Financial Management Multiple Choice Question


1. High inventory turnover may signal poor efficiency or overstocking.

True or False

2. The debt to equity ratio is generally less than or equal to the debt to asset ratio.

True or False

3. A compound average growth rate (CAGR) takes volatility into account.

True or False

4. Which of the following common ratios measures leverage? 

  • Current ratio 
  • Times interest earned 
  • Receivables turnover 
  • None of the above

5. A firm has current assets of $36,000, cash of $5,000, current liabilities of $20,000, total assets of $80,000 and total liabilities of $45,000, what is its net working capital? 

  • $16,000 
  • $28,000 
  • $35,000 
  • $44,000

6. Common-size income statements and balance sheets are created using which common base items (respectively)? 

  1. Sales and total assets 
  2.  Sales and total liabilities 
  3.  Operating income and total assets 
  4.  Net income and total equity

7. A firm has $100 of average inventory, operating profit of $500 and sales of $1,500. Its days in inventory is: 

  1. 36.5 days 
  2. 24.3 days 
  3. 73.0 days 
  4. Not enough information

8. Which of the following isolated events will NOT change the quick ratio for a manufacturer?

  1. Repayment of short-term debt  
  2. The cash purchase of new machinery 
  3. The credit sale of finished goods 
  4. A customer's cash payment of an outstanding receivable

9. The cash cycle measures the days required to produce finished goods or delivered services.

True or False

10. In general, the reduction of an asset is a source of funds. 

True or False

11. The cash conversion cycle as conventionally computed must be a number greater than or equal to zero.

True or False

12. The cash conversion cycle is calculated as: 

  1. Days in Inventory + Collection Period 
  2. Days in Inventory - Payables Period 
  3. Days in Inventory + Collection Period + Payables Period 
  4. None of the above

13. Which of the following is not a use of funds in a statement of sources and uses?

  1. Increase in long-term debt  
  2. Increase in the cash account 
  3. Reduction in accounts payable 
  4. Increase in accounts receivable

14. What is the optimal growth rate for a company with access to external capital?

  1. Internal growth rate  
  2. External growth rate 
  3. Sustainable growth rate 
  4. Cannot be determined

15. Scenario analysis is a way of testing forecasts by changing one assumption at a time. 

True or False

16. Which of the following is commonly used in preparing pro forma statements: 

  1. Historical financial statements 
  2. Projected sales 
  3. Efficiency ratios 
  4. All of the above

17. Pro forma statements are:

  1. Summaries of historical financial statements  
  2. Government-mandated analyzes of financial statements 
  3. Projected statements used in financial planning 
  4. Estimated tax liabilities

18. "Real" activities create cash for a business, while "financial" activities distribute cash within the company. 

True or False

19. Which of the following liabilities form part of a company's "real" activities? 

  1. Short-term debt
  2. Accounts payable
  3. Accrued operating expenses
  4. Long-term debt
  5. III only II and III I and IV I only

20. The cost of debt is generally lower than the cost of equity.

True or False

21. M&M's Proposition I states that a company's value depends on its capital structure.

True or False

22. A higher level of leverage generally reduces managerial discretion.

True or False

22. A share repurchase is financially equivalent to a dividend.

True or False

23. Which of the following is true? 

  1. Ignoring taxes, share repurchases and dividend payouts are equivalent.
  2. Share repurchases usually follow economic fluctuations.
  3. Dividend payouts and share repurchases lower share prices
  4. Dividends tend to be smoothed over time
  5. I and III II and IV II, III and IV I, II and IV

24. The owner of Grandma's Applesauce is planning to retire after the coming year. She has to repay a loan $50,000 plus 8 percent interest and must rely on cash flow from operations to do so. Cash flow from operations is uncertain; there is a 70% probability it will equal $65,000, and a 30% probability it will equal $45,000. Assuming a tax rate of 0%, what is the owner's expected cash flow after debt service? 

  1. $9,000 
  2. $5,000 
  3. $11,000 
  4. $7,700

25. Shareholders prefer high risk projects when facing a high probability of bankruptcy because

  1. High risk projects usually bring high rewards.  
  2. Shareholders have the residual claim on a company. 
  3. Creditors have the residual claim on a company, and therefore bear the risk. 
  4. There is a good chance the government will rescue them in bankruptcy.

26. The _________ states that the value of the firm is determined solely by the value of its assets.

  1. Static Trade-off Model  
  2. M&M proposition I 
  3. The Pecking Order Model 
  4. Agency Theory

27. A company has net income of $20,000 and a tax rate of 35 percent. Its total debt is $25,000, with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be the company's interest tax shield in the upcoming year? 

  1. $8,750 
  2. $700 
  3. $9,450 
  4. $2,450

28. According to the Static Trade-off Model of capital structure, the uniqueness of the optimum capital structure is due to ______. 

  1. interest tax shields 
  2. information effects 
  3. requirements of bankruptcy law 
  4. costs of financial distress



The assignment in finance includes questions with multiple choice answers. The questions range between debt equity ratio, compound average growth rate (CAGR), ratios of leverage, net working capital, days in inventory, cash conversion cycle, optional growth rate, cost of debt, cost of equity, etc. Answers to the questions have been given.


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