Financial Management Questions

Jimma University
C0llege of Business and Economics
Department of Accounting and Finance
Financial management I and II
Contact: ztariku212@gmail.com
General direction: Choice the best answer.
1. What is the goal of financial management?

A. To maximize profits
B. To minimize losses
C. To maximize shareholder wealth
D. To minimize expenses
2. What is the difference between financial management and accounting?
A. Financial management focuses on managing funds, while accounting focuses on
tracking and reporting financial information
B. Financial management focuses on bookkeeping, while accounting focuses on
budgeting
C. Financial management focuses on budgeting, while accounting focuses on managing
funds
D. Financial management and accounting are the same thing
3. Which financial decision involves determining how much money the company should
borrow?
A. Investment decision
B. Financing decision
C. Dividend decision
D. Working capital management
4. How would an increase in interest rates affect a company's cost of borrowing?
A. Increase the cost of borrowing
B. Decrease the cost of borrowing
C. No effect on the cost of borrowing
D. Cannot be determined
5. Which of the following financial decisions is most important for the long-term success of
the company?
A. Investment decision
B. Financing decision
C. Dividend decision
D. Working capital management
6. Which of the following financial decisions involves determining the appropriate mix of
debt and equity to finance the company's operations?
A. Investment decisions
B. Capital budgeting decisions
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C. Financial decisions
D. Dividend decisions
7. Which of the following is an advantage of financing with equity?
A. It is cheaper than debt financing
B. It provides a tax shield
C. It does not require repayment of principal or interest
D. It involves less risk than debt financing
8. Why is financial management important for businesses?
A. It helps them increase profits
B. It helps them minimize costs
C. It helps them make better decisions regarding financing and investments
D. All of the above
9. Which of the following financial ratios measures a company's ability to meet its short-
term obligations?
A. Debt-to-equity ratio
B. Return on investment ratio
C. Asset turnover ratio
D. Current ratio
10. How would you interpret a low return on assets (ROA) and a high return on equity
(ROE)?
A. The company is not profitable
B. The company is not efficient in utilizing its assets
C. The company has low debt-to-equity ratios
D. The company is profitable but relies heavily on debt
11. What does the term "financial market" refer to?
A. A marketplace where goods and services are traded
B. A marketplace where stocks and bonds are traded
C. A marketplace where real estate is bought and sold
D. A marketplace where gold and silver are traded
12. What is the difference between primary and secondary financial markets?
A. Primary markets deal with new securities, while secondary markets deal with already
issued securities.
B. Primary markets deal with already issued securities, while secondary markets deal
with new securities.
C. Primary markets deal with stocks, while secondary markets deal with bonds.
D. Primary markets deal with long-term securities, while secondary markets deal with
short-term securities.
13. How do changes in interest rates affect the value of bonds?
A. A decrease in interest rates causes bond prices to rise.
B. An increase in interest rates causes bond prices to rise.
C. A decrease in interest rates causes bond prices to fall.
D. An increase in interest rates causes bond prices to fall.
14. Which of the following is not a type of financial institution?
A. Credit unions
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B. Insurance companies
C. Commercial banks
D. Manufacturing companies
15. Which of the following financial markets is most important for the allocation of financial
resources?
A. Money market
B. Bond market
C. Stock market
D. Foreign exchange market
16. Which financial market is used for short-term borrowing and lending?
A. Bond market
B. Equity market
C. Money market
D. Foreign exchange market
17. What is capital budgeting?
A. Managing a company's daily cash flow
B. Selecting long-term investments that match corporate objectives
C. Funding short-term operations
D. Maximizing a firm's profits
18. What is the difference between debt financing and equity financing?
A. Debt financing comes from investors, while equity financing comes from borrowing.
B. Debt financing is an investment in a company, while equity financing requires
repayment.
C. Debt financing involves interest payments, while equity financing does not.
D. Debt financing is short-term, while equity financing is long-term.
19. How would you interpret a high debt-to-equity ratio?
A. The company is at risk of bankruptcy.
B. The company is highly leveraged.
C. The company has a low risk of default.
D. The company has a high rate of return on investment.
20. Which of the following factors is not considered when making capital budgeting
decisions?
A. Cash flow analysis
B. Discount rate
C. Market trends
D. Expected rate of return
21. What is working capital management?
A. Managing a company's long-term investments
B. Managing a company's debt
C. Managing a company's daily operations
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D. Managing a company's fixed assets
22. What is the difference between net present value and internal rate of return?
A. NPV is a measure of a project's profitability, while IRR takes into account the time
value of money.
B. IRR is a measure of a project's profitability, while NPV takes into account the time
value of money.
C. Both measure a project's profitability, but IRR is more commonly used.
D. Both measure a project's profitability, but NPV is more commonly used.
23. How does financial leverage affect a company's risk and return?
A. Increases both risk and return
B. Decreases both risk and return
C. Increases risk and decreases return
D. Decreases risk and increases return
24. What is the difference between shareholder wealth maximization and profit
maximization?
A. Shareholder wealth maximization focuses on long-term value creation, while profit
maximization is concerned with short-term profits.
B. Shareholder wealth maximization does not consider the interests of stakeholders other
than shareholders, while profit maximization does.
C. Shareholder wealth maximization is a more conservative approach than profit
maximization.
D. Shareholder wealth maximization is concerned with revenue growth, while profit
maximization only focuses on costs.
25. Which of the following would be an example of a decision that is in line with the goal of
maximizing shareholder value?
A. Making a large charitable donation to support a local organization
B. Reducing research and development spending to increase profits for the current year
C. Investing in a new technology that is expected to yield long-term benefits
D. Focusing on cost-cutting measures to reduce expenses
26. How does the goal of maximizing shareholder value align with the economic concept of
efficient markets?
