Finance Quiz Questions

Question #1 (1 point)

A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. If a firm has $3,000 in interest payments, what is the firm's degree of combined leverage?

7.5

10.0

12.5

15.0

Question #2 (1 point)

Which of the following is a consequence of level production in a company that experiences seasonal fluctuations in sales?

Current assets fluctuate up and down when sales and production are not equal

Permanent current assets tend to decrease as companies experience growth while fixed assets remain steady

Companies must take out loans during peak sales months and pay them back during slow months

All of the above are consequences of level production

Question #3 (1 point)

Leverage magnifies returns as volume increases as well as magnifies losses as volume decreases.

False

True

Question #4 (1 point)

An aggressive, risk-oriented firm is more likely to borrow long term and and maintain relatively high levels of liquidity, hoping to increase profits.

True

False

Question #5 (1 point)

When comparing the potential risk of multiple companies, the firms with higher coefficients of variance have higher business risk.

True

False

Question #6 (1 point)

Which of the following statements are potential reasons to explain the shape of the yield curve?

Short-term securities have greater liquidity, therefore higher rates must be offered to long-term bond buyers

Various financial institutions must invest in whichever security best matches their needs

Long-term rates reflect the average of short-term expected rates over the long-term security’s life span

All of the above statements partially explain the shape of the yield curve

Question #7 (1 point)

When interest rates are high and expected to decline, the financial manager generally tries to borrow short term

True

False

Question #8 (1 point)

Bluthe Industries manufactures a line of miniature model homes. Their average selling price is $400 per unit with a variable cost of $240 per unit. Bluthe's annual fixed expense is $800,000 per year. Calculate the company's EBIT at 6,000 units.

$160,000

$480,000

$800,000

$0

Question #9 (1 point)

As a firm's debt level decreases, their interest payments increase which increase the company's degree of financial leverage.

False

True

Question #10 (1 point)

Johnny Corp. faces a financing decision with their current assets. Two plans have been submitted to address their needs. Plan A would require using short term financing to pay all of their current assets. Plan B would instead require long-term financing to pay a large majority of their current assets. There is a 70% chance short-term interest rates will remain steady throughout the year, but management feels there is a 30% chance there will soon be a tight money period and they could rise significantly. If interest rates remain unchanged, plan A is expected to leave the company with a $7,200 higher earnings after taxes than plan B. However, if interest rates increase, plan A is expected to leave the company with $28,800 lower earnings after taxes when compared to plan B. Which plan should Johnny Corp. go with and why?

Plan A – There is an expected value of return of $1,800 for plan A versus plan B

Plan B – There is a negative expected value of return of -$3,600 for plan A versus plan B

Plan A – There is an expected value of return of $3,600 for plan A versus plan B

Plan B – There is a negative expected value of return of -$1,800 for plan A versus plan B

Question #11 (1 point)

Bluthe Industries manufactures a line of miniature model homes. Their average selling price is $400 per unit with a variable cost of $240 per unit. Bluthe's annual fixed expense is $800,000 per year. What is the break-even point in units for the company?

5,000

4,000

2,000

3,000

Question #12 (1 point)

The responsiveness of a firm's earnings before interest and taxes (EBIT) to fluctuations in sales is referred to as

managerial leverage

combined leverage

financial leverage

operating leverage

Question #13 (1 point)

A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. Which statement best describes the firm's degree of operating leverage?

A one percent increase in volume will produce a 5% decrease in operating income

A one percent increase in volume will produce a 5% increase in operating income

A one percent increase in volume will produce a 7% increase in operating income

A one percent increase in volume will produce a 7% decrease in operating income

Question #14 (1 point)

In most companies, working capital management concentrates on the following working capital actions except

setting minimum levels for cash

using notes payable to assure adequate cash availability

controlling inventory by setting inventory levels and controls

investing all excess cash in long-term debt instruments

Question #15 (1 point)

An increased amount of working capital results in increases in both profitability and risk.

False

True

Question #16 (1 point)

A firm sells 70,000 units, and their fixed costs are $60,000, variable cost per unit is $2.20, and the price per unit is $3.20. Which statement best describes the firm's position?

The firm is earning a profit of $10,000

The firm is breaking even

The firm is earning a profit of $15,000

The firm is operating at a loss of $15,000