Financial Decision Making MCQs

Baldwin Corporation’s inventory expressed as a percentage of current assets increased from 25% last July to 35% this July. The factor that is least...

is a seasonal company with traditionally higher activity in the summer months.
is beginning to experience high growth.
has inventory that is becoming obsolete.
used a material amount of cash from selling its short-term investments to purchase land

A company’s cash ratio will decrease if the company

purchases commercial paper.
purchases materials on account.
sells goods for cash at a selling price lower than cost.
receives cash by issuing a short-term note payable.

Mayson Ltd. reported net income of £3,500,000 for last year. The company had 100,000 shares of common stock outstanding with a par value of £1 and ...

10.00%.
5.00%.
3.33%.
2.71%

Zoron Corporation experienced the following year-over-year changes. Net profit margin Increased 25% Total asset turnover Increased 40% Total assets...

Increased 95.0%.
Increased 63.0%
Increased 12.5%.
Increased 10.0%.

Which one of the following ratios would be most affected by miscellaneous or nonrecurring income?

Net profit margin.
Operating profit margin.
Gross profit margin.
Debt-to-equity ratio.

Acme Company has sales of $100,000, cost of sales of $40,000, interest expense of $4,000, taxes of $18,000, and operating expenses of $15,000. What i...

60%.
45%.
41%.
23%

FreezeIt Inc. is a manufacturer of refrigeration systems based out of the United States with one subsidiary in Canada. The Canadian subsidiary export...

A reduction in expenses.
A reduction in revenues.
An increase in cash flows.
An increase in profit margins

FreezeIt Inc. is a manufacturer of refrigeration systems based out of the United States with one subsidiary in Canada. The Canadian subsidiary export...

A reduction in expenses.
A reduction in revenues.
An increase in cash flows.
An increase in profit margins

To calculate cash flows using the indirect method, which one of the following items must be added back to net income?

Revenue.
Marketing expense.
Depreciation expense.
Interest income.

Since incorporating three years ago, Lawrence Inc. has estimated bad debts at a rate of 3% using the income statement approach. During its fourth yea...

both operating leverage and times interest earned.
the current year’s income by $1,125,000 and decrease the firm’s operating leverage.
the current year’s income by $375,000 and increase the firm’s operating leverage.
the current year’s income by $30,000 and decrease the firm’s financial leverage

A major difference between economic profit and accounting profit is that economic profit

allows for more accurate expense accruals.
minimizes the impact of accounting estimates.
reduces profits by associated cost of capital.
adjusts accounting profit by depreciation.

OldTime Inc. is a mature firm operating in a very stable market. Earnings growth has averaged about 3.2% for the last dozen years, just staying in li...

The beta will fall and the required return will rise.
The beta will fall and the required return will fall.
The beta will rise and the required return will fall.
The beta will rise and the required return will rise.

Using the capital asset pricing model (CAPM), determine the expected market risk premium from the following information. Beta of Investment A 1.4 R...

3.14%
6.14%.
7.43%.
8.28%

A gold mining company expects to sell 10,000 ounces of gold 6 months from today. The revenue risk of selling the gold can be hedged by

selling the gold in the spot market 6 months from today.
buying a gold futures contract for 10,000 ounces today that expires in 6 months.
selling a gold futures contract for 10,000 ounces today that expires in 6 months.
buying a gold futures contract for 5,000 ounces today that expires in 6 months, and selling a gold futures contract for 5,000 ounces today that expires in 6 months.

What variable is measured on the horizontal axis of the yield curve?

Years to maturity of the bonds.
Yield of the bonds
Duration of the bonds.
Par value of the bonds.

Vega Inc. needs to raise $50,000,000 for expansion. The two available options are to sell 7%, 10-year bonds at face value or to sell 5% preferred sto...

Cash flow with the bond issue is $50,000 higher.
Cash flow with the bond issue is $225,000 higher.
Cash flow with the stock issue is $525,000 higher.
Cash flow with the stock issue is $700,000 higher.

Zeta Corporation’s current year earnings are $2.00 per share. Using a discounted cash flow model, the controller determines that Zeta’s common st...

20%.
15%.
10%.
7%

With regard to a capital investment project, which one of the following statements best describes the relationship between the cost of capital and th...