A. The goal of maximizing shareholder value requires companies to engage in illegal
insider trading to earn profits.
B. The goal of maximizing shareholder value is not related to efficient markets.
C. The goal of maximizing shareholder value aligns with the efficient markets
hypothesis because it assumes that stock prices reflect all available information.
D. The goal of maximizing shareholder value aligns with the efficient markets
hypothesis because it assumes that investors are irrational.
27. What is the difference between a partnership and a limited liability company (LLC)?
A. A partnership has no liability protection for its owners, while an LLC does.
B. A partnership only has one owner, while an LLC can have multiple owners.
C. A partnership offers limited liability protection for its owners, while an LLC offers
more extensive liability protection.
D. There is no difference between a partnership and an LLC.
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28. Which of the following business forms would be most appropriate for a small business
owner who wants to retain complete control over the business?
A. Corporation
B. Sole proprietorship
C. Partnership
D. Limited liability company
29. What is the primary purpose of financial analysis?
A. To predict future financial performance
B. To understand the company's financial health and performance
C. To compare the company's performance to that of its competitors
D. To make investment decisions
30. What does a trend analysis aim to do?
A. Compare a company's financial performance to that of its competitors
B. Analyze a company's past financial statements to identify trends over time
C. Predict future financial performance based on past performance
D. Identify areas where cost-cutting measures can be implemented
31. Which financial ratio would be most useful for evaluating a company's liquidity?
A. Debt to equity ratio
B. Return on investment ratio
C. Current ratio
D. Asset turnover ratio
32. How would you use financial analysis to evaluate a company's profitability?
A. By looking at the company's current ratio
B. By analyzing the company's operating margin
C. By analyzing the company's revenue growth rate
D. By comparing the company's financial ratios to those of its competitors
33. Which financial analysis method would you use to identify potential areas for
improvement in a company's financial performance?
A. Ratio analysis
B. Trend analysis
C. Vertical analysis
D. Horizontal analysis
34. What is the difference between a liquidity ratio and a profitability ratio?
A. Liquidity ratios compare how much a company owes to how much it owns, while
profitability ratios compare revenue to expenses.
B. Liquidity ratios are used to evaluate long-term financial stability, while profitability
ratios focus on short-term profitability.
C. Liquidity ratios evaluate a company's ability to meet short-term obligations, while
profitability ratios evaluate a company's earnings and ability to generate a profit.
D. Liquidity ratios focus on a company's income statement, while profitability ratios
focus on its balance sheet.
35. Which of the following financial analyses could be used to identify potential investment
opportunities in a particular market?
A. Vertical analysis
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B. Horizontal analysis
C. Ratio analysis
D. Comparative analysis
36. How would you use trend analysis in financial analysis?
A. To predict future financial performance
B. To estimate the company's valuation
C. To evaluate the company's historical financial performance
D. To identify potential competitors within the industry
37. Which financial analysis tool would be most helpful in evaluating a company's overall
financial health?
A. Ratio analysis
B. Trend analysis
C. Vertical analysis
D. Horizontal analysis
38. What is the purpose of a financial ratio?
A. To determine the market value of a company
B. To analyze a company's financial health and performance
C. To predict future trends in the industry
D. To calculate the company's outstanding debt
39. What is the current ratio used for in financial ratio analysis?
A. To measure the profitability of a company
B. To determine the liquidity of a company
C. To calculate the long-term solvency of a company
D. To evaluate the efficiency of a company
40. If a company has a debt-to-equity ratio of 2.5, what does this mean?
A. The company has more equity than debt
B. The company is highly leveraged
C. The company has a great potential for growth
D. The company is generating high profits
41. What does a gross margin ratio measure?
A. The profitability of a company
B. The liquidity of a company
C. The efficiency of a company's operations
D. The market value of a company
42. What types of conclusions can be drawn from a trend analysis of a company's financial
ratios?
A. Future predictions of the company's financial performance
B. Identification of weaknesses and strengths in the company's financial health over time
C. Comparison of the company's financial ratios to those of competitors
D. Comparison of the company's financial ratios to those of other industries
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43. What is the purpose of a liquidity ratio in financial analysis?
A. To evaluate a company's ability to generate a profit
B. To determine the amount of debt a company has
C. To assess a company's ability to meet its short-term obligations
D. To calculate the value of a company's stock
44. What is the difference between the current ratio and the quick ratio?
A. The current ratio includes inventory in its calculation, while the quick ratio does not.
B. The current ratio measures a company's ability to meet its short-term obligations,
while the quick ratio measures its overall financial health.
C. The current ratio is a percentage, while the quick ratio is measured in dollars.
D. The current ratio and the quick ratio are the same thing.
45. How would you use the current ratio to evaluate a company's liquidity?
A. By dividing its total liabilities by its total assets
B. By comparing its current assets to its current liabilities
C. By comparing its earnings to its expenses
D. By dividing its net income by its total assets
46. How would you interpret a current ratio of 1.5 for a company?
A. The company has more liabilities than assets
B. The company is experiencing financial difficulties
C. The company has the ability to pay its short-term debts
47. How would you determine if a company's quick ratio is too low?
A. By comparing it to the industry average
B. By dividing its total assets by its total liabilities
C. By analyzing its long-term solvency
D. By comparing it to the company's gross profits
48. What is the current ratio used for in financial analysis?
A. To evaluate a company's long-term debt
B. To assess a company's risk of defaulting on its loans
C. To measure a company's short-term liquidity
D. To determine a company's overall financial health
49. If a company has $100,000 in current assets and $50,000 in current liabilities, what is its
current ratio?
