
c. 25 percent
d. 2.5 percent

28. The return on equity for Dana Dairy Products for 2019 was ________. (See Table 3.2)
a. 0.6 percent
b. 5.6 percent
c. 0.9 percent
d. 50 percent

29. Using the modified DuPont formula allows the analyst to break Dana Dairy Products return on equity into 3
components: the net profit margin, the total asset turnover, and a measure of leverage (the financial leverage
multiplier). Which of the following mathematical expressions represents the modified DuPont formula relative
to Dana Dairy Products' 2019 performance? (See Table 3.2)
a. 5.6(ROE) = 2.5(ROA) × 2.22(Financial leverage multiplier)
b. 5.6(ROE) = 3.3(ROA) × 1.70(Financial leverage multiplier)
c. 4.0(ROE) = 2.5(ROA) × 2.00(Financial leverage multiplier)
d. 2.5(ROE) = 5.6(ROA) × 2.22(Financial leverage multiplier)

30. As the financial leverage multiplier increases, this may result in ________.
a. an increase in the net profit margin and return on investment, due to the decrease in interest expense as
debt decreases
b. an increase in the net profit margin and return on investment, due to the increase in interest expense as
debt increases
c. a decrease in the net profit margin and return on investment, due to the increase in interest
expense as debt increases
d. a decrease in the net profit margin and return on investment, due to the decrease in interest expense as
debt decreases