The internal rate of return must exceed the cost of capital for the project to be acceptable.
If the internal rate of return exceeds zero, the project will be profitable.
The cost of capital must exceed the internal rate of return for the project to be acceptable.
The internal rate of return should be compared to a pre-determined benchmark without regard to the cost of capital.

Pane Software Inc. has total capital of $100 million, and its cost of capital was 12%. A new project has been proposed that will require additional c...

6.40%.
7.56%.
10.00%.
11.82%.

All other things being equal, which one of the following factors would result in an increase in cash reported on the balance sheet from one period to...

Reduction of days sales outstanding of accounts receivable.
Decrease in the accrued vacation liability.
Increase in the level of inventory held.
Increase in the speed with which accounts payable invoices are paid.

Topka Inc. needs to borrow $500,000 to meet its working capital requirements for next year. The Merchant Bank has offered the company a 9.5% simple i...

11.02%.
11.31%
12.75%.
19.00%.

Which one of the options below best describes a public offering where there is less price uncertainty due to the existence of a benchmark price?

Shelf registration.
A subsequent or secondary offering.
A red herring registration.
An initial public offering

Monroe Company needs an additional machine that will be used for the next five years at which time the machine will be obsolete and have zero salvage...

purchase the asset for a $40,000 advantage.
purchase the asset for a $3,627 advantage.
lease the asset for a $45,918 advantage.
lease the asset for a $13,557 advantage.

BigCo, a large conglomerate, has a division that has developed a new and highly promising technology. BigCo would like to retain control of this divi...

A spin-off of the division.
Sale of the division to another firm.
A management buy-out of the division.
An equity carve-out of the division

Suppose that Swiss wrist watches priced in Swiss Francs become very popular among U.S. consumers while at the same time Britain experiences relativel...

The U.S. dollar will appreciate relative to both the Swiss Franc and the British pound.
The U.S. dollar will depreciate relative to both the Swiss Franc and the British pound.
The U.S. dollar will appreciate relative to the Swiss Franc and depreciate relative to the British pound.
The U.S. dollar will depreciate relative to the Swiss Franc and appreciate relative to the British pound.

A U.S. company has an account payable it must pay in six months with one Japanese company, and an account receivable to be received in six months wit...

both the account payable and account receivable are denominated in U.S. dollars.
both the account payable and the account receivable are denominated in Japanese Yen and the Yen account receivable is greater than the Yen account payable.
both the account payable and the account receivable are denominated in Japanese Yen and the Yen account receivable is less than the Yen account payable.
the account payable is denominated in dollars and the account receivable is denominated in Yen.

A company attempts to achieve an annual after-tax operating profit of $2,400,000 by selling a good for $3,000 per unit. Production of the good involv...

15,000.
16,440.
19,000.
21,000.

Blount Inc. is considering discontinuing a certain product line if it does not have a margin of safety higher than 15%. The breakeven sales are $76,8...

No, because the margin of safety ratio of 17.2% is not better than 15%.
Yes, because the margin of safety ratio of 17.2% is better than 15%.
No, because the margin of safety ratio of 14.7% is not better than 15%.
Yes, because the margin of safety ratio of 14.7% is better than 15%.

TwelCo produces and sells two main products, with contribution margins per unit as follows. Product A: $10.00 per unit Product B: $ 8.00 per unit ...

36%
44%.
56%.
64%.

Sudden economic changes have forced the Auto Facsimilie Co. to alter its business strategy. The company is considering eliminating product lines, lay...

Production workers’ wages, severance, and advertising.
Utility costs at the closed factory and real estate taxes.
Research and development costs of eliminated product lines.
The costs of selling or demolishing the factory

Oak Fine Furnishings manufactures a wide range of home furnishings. One of their products is an oak headboard. The company currently sells 4,000 head...

a gross margin of $380,000.
a 50% increase in earnings before interest and taxes.
fixed costs of $225,000.
earnings before interest and taxes of $120,000.

Giant Co has received an offer from Patriot Co to produce units that Giant Co currently produces and sells. The unit price quoted by Patriot Co is hi...

Market demand for the product exceeds Giant Co’s capacity.
Giant Co’s fixed overhead would remain the same if Giant Co purchased units from Patriot Co.
Giant Co has significant sunk costs.
Giant Co’s administrative costs are zero

Joe Cooper owns and operates an ice cream truck that he drives through residential neighborhoods to sell five different treats to the area’s childr...

discontinue the sales of Creamy Delight to increase his profits by $1,200.
discontinue the sales of Creamy Delight to increase his profits by $240.
continue to sell Creamy Delight to avoid a decrease in profit of $6,960.
continue to sell Creamy Delight to avoid a decrease in profit of $11,400.