A. 0.5
B. 1.0
C. 1.5
D. 2.0
50. What is the acid test ratio used for in financial analysis?
A. To evaluate a company's long-term debt
B. To measure a company's short-term liquidity
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C. To assess a company's profitability
D. To determine a company's overall financial health
51. If a company has $100,000 in current assets, $30,000 in inventory, and $50,000 in current
liabilities, what is its acid test ratio?
A. 1.4
B. 2.0
C. 2.3
D. 3.3
52. How would you interpret an acid test ratio of 0.8 for a company?
A. The company has more liabilities than assets
B. The company is experiencing financial difficulties
C. The company has a low level of debt
53. What is the difference between the inventory turnover ratio and the receivables turnover
ratio?
A. The inventory turnover ratio only measures inventory, while the receivables turnover
ratio only measures receivables.
B. The inventory turnover ratio measures how quickly inventory is sold, while the
receivables turnover ratio measures how quickly receivables are collected.
C. The inventory turnover ratio only includes current assets, while the receivables
turnover ratio includes all assets.
D. The inventory turnover ratio measures a company's profitability, while the receivables
turnover ratio measures its efficiency.
54. How would you use the asset turnover ratio to evaluate a company's efficiency?
A. By dividing its net income by its total assets
B. By dividing its revenue by its total assets
C. By dividing its expenses by its total assets
D. By dividing its liabilities by its total assets
55. What does a low receivables turnover ratio indicate for a company?
A. The company is efficiently collecting its receivables from customers
B. The company has a high level of debt
C. The company is experiencing financial difficulties
D. The company has a high level of inventory on hand
56. How would you determine if a company's inventory turnover ratio is too low?
C. By analyzing its long-term debt
D. By comparing it to the company's gross margin ratio
57. What is the purpose of a leverage ratio in financial analysis?
A. To evaluate a company's overall financial health
B. To assess a company's short-term liquidity
C. To measure a company's level of debt
D. To determine a company's profitability
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58. What is the difference between the debt-to-assets ratio and the debt-to-equity ratio?
A. The debt-to-assets ratio measures a company's level of debt, while the debt-to-equity
ratio measures its ability to meet short-term obligations.
B. The debt-to-assets ratio measures a company's level of debt, while the debt-to-equity
ratio measures its long-term solvency.
C. The debt-to-assets ratio includes all liabilities, while the debt-to-equity ratio only
includes long-term debt.
D. The debt-to-assets ratio and the debt-to-equity ratio are the same thing.
59. How would you use the interest coverage ratio to evaluate a company's ability to service
its debt?
B. By dividing its earnings before interest and taxes by its interest expense
C. By dividing its cash flow from operating activities by its total debt
D. By dividing its liabilities by its total assets
60. What does a high debt-to-equity ratio indicate for a company?
A. The company has a low level of debt
B. The company is generating high profits
C. The company is efficiently managing its assets
D. The company has a high level of financial risk
61. How would you determine if a company's debt-to-assets ratio is too high?
B. By dividing its net income by its total assets
D. By comparing it to the company's gross margin ratio
62. What is the purpose of a profitability ratio in financial analysis?
A. To assess a company's short-term liquidity
B. To measure a company's efficiency in using its assets
C. To evaluate the profitability of a company
D. To measure a company's level of debt
63. What is the difference between return on assets (ROA) and return on equity (ROE)?
A. ROA measures a company's efficiency, while ROE measures its profitability.
B. ROA measures a company's profitability, while ROE measures its efficiency.
C. ROA measures a company's overall financial health, while ROE measures its long-
term solvency.
D. ROA and ROE are the same thing.
64. How would you use the gross profit margin to evaluate a company's profitability?
B. By dividing its revenue by its expenses
C. By dividing its gross profit by its revenue
D. By dividing its operating income by its net income
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65. What does a low net profit margin indicate for a company?
A. The company is generating high profits
B. The company is inefficient in managing its costs
D. The company is experiencing financial difficulties
66. How would you determine if a company's return on investment (ROI) is too low?
C. By analyzing its long-term debt
D. By comparing it to the company's gross profit margin
67. Which profitability ratio measures how much net income a company generates relative to
its revenue?
A. Gross profit margin
B. Net profit margin
C. Return on assets
D. Return on equity
68. What is the difference between gross profit and net profit?
A. Gross profit includes operating expenses, while net profit does not.
B. Gross profit includes the cost of goods sold, while net profit includes all expenses.
C. Gross profit measures a company's profitability, while net profit measures its ability
to generate cash flow.
D. Gross profit and net profit are the same thing.
69. What is the purpose of a market value ratio in financial analysis?
A. To evaluate a company's overall financial health
B. To assess a company's short-term liquidity
C. To measure a company's level of debt
D. To assess a company's market value and investor confidence
70. What is the difference between price-to-earnings (P/E) ratio and earnings-per-share
(EPS)?
A. P/E ratio measures the price of a stock relative to its earnings, while EPS measures the
total earnings of a company.
B. P/E ratio measures the total earnings of a company, while EPS measures the price of a
stock relative to its earnings.
C. P/E ratio measures the market value of a company, while EPS measures its book
value.
D. P/E ratio and EPS are the same thing.
71. How would you use the price-to-book (P/B) ratio to evaluate a company's market value?
A. By dividing its market capitalization by its book value
C. By dividing its earnings per share by its stock price
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D. By dividing its price-earnings ratio by its earnings per share
72. What does a high price-to-sales (P/S) ratio indicate for a company?
A. The company has a low level of profitability
B. The company is generating high profits
D. The company has a high level of financial risk
73. How would you determine if a company's market capitalization is too high?
D. By comparing it to the company's gross profit margin
74. What does a higher return on equity (ROE) indicate for a company?
A. The company is generating more profits with less equity
B. The company is generating lower profits with more equity
C. The company is inefficient in using its assets to generate profits
D. The company has a low level of debt
75. How would you use the debt-to-total assets ratio to evaluate a company's level of debt?
B. By dividing its total liabilities by its total assets
C. By dividing its total equity by its total assets
D. By dividing its earnings per share by its stock price
76. What does a low gross profit margin suggest about a company's pricing strategy?
A. The company is pricing its products too high
B. The company is pricing its products too low
C. The company is inefficient in managing its costs and expenses
77. How would you determine whether a company's return on assets (ROA) is high or low
compared to a similar company?
