FM McQs Bank Foundations of Financial Management(B)

Financial Forecasting

1
Planning for future growth is called:

A) capital budgeting
B) working capital management
C) financial forecasting
D) none of the above

Explanation: This involves looking ahead to the future.

2
Which one of the following is NOT a tool of financial forecasting?

A) cash budget
B) capital budget
C) pro forma balance sheet
D) pro forma income statement

Explanation: The other three are all tools used by an analyst.

3
The first step in developing a pro forma income statement is to:

A) build a sales forecast

B) determine the production schedule
C) determine cost of goods sold
D) none of the above

Explanation: A sales forecast begins the process.

4
Pro forma statements are _______ statements.

A) actual
B) projected
C) a previous year's
D) none of the above

Explanation: Pro forma statements are based on estimates or projections.

5
All of the following compose cost of goods sold except ________________.

A) raw material
B) labor
C) overhead
D) all of the above are part of cost of goods sold

Explanation: The cost of good sold involves all three of these items.

6
Financial managers use the _____________ to plan for monthly financing needs.

A) capital budget
B) cash budget
C) pro forma income statement
D) none of the above

Explanation: The cash budget allows for planning cash needs.

7
The payments that a firm collects from its customers are called _______________.

A) cash disbursements
B) cash outflows
C) cash receipts
 D) none of the above

Explanation: Cash receipts represent cash coming into the firm.

8
Examples of cash disbursements are all but _________________.

A) payment for materials purchased

B) collection of accounts receivable
C) payment of dividends
D) payment of taxes

Explanation: The collection of accounts receivable is an example of a cash receipt, not a

cash disbursement.

9
In developing the pro forma balance sheet, we get common stock from
_________________.

A) the firm's previous balance sheet

B) the firm's cash budget
C) the firm's income statement
D) none of the above

Explanation: Common stock appears on the balance sheet.

10
The percent of sales method of financial forecasting shows us the relationship between
___________ and financing needs.

A) changes in the level of liabilities

B) changes in the level of assets
C) changes in debt
D) changes in the level of sales

Explanation: It compares the relationship between balance sheet items and sales.
 Operating and Financial Leverage

1
An example of a semi-variable cost is:

A) rent
B) raw material
C) depreciation
D) utilities

Explanation: The other three represent fixed or variable costs.

2
_____________ is the point at which firm profit is equal to zero.

A) breakeven
B) operating breakeven
C) financial leverage
D) combined breakeven

Explanation: This is the point where the firm's revenues equal its expenses.

3
In breakeven analysis, if fixed costs rise, then the breakeven point will __________.

A) fall
B) rise
C) stay the same
D) none of the above

Explanation: This implies that a larger quantity will have to be sold in order to break even.
4
In the breakeven formula, Price - Variable Cost is called the_____________.

A) breakeven point
B) leverage
C) contribution margin
D) none of the above

Explanation: This implies that a larger quantity will have to be sold in order to cover the
additional fixed costsand still break even.

5
Which of the following types of firms may operate with high operating leverage?

A) a doctor's office
B) an auto manufacturing facility
C) a mental health clinic
D) none of the above would have high operating leverage

Explanation: This implies a high break-even point and high operating expenses.

6
The ____________________ is the percentage change in operating income that results
from a percentage change in sales.

A) degree of financial leverage

B) breakeven point
C) degree of operating leverage
D) degree of combined leverage

Explanation: This is called the degree of operating leverage (DOL).

7
If interest expenses for a firm rise, we know that firm has taken on more
______________.
 A) financial leverage
B) operating leverage
C) fixed assets
D) none of the above

Explanation: Financial leverage refers to interest expense on debt.

8
The ________________ is the percentage change in earnings per share that results from
a percentage change in operating income.

A) degree of combined leverage

B) degree of financial leverage
C) breakeven point
D) degree of operating leverage

Explanation: This is known as the degree of financialleverage (DFL).

9
Combined leverage is the percentage change in relationship between sales and
____________.

A) operating income
B) operating leverage
C) earnings per share
D) breakeven point

Explanation: This combines operating leverage and financial leverage.

10
A highly leveraged firm is __________ risky than its peers.

A) less
B) more
C) the same
D) none of the above
Explanation: Leverage is equivalent to risk, because it implies a higher level of fixed
costs.

Working Capital and the Financing Decision

1
Working capital management involves the financing and management of the _______
assets of the firm.

A) fixed
B) total
C) current
D) none of the above

Explanation: Working capital management deals with the financing and management of
current assets.

2
An asset sold at the end of a specified time period is called a _____________ asset.

A) temporary current
B) self-liquidating
C) current
D) permanent current

Explanation: A self-liquidating asset is one that will be sold after a certain amount of time.

3
Fixed assets are usually financed with _____________ funds.

A) long-term
B) short-term
C) permanent
 D) none of the above

Explanation: Fixed assets are by definition long-term assets.

4
______________ is usually used to finance self-liquidating assets.

A) Long-term financing
B) Short-term financing
C) Permanent financing
D) none of the above

Explanation: These are short-term or temporary assets.

5
Short-term interest rates, in a normal economy, are generally ________ than long-term
rates.

A) higher
B) the same
C) lower
D) none of the above

Explanation: Long-term interest rates are normally higher than short-term interest rates to
compensate for uncertainty or risk.