Adams Corporation’s goal is for operating income to equal 6% of sales. Adams estimates that the highest selling price the market will bear is $115 ...

$108.10
$73.10.
$68.50.
$62.75

Which one of the following statements best describes characteristics of the growth phase of the product life cycle?

There is limited competition and prices are high.
Competition increases and prices are falling.
Competition increases and prices are high.
There is limited competition and prices are falling.

Which one of the following is the most important difference between a monopoly and a firm facing perfect competition, assuming both are unconstrained...

The competitive firm sets its price to maximize total revenue, while the monopolist maximizes the price.
The monopolist will set the output so that marginal cost equals the average cost.
The monopoly equilibrium price is the optimal level for society as a whole

Virtucon Company identifies supply chain risks as part of their Enterprise Risk Management (ERM) process. After identification of this risk, Virtucon...

both inherent and residual risk.
external but not inherent factors.
only expected events.
residual but not inherent risk.

At the beginning of the year, a portfolio manager who manages a portfolio with a mean annual return of 8% and annual standard deviation of 25% wants ...

Arbitrage Pricing Theory.
Capital Asset Pricing Model.
Covariance.
Value-at-Risk

For a firm engaged in risk management, Value at Risk is defined as the

maximum value a company can lose.
maximum loss within a certain time period at a given level of confidence.
worst possible outcome given the distribution of outcomes.
most likely negative outcome at a given level of confidence.

DRP Insurance Company wants to be “best in class” in terms of Enterprise Risk Management (ERM) implementation. To achieve this goal, the company ...

Review of accidents and operational measures.
Analysis of default histories and dispersion.
Summary of driving records and age.
Review of incidents and new market conditions

The stage of the capital budgeting process that has the most risk is

identifying alternative possible projects.
forecasting cash flow.
raising funds to initially support the project.
evaluating performance and learning.

Charles Company owns a building that originally cost $400,000 and has a current book value of $250,000. The building was financed by a loan that has ...

$272,000.
$292,000.
$372,000.
$392,000

The primary advantage of using the internal rate of return method to evaluate capital budgeting projects is that it

results in decisions that will maximize shareholder wealth.
results in decisions that will maximize income.
is easy to understand and communicate.
assumes a conservative reinvestment rate.

A company invested $500,000 in a new project. The project is expected to yield annual incremental cash flows of $175,000 for 4 years. What is the app...

10%.
15%
35%
40%.

One disadvantage of using internal rate of return is that it

provides a result that cannot be compared to other projects.
may not be used when cash flows vary from positive to negative in different years.
is difficult for managers to understand the results of the calculation.
can only use a limited number of years in calculating the result

Assume that an investment project’s assumed cash flows are not changed, but the assumed weighted average cost of capital is reduced. What impact wo...

NPV would increase and IRR would increase.
NPV would decrease and IRR would increase.
NPV would not change and IRR would not change.
NPV would increase and IRR would not change.

If a project has a profitability index that is greater than 1.0, it means that the

initial investment exceeds the cash-flows.
cash-flows exceed the initial investment.
required return is less than the internal rate of return.
internal rate of return is equal to the required return.

Large firms often seek to control risk through allocating or rationing capital among divisions. When capital is rationed, managers are most likely to...

net present value rankings.
internal rate of return rankings.
payback periods.
profitability index rankings.

An analyst is in the process of determining what the current share price should be for PaperToy Inc. In early January, the analyst collected the foll...

$21.00
$20.00.
$7.00.
$6.67.

The U.S Foreign Corrupt Practices Act is particularly focused on the dealings of financial institutions and the safeguarding of the global financial ...

money laundering.
insider trading.
terrorist financing.
extortion and bribery

Corporations have the responsibility to issue financial statements that are timely, accurate, and transparent, reflecting all the transactions of the...

I and II only.
I and III only.
II and III only.
II and IV only

Jonathan is applying for a personal loan from a local bank. As part of its standard procedure for loan assessment, the bank has asked him to provide ...

$1,880,000
$2,115,000
$2,240,000
$3,750,000

Mr. and Mrs. Yung, both aged 48 and each with a life expectancy of 90, have a current annual household income of $600,000 and current savings of $1.7...