B. By dividing its revenue by its expenses
D. By comparing it to the industry's net income
78. What is the problem with using financial ratios to compare companies in different
industries?
A. Different industries have different accounting standards
B. Different industries have different levels of debt
C. Different industries have different levels of profitability
D. Financial ratios cannot be used to compare companies in different industries
79. Why might a company's financial statements not reflect its true financial health?
A. The company may manipulate its financial statements
B. The company may use different accounting methods than other companies
C. The company may have hidden liabilities or assets
D. All of the above
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80. Why might financial ratios lead to incorrect conclusions about a company's financial
health?
A. Financial ratios may not reflect long-term trends
B. Financial ratios may focus on short-term metrics
C. Financial ratios may not account for differences between companies
D. All of the above
81. How does the time value of money affect investing?
A. Investing allows money to grow over time due to compound interest
B. Investing is not affected by the time value of money
C. Investing only benefits investors in the short-term
D. Investing can lead to a loss of value over time
82. How would you calculate the future value of a lump sum investment?
A. By multiplying the present value by the interest rate and the number of periods
B. By dividing the present value by the interest rate and the number of periods
C. By adding the present value to the interest rate and the number of periods
D. By subtracting the present value from the interest rate and the number of periods
83. What factors affect the present value of an investment?
A. The time horizon, interest rate, and compounding frequency
B. The time horizon, asset class, and tax implications
C. The interest rate, asset class, and fees
D. The compounding frequency, tax implications, and fees
84. How would you determine whether an investment with a high interest rate is a good
investment?
A. By comparing it to the industry standard for similar investments
B. By calculating the future value of the investment
C. By calculating the net present value of the investment
D. By comparing it to the historical rate of inflation
85. What is the future value of a single amount?
A. The amount of money you will have in the future if you invest a single amount today
B. The amount of money you will owe in the future if you borrow a single amount today
C. The amount of money you currently have in your bank account
D. The amount of money you earned in the past
86. What is the relationship between interest rates and the future value of a single amount?
A. Higher interest rates lead to a higher future value
B. Higher interest rates lead to a lower future value
C. Interest rates have no impact on the future value
D. The relationship between interest rates and the future value is inverse
87. How would you calculate the future value of a single amount with annual compounding?
A. FV = PV x (1 + r/n) ^ nt
B. FV = PV x (1 + r) ^ t
C. FV = PV x r x t
D. FV = PV / (1 + r) ^ t
88. How would an increase in the time to maturity affect the future value of a single amount?
A. An increase in the time to maturity would increase the future value
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B. An increase in the time to maturity would decrease the future value
C. An increase in the time to maturity would have no impact on the future value
D. The impact of an increase in the time to maturity would depend on the interest rate
89. How would you evaluate whether an investment with a high return is a better choice than
one with a lower return in terms of future value?
A. By calculating the net present value of each investment
B. By comparing the future values of each investment
C. By considering the tax implications of each investment
D. By comparing the historical performance of each investment
90. What is the present value of a single amount?
A. The current value of a future amount of money
B. The amount of money you currently have in your bank account
C. The amount of money you need to pay in the future
91. How does the discount rate affect the present value of a single amount?
A. A higher discount rate leads to a higher present value
B. A higher discount rate leads to a lower present value
C. The discount rate has no impact on the present value
D. The impact of the discount rate on the present value is inverse
92. How would you calculate the present value of a single amount with monthly
compounding?
A. PV = FV / (1 + r) ^ n
B. PV = FV x (1 + r) ^ n
C. PV = FV / (1 + r/n) ^ nt
D. PV = FV x r x t
93. How would a decrease in the interest rate affect the present value of a single amount?
A. A decrease in the interest rate would increase the present value
B. A decrease in the interest rate would decrease the present value
C. A decrease in the interest rate would have no impact on the present value
D. The impact of a decrease in the interest rate would depend on the compounding
frequency
94. How would you evaluate whether it is better to receive a lump sum payment today or a
series of payments in the future?
A. By comparing the net present value of each option
B. By comparing the future value of each option
C. By comparing the tax implications of each option
D. By considering the historical performance of similar investments
95. What is the future value of an annuity?
A. The amount of money you will have in the future if you invest a series of equal
payments today
B. The amount of money you will owe in the future if you borrow a series of equal
payments today
C. The amount of money you currently have in your bank account
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96. Why is the future value of an annuity greater than the future value of a single amount?
A. An annuity receives more interest over time than a single amount
B. An annuity is invested for a longer period of time than a single amount
C. An annuity compounds interest more frequently than a single amount
D. The future value of an annuity is not necessarily greater than the future value of a
single amount
97. How would you calculate the future value of an annuity with monthly payments?
A. FV = PMT x [(1 + r) ^ n - 1] / r
B. FV = PMT x (1 + r) ^ n
C. FV = PMT x r x n
D. FV = PMT / (1 + r) ^ n
98. How would the length of the annuity affect the future value of an annuity?
A. A longer annuity period would increase the future value
B. A longer annuity period would decrease the future value
C. The length of the annuity would have no impact on the future value
D. The impact of the length of the annuity would depend on the interest rate
99. How would you evaluate whether a larger periodic payment or a longer annuity period is
a better way to increase the future value of an annuity?
