BAM 513 Financial Management
Unit 2 Examination
Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
1. A firm’s return on equity (ROE) measures ______.
a.
b.
c.
d.
its
its
its
its
profitability relative to its total assets
profitability relative to its equity investment
return on sales
debt to equity ratio
2. A firm’s ________ contains key financial statements, management’s insights about performance
and additional financial details to aid in understanding financial statements.
a.
b.
c.
d.
annual report
balance sheet
income statement
statement of cash flows
3. Spartacus Inc., has sales of $4,500,000, net income of $250,000, assets worth $3,700,000,
and total common stockholder equity of $2,500,000. The ROE for Spartacus is ______.
a.
b.
c.
d.
5.56%
6.76%
10.00%
55.56%
4. The asset turnover ratio ______.
a. considers how much revenue a firm is able to generate relative to its asset base
b. affects the firm’s ROE in that a higher ratio increases ROE and a lower ratio decreases
ROE other things equal
c. captures the capital intensity of a business: the more capital intense a firm is, the lower its
asset turnover
d. all of the above
5. How many times can the Johnson Corporation cover their interest expenses if the firm has sales
of $3,000,000, total assets of $2,100,000, EBIT equal to $1,000,000, a tax rate of 40%
and interest expense of $250,000?
a.
b.
c.
d.
88
1.43
2.10
4.00
12.00
BAM 513 Financial Management
Unit 2 Examination
6. The average age of inventory ratio would most likely be considered ______.
a.
b.
c.
d.
a
a
a
a
profitability ratio
leverage ratio
working capital measure
debt ratio
7. The cash flow cycle also is known as the ______.
a.
b.
c.
d.
cash conversion cycle
cash-to-cash cycle
working capital cycle
revolving credit cycle
8. For an exporter to lose money after accepting a banker’s acceptance, ______.
a.
b.
c.
d.
both the importer and the importer’s bank would need to default on the agreement
the importer would have to default on the agreement
the exporter would have to default on the agreement
the federal government would need to step into the transaction and declare it to be null
and void
9. The ________ is, in theory, the interest rate offered to a bank’s most credit worthy customers.
a.
b.
c.
d.
LIBOR
prime rate
promissory rate
bridge rate
10. Your firm issues 20-year bonds. This type of financing would be most appropriate for which of
the following activities?
a.
b.
c.
d.
89
the
the
the
the
support of accounts receivable
construction of a new warehouse
support of accounts payable
financing of inventory
BAM 513 Financial Management
Unit 2 Examination
11. Which of the following trade credit terms for goods and services purchased would be least
desirable to the purchasing firm?
a.
b.
c.
d.
2/10 net 30
1/10 net 30
3/15 net 30
Unless we know the firm’s cost of borrowing we cannot determine which set of terms is
least preferred.
12. The practice of extending credit to customers is known as ______.
a.
b.
c.
d.
float
trade credit
forfaiting
discounting
13. Your new firm uses cash on hand to purchase $5,000 of inventory. The two accounting
transactions are to ________ cash by $5,000 and to ________ inventory by $5,000.
a.
b.
c.
d.
decrease;increase
decrease;decrease
increase;increase
increase;decrease
14. Managers often begin with an estimate of ________ when beginning to develop pro forma
financial statements.
a.
b.
c.
d.
net income
sales
assets
equity
15. It is not unusual for a successful firm to temporarily grow more rapidly than its sustainable
growth rate if the firm is in the ________ phase of business.
a.
b.
c.
d.
90
swan song
start-up
cash cow
middle
BAM 513 Financial Management
Unit 2 Examination
16. A pro forma ________ forecasts the timing and amount of cash inflows and cash outflows.
a.
b.
c.
d.
income statement
balance sheet
cash budget
annual report
17. Jensen Inc. has net earnings of $24,000,000 this year and a dividend payout policy of 40%
of earnings. If the firm follows its regular payout policy what will be the addition to retained
earnings this year?
a.
b.
c.
d.
$9,600,000
$12,000,000
$14,400,000
$16,000,000
18. Dunweiler Inc., is developing a pro forma income statement for the coming year. The chief
financial officer estimates that sales will be $150,000,000. If gross profits are historically
36% of sales, what is the expected cost of goods sold (in dollars)?
a.
b.
c.
d.
$36,000,000
$54,000,000
$64,000,000
$96,000,000
19. If you were able to invest $2,500 at a rate of 6.40% for six months, how much money would
you have at the end of that period?
a.
b.
c.
d.
$2,349.62
$2,423.65
$2,578.76
$2,660.00
20. What is the present value of $3,500 received 3 years from today if the prevailing interest rate
is 6.10%?
a.
b.
c.
d.
91
$2,732.98
$2,930.37
$3,625.14
$4,192.20
BAM 513 Financial Management
Unit 2 Examination
21. Cascade Industries Inc. intends to pay a common stock dividend of $3.18 one year from
today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year
indefinitely. If the firm has a 13% required rate of return, what is the current price per share of
stock?
a.
b.
c.
d.
$21.20
$28.91
$21.62
$29.49
22. If a bond is selling for its face value, which of the following statements is TRUE?
a.
b.
c.
d.
The coupon rate and the yield to maturity are the same.
The par value is less than the face value.
This is only possible if this is a zero coupon bond.
all of the statements above are true
23. Which of the following is a type of financial security issued by a corporation in need of capital?
a.
b.
c.
d.
bonds
preferred stock
common stock
all of the above
24. Eastinghome Inc. just paid $8,000 to a landowner to explore for but not extract valuable
minerals. If the landowner invests the money at a rate of 5.5% compounded annually for
7 years, what is the investment worth at the end of that time period?
a.
b.
c.
d.
$5,499.49
$11,637.43
$56,000.00
$66,135.15
25. You own a contract that promises an annuity cash flow of $100 beginning-of-the-year cash
flows for each of the next three years (note: the first cash flow is today). At an interest rate of
10%, what is the present value of this contract?
a.
b.
c.
d.
92
$248.69
$273.55
$331.00
$364.10

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