$7.04 million
$7.29 million
$9.36 million
$10.08 million

Ronald has taken out a car loan of $280,000 to be repaid over 3 years. Interest rate is at 3.5% for the first year, 4.5% for the second year, and 5.5...

$8,205; $7,924; $7,421
$8,205; $8,289; $8,334
$8,205; $12,221; $24,034
$8,329; $8,329; $8,329

Which of the following types of business ownership imply that the nature of the liability of the owner(s) with respect to the business is a personal ...

III only
I & II only
II & III only
I, II & III

Ruby is 60 years old and expects to live until at least age 80. She is considering a proposal of an annuity from an insurance company. For a premium ...

I & IV only
II & IV only
II & V only
III & V only

A financial planner has extracted the following information about a client from his file: “Existing investment portfolio: aggressive Findings of r...

Adopt the client’s existing investment portfolio.
Ask the client to do the risk-profiling questionnaire again.
Discuss with the client the possible need for adjusting his asset allocation.
Follow the findings of the risk-profiling questionnaire.

Robert is a 35-year old single male who has just lost his job as a salesperson due to the recent economic downturn. Which of the following are approp...

I & II only
I & III only
II & III only
I, II & III

Generally speaking, a financial planner is expected to ensure that the client’s I. goals are prioritized in the order of importance. II. investmen...

I only
I & II only
I & III only
II & III only

Amy and Ben are a married couple aged 30 and 32 respectively, they are concerned about their heavy debt load as below: I. Mortgage (interest at 4.5%...

I, III, II, IV
I, IV, III, II
IV, I, II, III
IV, III, II, I

A financial planner is writing an article on financial activities for readers over 60 years of age who have a personal profile typical for that age g...

I & II only
III & IV only
I, II & IV only
II, III & IV only

Freshly Restaurant (Freshly) has employed Rose as a full-time waitress for 6 months. Rose receives a fixed monthly salary, and at the end of each mon...

I only
I & II only
II & III only
I, II & III

Richard is an Australian citizen who came to Hong Kong under an employment visa in June 2010. He was contracted to work in the Hong Kong subsidiary o...

Richard is automatically exempted from joining the MPF Scheme on the basis that he is an expatriate with an employment visa.
Richard is required to enroll in an MPF Scheme after he has remained in Hong Kong for 60 days.
Richard is not required to enroll in any MPF Scheme during the 12 months he was in Hong Kong.
Richard is not required to enroll in any MPF Scheme until he has obtained a valid Hong Kong Identity Card.

Which of the following statements CORRECTLY describe “H-shares”? I. They are traded either in Hong Kong dollars or in Renminbi. II. They are iss...

I & II only
II & III only
I, III & IV only
I, II, III & IV

A monetary policy involves the control of: I. interest rates. II. government spending. III. the supply of money. IV. tax rates.

I & III only
II & IV only
I, II & IV only
I, III & IV only

Economic indicators suggest that there will be a rise in interest rates in the coming six months. Which ONE of the following investment portfolios wo...

One-third in cash, one-third in short-term bonds and one-third in shares.
One-third in long-term bonds, one-third in property and one-third in shares.
One-third in cash, one-third in long-term bonds and one-third in shares.
One-third in short-term bonds, one-third in property and one-third in shares

Which of the following are typical features of a forward contract? I. The price of the goods is determined at the time of making the contract. II. T...

I & II only
I & III only
II & III only
I, II & III

When investing in real assets such as properties or land at times of inflation, the future cashflows from the investments are likely to rise in: I. i...

II only
III only
I & II only
I & III only

Which of the following abilities of a financial planning strategy can be evaluated with reference to information provided by a financial budget? I. ...

I & IV only
I, II & III only
I, II & IV only
II, III & IV only

In the early stage of establishing a relationship with a client, a financial planner should: I. discuss the process and concepts of financial plannin...

I & III only
II & IV only
I, II & III only
I, III & IV only

Which of the following statements about determining the client’s personal and financial goals, needs and priorities are CORRECT? I. They must be d...

I & II only
I & III only
II & III only
I, II & III

Evaluating the client’s financial position is an important step in the financial planning process. Which of the following tasks should be completed...

I & III only
I, II & III only
I, II & IV only
II, III & IV only

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Financial Decision Making MCQs