A. By comparing the future values of each option
B. By considering the tax implications of each option
C. By comparing the historical performance of similar investments
D. By comparing the net present value of each option
100. What is an annuity?
A. A series of equal payments made at irregular intervals
B. A series of unequal payments made at regular intervals
C. A series of equal payments made at regular intervals
D. A series of unequal payments made at irregular intervals
101. What is the difference between a simple annuity and a deferred annuity?
A. A simple annuity begins payments immediately, while a deferred annuity begins
payments at a later date
B. A simple annuity makes irregular payments, while a deferred annuity makes equal
payments at regular intervals
C. A simple annuity has a fixed interest rate, while a deferred annuity has a variable
interest rate
D. There is no difference between a simple annuity and a deferred annuity
102. How would the interest rate affect the present value of an annuity?
A. A higher interest rate would decrease the present value
B. A higher interest rate would increase the present value
C. The interest rate would have no impact on the present value
D. The impact of the interest rate would depend on the payment schedule
103. What is a perpetuity annuity?
A. An annuity that pays equal payments for a specified period of time
B. An annuity that pays equal payments for the rest of one's life
C. An annuity that pays equal payments at irregular intervals
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D. An annuity that increases payments over time
104. What is a deferred annuity?
A. An annuity that begins payments immediately
B. An annuity that delays payments until a future date
C. An annuity that has a variable interest rate
D. An annuity that makes payments at irregular intervals
105. How would you calculate the present value of a perpetuity annuity?
A. PV = PMT / r
B. PV = PMT x (1 / r)
C. PV = PMT x r
D. PV = PMT / (1 - r)
106. How would you determine whether a variable annuity or a fixed annuity is a better
choice for an investor?
A. By comparing the past performance of each option
C. By comparing the future values of each option
D. By evaluating the risk tolerance of the investor
107. How would you evaluate whether a term certain annuity or a life annuity is a better
choice for retirement income?
A. By comparing the past performance of each option
C. By comparing the future values of each option
D. By evaluating the investor's life expectancy
108. What is the nominal rate?
A. The annual interest rate quoted by a financial institution before factoring in
compounding
B. The annual interest rate after factoring in compounding
C. The total amount of interest earned on an investment
D. The amount of money invested
109. What is the effective annual rate?
A. The annual interest rate after factoring in compounding
B. The annual interest rate quoted by a financial institution before factoring in
compounding
C. The total amount of interest earned on an investment
D. The amount of money invested
110. How would you calculate the effective annual rate from a quoted nominal rate with
quarterly compounding?
A. EAR = (1 + r) ^ n
B. EAR = (1 + r/n) ^ n – 1
C. EAR = (1 + r/4) ^ 4
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D. EAR = r/4
111. How would you compare two investments with different nominal rates and
compounding frequencies?
A. By comparing the total amount of interest earned on each investment
B. By comparing the future value of each investment
C. By comparing the present value of each investment
D. By comparing the effective annual rate of each investment
112. How would you evaluate whether a loan with a lower nominal rate and a higher
frequency of compounding is better than a loan with a higher nominal rate and a lower
frequency of compounding?
A. By comparing the total amount of interest paid on each loan
B. By comparing the future value of each loan
C. By comparing the present value of each loan
D. By comparing the effective annual rate of each loan
113. What is financial risk?
A. Losses due to negative market movements
B. Potential gains from positive market movements
C. Unexpected inflation
D. The absence of diversification
114. What is beta in finance?
A. A measure of market risk
B. A measure of specific risk
C. A measure of inflation
D. A measure of interest rate risk
115. What is the risk-return tradeoff?
A. The higher the risk, the higher the potential return
B. The lower the risk, the higher the potential return
C. The higher the risk, the lower the potential return
D. The lower the risk, the lower the potential return
116. How is expected return calculated?
A. By multiplying the investment's potential returns by its probability of occurring
B. By dividing the investment's potential returns by its probability of occurring
C. By adding the investment's potential returns and dividing by the number of potential
returns
D. By subtracting the investment's potential returns from its probability of occurring
117. How would you calculate the variance of an investment's returns?
A. By subtracting the expected return from each potential return and squaring the
differences
B. By dividing the sum of the squared differences between each potential return and the
expected return by the number of potential returns minus one
C. By adding the squared differences between each potential return and the expected
return and dividing by the number of potential returns minus one
D. By subtracting each potential return from the expected return and dividing the
differences by the number of potential returns
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118. How would you evaluate the risk of a portfolio of investments?
A. By calculating the standard deviation of the portfolio's returns
B. By multiplying the returns of each investment in the portfolio by its beta
C. By adding the expected returns of each investment in the portfolio
D. By dividing the total value of the portfolio by the number of investments
119. What is a portfolio in finance?
A. A collection of investments
B. A collection of debts
C. A collection of assets
D. A collection of expenses
120. What is diversification in portfolio management?
A. Spreading investments across different asset classes
B. Spreading investments across different countries
C. Spreading investments across different industries
D. All of the above
121. How would you calculate the expected return of a portfolio?
A. By multiplying the weights of each investment in the portfolio by their expected
returns and summing the results
B. By adding the weights of each investment in the portfolio and dividing by the number
of investments
C. By subtracting the weights of each investment in the portfolio from their expected
returns
D. By multiplying the number of investments in the portfolio by their expected returns
122. How would you evaluate the risk of a portfolio?
A. By calculating the expected return of each investment in the portfolio
B. By calculating the standard deviation of the returns of each investment in the portfolio
C. By calculating the total value of the portfolio
D. By calculating the weight of each investment in the portfolio
123. How would you evaluate the performance of a portfolio relative to a benchmark
index?
