20 MCQ's

1) Financial leverage deals with:
A.-the relationship of debt and equity in the capital structure.
B.-the entire income statement.
C.-the relationship of fixed and variable costs.
D.-the entire balance sheet.


2) When a firm employs no debt
A.-it has a financial leverage of zero.
B.-its operating leverage is equal to its financial leverage.
C.-it has a financial leverage of one.
D.-it will not be profitable.


3) A firm's break-even point will rise if
A.-contribution margins increase
B.-price per unit rises
C.-fixed costs decrease
D.-variable cost per unit rises


4) If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to:
A.-$10,000
B.-$30,000
C.-$13,333
D.-$50,000

1) In break-even analysis, the contribution margin is defined as
A.-price minus fixed cost.
B.-variable cost minus fixed cost.
C.-price minus variable cost.
D.-fixed cost minus variable cost.

2) Kuznets Rental Center requires $1,000,000 in financing over the next two years. Kuznets can borrow long-term at 9 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 7 percent interest in the first year. Then, Kuznets projects paying 10 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?
A.-Kuznets will definitely end up paying less under the long-term financing plan.
B.-Kuznets will probably pay more under the short-term financing plan.
C.-Kuznets will definitely end up paying more under the long-term financing plan.
D.-Kuznets will probably pay less under the short-term financing plan.


3) The theory of the term structure of interest rates which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the
A.-segmentation theory.
B.-liquidity premium theory.
C.-expectations hypothesis.
D.-market average rate theory.


4) Normally, permanent current assets should be financed by
A.-short-term funds.
B.-long-term funds.
C.-borrowed funds.
D.-internally generated funds.

1) Risk exposure due to heavy short-term borrowing can be compensated for by
A.-carrying illiquid assets.
B.-carrying highly liquid assets.
C.-carrying longer term, more profitable current assets.
D.-carrying more receivables to increase cash flow.


2) An aggressive working capital policy would have which of following characteristics?
A.-A low ratio of short-term debt to fixed assets.
B.-A high ratio of long-term debt to fixed assets.
C.-A high ratio of short-term debt to long-term sources of funds.
D.-A short average collection period.


3) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A.-Illiquid assets and heavy long-term borrowing
B.-Illiquid assets and heavy short-term borrowing
C.-Liquid assets and heavy long-term borrowing
D.-Liquid assets and heavy short-term borrowing


4) "Float" takes place because
A.-the level of cash on the firm's books is equal to the level of cash in the bank.
B.-a firm is early in paying its bills.
C.-a lag exists between writing a check and clearing it through the banking system.
D.-a customer writes "hot" checks.

1) In managing cash and marketable securities, what should be the manager's primary concern?
A.-Maximization of liquid assets
B.-Maximization of profit
C.-Acceptable return on investment
D.-Liquidity and safety


2) How would electronic funds transfer affect the use of "float"?
A.-Decrease its use somewhat
B.-Increase its use somewhat
C.-Virtually eliminate its use
D.-Have no effect on its use

3) Dun & Bradstreet is known for providing
A.-credit scoring reports that rank a company's payment habits relative to its peer group.
B.-interest rate information to cash managers.
C.-cash management systems to corporate treasurers.
D.-consumer credit reports to credit card companies.


4) The three primary policy variables to consider when extending credit include all of the following except
A.-the level of inflation.
B.-credit standards.
C.-the terms of trade.
D.-collection policy.

1) Variables important to credit scoring models include
A.-negative public records.
B.-age of company in years.
C.-facility ownership.
D.-all of these variables apply.

2) What is generally the largest source of short-term credit small firms?
A.-Commercial paper
B.-Bank loans
C.-Installment loans
D.-Trade credit

3) Commercial paper that is sold without going through a broker or dealer is known as
A.-dealer paper.
B.-term paper.
C.-book-entry transactions.
D.-direct paper.

4) Which of the following is not a true statement about commercial paper?
A.-Finance paper is also referred to as direct paper.
B.-Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper.
C.-Dealer paper is sold directly to the lender by a finance company.
D.-Finance paper is sold directly to the lender by the finance company.