6
The expectations hypothesis says that _________ interest rates are a function of
_______ interest rates.

A) short-term; long-term
B) long-term; short-term
C) short-term; short-term
D) none of the above
Explanation: This theory says that long-term interest rates reflect the average of short-
term expected rates.

7
Insurance companies would tend to invest in __________ securities.

A) short-term
B) intermediate term
C) long-term
D) not enough information to answer

Explanation: An insurance company would prefer long-term securities because they are
more conservative or safer.

8
The ______________ theory says that investors must be paid a premium to hold long-
term securities.

A) expectations hypothesis
B) time value theory
C) segmentation
D) liquidity premium

Explanation: This is the liquidity premium.

9
Short-term financing plans with high liquidity have:

A) high return and high risk

B) moderate return and moderate risk
C) low profit and low risk
D) none of the above

Explanation: This is known as a "middle-of-the-road" approach.

10
Long-term financing plans with low liquidity have:

A) high return and high risk

B) moderate return and moderate risk
C) low return and low risk
D) none of the above

Explanation: This is also known as a "middle-of-the-road" approach.

Current Asset Management

1
The transaction motive for holding cash is for

A) a safety cushion
B) daily operating requirements
C) compensating balance requirements
D) none of the above

Explanation: This is money for everyday transactions.

2
Which of the following motives for holding cash is required by the bank before loaning
money?

A) compensating balance motive

B) transactions motive
C) precautionary motive
D) none of the above

Explanation: This can be considered a form of collateral.

3
The difference between the cash balance on the firm's books and the balance shown on
the bank's books is called:

A) the compensating balance

B) float
C) a safety cushion
D) none of the above

Explanation: Float implies that it takes time for checks to clear.

4
Electronic funds transfer has __________ the use of float.

A) reduced
B) increased
C) had no effect on
D) none of the above

Explanation: Electronic funds transfer (EFT) has moved cash more quickly and reduced
float.

5
The most utilized marketable security by most firms is the:

A) Treasury bond
B) Agency security
C) Certificate of Deposit
D) Treasury bill

Explanation: Treasury bills (T-Bills) are very safe, popular investments.

6
Of the following marketable securities, which are guaranteed by the Federal government?

A) agency securities
B) negotiable certificates of deposit
 C) banker's acceptances
D) none of the above

Explanation: None of these are backed by the government.

7
The 5 C's of credit include:

A) conditions
B) collateral
C) character
D) all of the above

Explanation: The other two C's of credit are capacity and capital.

8
The use of safety stock by a firm will:

A) reduce inventory costs

B) increase inventory costs
C) have no effect on inventory costs
D) none of the above

Explanation: Safety stock is extra inventory a firm keeps in case of unforseen

circumstances.

9
All of these factors are used in credit policy administration except:

A) credit standards
B) terms of trade
C) dollar amount of receivables
D) collection policy

Explanation: The other three choices are the primary policy variables to consider.
10
Firms aim to hold ______ cash balances since cash is a non-interest earning asset.

A) low
B) average
C) high
D) none of the above

Explanation: A firm does not want to keep too much cash on hand because it will lose
interest (by not keeping the money in a bank).

Sources of Short-Term Financing

1
The largest provider of short-term credit for a business is:

A) banking organizations
B) suppliers to the firm
C) commercial paper
D) Eurodollars

Explanation: This is also known as trade credit.

2
The number of days until the firm is past due to a supplier is called the:

A) discount period
B) term to credit
C) payment period
D) none of the above

Explanation: The payment period is the number of days a firm has to pay its bill.
3
If a firm is given trade credit terms of 2/10, net 30, then the cost of the firm failing to take
the discount is:

A) 2%
B) 30%
C) 36.72%
D) 10%

4
The interest rate given by a bank to its most creditworthy customers is the:

A) prime rate
B) LIBOR rate
C) federal funds rate
D) discount rate

Explanation: This is the "best" interest rate charged to people with excellent credit.

5
Which of the following types of bank loans generally have the highest effective rate of
interest?

A) simple interest loan

B) discount interest loan
C) loan with a compensating balance
D) installment loan

Explanation: Installment loans tend to be the most expensive.

6
If a firm needs to borrow $100,000, at 8% interest, to finance working capital needs and a
20% compensating is required, then the firm should borrow __________.

A) $100,000
 B) $80,000
C) $125,000
D) $108,000

Explanation: The formula to calculate this is: amount needed/(1-c), where c = the
compensating balance percentage.

7
If a bank offers a firm a simple interest loan of $1000 for 120 days at a cost of $60
interest, what is the effective rate of interest on the loan?

A) 18.00%
B) 6.00%
C) 20.00%
D) none of the above

Explanation: This is calculated by using formula 8-2 in this chapter.

8
If a company raises money to finance short-term needs by selling its accounts receivable
to another party, this is called ___________.

A) pledging
B) warehousing
C) factoring
D) none of the above

Explanation: Factoring means selling the accounts receivable outright.

9
The most restrictive policy for using inventory as collateral for short-term borrowing is
called:

A) blanket inventory lien

B) warehousing inventory
C) trust receipt
 D) factoring

Explanation: This is a complex method of inventory financing wherein the lender takes
control of the inventory.

10
A type of accounts receivable financing where a firm uses its receivables as collateral is
called:

A) pledging
B) securitization
C) factoring
D) warehousing

Explanation: Pledging means using accounts receivable as collateral.