A. By comparing the expected returns of the portfolio and the benchmark index
B. By comparing the standard deviation of the returns of the portfolio and the benchmark
index
C. By comparing the correlation between the returns of the portfolio and the benchmark
index
D. By comparing the weights of each investment in the portfolio and the benchmark
index
124. What is portfolio weight?
A. The value of each investment in a portfolio
B. The proportion of each investment in a portfolio
C. The expected return of each investment in a portfolio
D. The standard deviation of the returns of each investment in a portfolio
125. How is portfolio weight calculated?
A. By multiplying the number of shares of each investment by its price
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B. By dividing the value of each investment by the total value of the portfolio
C. By adding the expected returns of each investment in the portfolio
D. By multiplying the number of shares of each investment by its beta
126. If an investor has a $100,000 portfolio with $50,000 in stocks and $50,000 in bonds,
what is the weight of the stocks in the portfolio?
A. 25%
B. 50%
C. 75%
D. 100%
127. How would you adjust the weights of investments in a portfolio to rebalance it?
A. By buying more of the investments with higher weights
B. By selling the investments with lower weights
C. By adjusting both the buying and selling of investments
D. By doing nothing and letting the weights naturally shift over time
128. How would you evaluate the effectiveness of a portfolio's weights?
A. By comparing the portfolio's returns to a benchmark index
B. By comparing the portfolio's weights to the weights of a peer portfolio
C. By calculating the portfolio's standard deviation
D. By calculating the portfolio's expected return
129. What is portfolio expected return?
A. The total value of the investments in the portfolio
B. The average of the potential returns of each investment in the portfolio
C. The historical return of the portfolio
D. The predicted return of the portfolio based on current market conditions
130. How are expected returns of individual investments combined to calculate the
expected return of a portfolio?
A. By adding together the expected returns of each investment
B. By multiplying together the expected returns of each investment
C. By taking the average of the expected returns of each investment
D. By weighting the expected returns of each investment by their portfolio weight and
summing the results
131. If an investor has a $200,000 portfolio with $150,000 in stocks and $50,000 in bonds,
and the expected return of stocks is 10% and the expected return of bonds is 5%, what is
the expected return of the portfolio?
A. 7.5%
B. 8%
C. 9%
D. 11%
132. How would the expected return of a portfolio change if the expected return of one of
its investments increases?
A. It would decrease
B. It would stay the same
C. It would increase
D. It is impossible to determine
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133. How would you evaluate the performance of a portfolio's expected returns over time?
A. By comparing the portfolio's expected returns to the market index over the same time
period
B. By looking at the weight distribution of the portfolio
C. By reviewing the portfolio's fees and expenses
D. By comparing the portfolio's actual returns to its expected returns over the same time
period
134. How is portfolio risk typically measured?
A. By the expected return of the portfolio
B. By the weighted average of the volatility of each investment in the portfolio
C. By the total value of the portfolio
D. By the number of investments in the portfolio
135. What is systematic risk in portfolio management?
A. Risk that is specific to an individual investment
B. Risk that affects the overall market or economy
C. Risk that is hedged against by diversification
D. Risk that is unrelated to market conditions
136. How would you adjust the weights of investments in a portfolio to manage risk?
A. By buying more of the low-risk investments
B. By selling the high-risk investments
C. By adjusting both the buying and selling of investments
D. By doing nothing and letting the weights naturally shift over time
137. How would you compare the risk of two portfolios with different risk levels?
A. By comparing their expected returns
B. By comparing their portfolio weight distribution
C. By comparing their standard deviations
D. By comparing the number of investments in each portfolio
138. What is diversification in portfolio management?
A. Spreading investments across different asset classes
B. Spreading investments across different countries
C. preading investments across different industries
D. All of the above
139. How does diversification reduce portfolio risk?
A. By increasing the expected return of the portfolio
B. By decreasing the number of investments in the portfolio
C. By reducing the correlation between the returns of the investments in the portfolio
D. By increasing the individual risk of each investment in the portfolio
140. How would you diversify a portfolio that is heavily weighted towards a single
industry?
A. By adding more investments from the same industry
B. By removing the existing investments from that industry and replacing them with
investments from a different industry
C. By removing the existing investments and not replacing them
D. By doing nothing and letting market conditions naturally diversify the portfolio
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141. How would you evaluate the diversification of a portfolio?
A. By comparing the portfolio's expected returns to those of a market index
B. By looking at the portfolio weight distribution
D. By analyzing the correlation between the returns of the investments in the portfolio
142. How would you evaluate the effectiveness of diversification in a portfolio?
B. By comparing the portfolio's risk-adjusted returns to a benchmark index
D. By comparing the weight distribution of the portfolio to a peer portfolio
143. What is unsystematic risk in portfolio management?
A. Risk that affects the overall market or economy
B. Risk that is specific to an individual investment
144. How does diversification help reduce unsystematic risk?
A. By spreading the investments across different asset classes
B. By spreading the investments across different countries
C. By spreading the investments across different industries
D. By spreading the investments across different individual investments
145. How would you diversify a portfolio that is heavily weighted towards a single stock?
A. By adding more shares of the same stock
B. By removing the existing shares of that stock and not replacing them
C. By removing the existing shares and replacing them with shares of a different stock in
the same industry
D. By removing the existing shares and replacing them with shares of a different stock in
a different industry
146. How would you analyze the unsystematic risk of a portfolio?
A. By comparing the portfolio's expected returns to those of a market index
B. By looking at the portfolio weight distribution
D. By analyzing the volatility and correlation between the returns of the individual
investments in the portfolio
147. How would you evaluate the effectiveness of diversification in reducing unsystematic
risk?
B. By comparing the portfolio's risk-adjusted returns to a benchmark index
D. By comparing the weight distribution of the portfolio to a peer portfolio
148. What is systematic risk in portfolio management?
A. Risk that affects the overall market or economy
B. Risk that is specific to an individual investment
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149. What is the cost of capital?
A. The total value of a company's assets
B. The cost of debt financing
C. The rate of return required by investors to invest in a company
D. The cost of equity financing
150. How is the cost of equity calculated?
A. By adding the risk-free rate to the equity risk premium
B. By adding the company's cost of debt to the equity risk premium
C. By multiplying the company's dividend yield by the current stock price
D. By subtracting the company's dividend yield from the current stock price
151. How would you estimate the cost of debt for a company?
A. By looking at the current market price of the bonds issued by the company
B. By estimating the average interest rate of the company's outstanding debt
C. By estimating the future interest rate on the company's debt
D. By asking the company's creditors for their estimate of the cost of debt
152. How would an increase in a company's cost of capital affect its investment decisions?
A. It would lead the company to increase its investments in riskier projects
B. It would lead the company to decrease its investments in riskier projects
C. It would not affect the company's investment decisions
D. It would lead the company to invest only in low-risk projects
153. How would you evaluate a company's cost of capital?
A. By comparing the company's cost of capital to its historical cost of capital
B. By comparing the company's cost of capital to the average cost of capital for its
industry
C. By comparing the company's cost of capital to the risk-free rate
D. By comparing the company's cost of capital to the cost of capital for the overall
market
154. What is the cost of debt?
A. The rate of return required by investors to invest in a company's debt
B. The rate of return required by investors to invest in a company's equity
C. The interest rate paid by the company on its outstanding debt
D. The total amount of outstanding debt for a company
155. How is the cost of debt different from the cost of equity?
A. The cost of debt is typically lower than the cost of equity
B. The cost of debt is typically higher than the cost of equity
C. The cost of debt is not influenced by market conditions
D. The cost of debt is not influenced by the company's creditworthiness
156. How would you calculate the after-tax cost of debt?
A. By multiplying the before-tax cost of debt by the company's tax rate
B. By dividing the company's interest expense by its net income
C. By adding the company's tax rate to the before-tax cost of debt
D. By subtracting the company's tax rate from the before-tax cost of debt
157. How would an increase in a company's cost of debt affect its financial statements?
A. It would increase the company's net income
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B. It would decrease the company's net income
C. It would have no effect on the company's net income
D. It would cause the company's net income to fluctuate unpredictably
158. How would you evaluate whether a company's cost of debt is too high?
A. By comparing the company's cost of debt to its historical cost of debt
B. By comparing the company's cost of debt to the cost of debt for its industry
C. By comparing the company's cost of debt to the risk-free rate
D. By comparing the company's cost of debt to the cost of capital for the overall market
159. What is the cost of preferred stock?
A. The dividend yield paid to investors who hold preferred stock
B. The rate of return required by investors to invest in a company's preferred stock
C. The market capitalization of a company's preferred stock
D. The par value of a company's preferred stock
160. How is the cost of preferred stock calculated?
A. By multiplying the stock's current market price by the dividend yield
B. By dividing the preferred stock's annual dividend by its net present value
C. By adding the preferred stock's current market price to its dividend yield
D. By subtracting the preferred stock's current market price from its dividend yield
161. How would an increase in a company's cost of preferred stock affect its financial
statements?
A. It would decrease the company's net income
B. It would increase the company's net income
C. It would have no effect on the company's net income
D. It would cause the company's net income to fluctuate unpredictably
162. How would you compare the cost of preferred stock to the cost of debt?
A. By comparing the dividend yield on preferred stock to the interest rate on the
company's debt
B. By comparing the market capitalization of preferred stock to the market capitalization
of debt
C. By comparing the after-tax cost of preferred stock to the after-tax cost of debt
D. By comparing the historical cost of preferred stock to the historical cost of debt
163. How would you evaluate whether a company should issue preferred stock or debt to
finance a new project?
A. By comparing the cost of preferred stock to the cost of debt
B. By comparing the cash flow generated by the project to the expected dividend
payments on preferred stock
C. By comparing the interest payments on debt to the cost of equity financing
D. By comparing the par value of preferred stock to the face value of the debt
164. What is the cost of common equity capital?
A. The rate of return required by stockholders to invest in a company's common stock
B. The current market price of a company's common stock
C. The par value of a company's common stock
D. The book value of a company's common stock
165. How is the cost of common equity calculated using the dividend growth model?
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A. By dividing the current stock price by the current dividend per share
B. By multiplying the current dividend per share by the expected rate of dividend growth
C. By adding the expected rate of dividend growth to the stock price appreciation rate
D. By dividing the expected dividend per share by the stock's expected price per share
166. How would you adjust the dividend growth model to account for an increase in the
risk associated with a company's common stock?
A. By decreasing the expected rate of dividend growth
B. By increasing the expected rate of dividend growth
C. By decreasing the current dividend per share
D. By increasing the current dividend per share
167. How would an increase in a company's cost of common equity affect its weighted
average cost of capital?
A. It would increase the weighted average cost of capital
B. It would decrease the weighted average cost of capital
C. It would have no effect on the weighted average cost of capital
D. It would cause the weighted average cost of capital to fluctuate unpredictably
168. What is the cost of retained earnings?
A. The internal rate of return required by a company's management on its retained
earnings
B. The return on investment required by a company's debt holders on retained earnings
C. The opportunity cost of using retained earnings for new investment projects
D. The external cost of raising capital through retained earnings
169. How is the cost of retained earnings calculated using the CAPM model?
A. By adding the risk-free rate to the company's beta multiplied by the market risk
premium
B. By subtracting the company's beta from the market risk premium multiplied by the
risk-free rate
C. By dividing the company's beta by the market risk premium and subtracting the risk-
free rate
D. By multiplying the risk-free rate by the market risk premium and subtracting the
company's beta
170. How would you adjust the CAPM model to account for an increase in the risk
associated with a company's retained earnings?
A. By using a higher risk-free rate
B. By using a lower risk-free rate
C. By using a higher market risk premium
D. By using a lower market risk premium
171. How would an increase in a company's cost of retained earnings affect its future
investment decisions?
A. It would lead the company to invest in riskier projects
B. It would lead the company to invest in less risky projects
C. It would have no effect on the company's investment decisions
D. It would cause the company to raise additional external capital
172. What is the weighted average cost of capital (WACC)?
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A. The average rate of return required by all investors in a company's equity and debt
B. The average market capitalization of a company's equity and debt
C. The average book value of a company's equity and debt
D. The average par value of a company's equity and debt
173. How is the WACC calculated?
A. By multiplying the before-tax cost of debt by the after-tax cost of debt
B. By adding the cost of common equity to the weight of common equity, and the cost of
debt to the weight of debt
C. By multiplying the cost of preferred stock by the weight of preferred stock, the cost of
debt by the weight of debt, and the cost of common equity by the weight of common
equity
D. By dividing the total cost of all sources of financing by the total amount of financing
174. How would you adjust a company's WACC to account for an increase in the risk
associated with a new project?
A. By decreasing the cost of capital for equity financing
B. By increasing the cost of capital for equity financing
C. By decreasing the cost of capital for debt financing
D. By increasing the cost of capital for debt financing
175. How would a company's WACC be affected by an increase in its cost of debt?
A. It would increase the overall WACC
B. It would decrease the overall WACC
C. It would have no effect on the overall WACC
D. It would cause the WACC to fluctuate unpredictably
176. What is capital budgeting?
A. The process of acquiring new capital through external financing
B. The process of identifying and evaluating potential investment opportunities
C. The process of managing a company's working capital
D. The process of restructuring a company's debt
177. How is the net present value (NPV) method used in capital budgeting?
A. By comparing the present value of expected future cash inflows to the present value
of expected future cash outflows
B. By comparing the expected rate of return to the required rate of return for the project
C. By comparing the internal rate of return to the company's weighted average cost of
capital
D. By comparing the profitability index to the company's net income
178. How would you determine the payback period for a capital budgeting project?
A. By dividing the initial investment by the expected annual cash inflow
B. By subtracting the expected annual cash inflow from the initial investment
C. By dividing the initial investment by the expected net present value
D. By subtracting the expected net present value from the initial investment
179. How would an increase in the discount rate used in the NPV method affect a project's
evaluation?
A. It would increase the project's NPV
B. It would decrease the project's NPV
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C. It would have no effect on the project's NPV
D. It would cause the project's NPV to fluctuate unpredictably
180. How would you evaluate whether a new capital budgeting project is more or less
feasible than existing projects?
A. By comparing the internal rate of return of the new project to the net present value of
existing projects
B. By comparing the payback period of the new project to the internal rate of return of
existing projects
C. By comparing the profitability index of the new project to the payback period of
existing projects
D. By comparing the net present value of the new project to the net present value of
existing projects
181. What is the payback period in capital budgeting?
A. The amount of time it takes for a project to break even
B. The amount of time it takes for a project to generate a positive net present value
C. The amount of time it takes for a project to recover its initial investment
D. The amount of time it takes for a project to reach its maximum profitability
182. How is the internal rate of return (IRR) method used in capital budgeting?
A. By discounting future cash flows to their present value and comparing them to the
initial investment
B. By dividing the initial investment by the expected annual cash flow
C. By comparing the present value of future cash inflows to the project's required rate of
return
D. By calculating the discount rate that makes the net present value equal to zero
183. How would you calculate the profitability index of a capital budgeting project?
A. By dividing the present value of expected future cash inflows by the expected net
present value
B. By dividing the expected net present value by the present value of expected future
cash outflows
C. By dividing the present value of expected future cash inflows by the initial investment
D. By dividing the initial investment by the expected net present value
184. How would a company choose between two capital budgeting projects with different
investment amounts and net present values using the NPV method?
A. By choosing the project with the highest net present value
B. By choosing the project with the highest investment amount
C. By choosing the project with the highest initial cash inflow
D. By calculating the profitability index of each project
185. Which formula is used to calculate Net Present Value (NPV)?
A. NPV = Initial investment - total cash inflows
B. NPV = Initial investment + total cash inflows
C. NPV = Total cash inflows / Initial investment
D. NPV = Present value of cash inflows - Total cash outflows
186. What is the effect of a higher discount rate on the NPV?
25
A. NPV increases
B. NPV decreases
C. NPV remains constant
D. NPV may become negative
187. A company invests $100,000 and expects to receive $40,000 annually for 5 years.
Assuming a discount rate of 10%, what is the NPV of the project?
A. $10,000
B. $20,000
C. $30,000
D. $35,000
188. How should a company evaluate two potential investment proposals with different
cash inflows?
A. Compare the raw cash inflows
B. Calculate the payback period first
C. Calculate the NPV of each proposal and compare them
D. Calculate the profitability index of each proposal and compare them
189. How does a company's credit rating affect its cost of debt?
A. Higher credit rating increases cost of debt
B. Lower credit rating decreases cost of debt
C. Higher credit rating decreases cost of debt
D. Credit rating has no effect on the cost of debt
190. A company issued $500,000 of 7% annual interest bonds, that mature in 10 years.
Assuming a tax rate of 20%, what is the after-tax cost of debt?
A. 5.60%
B. 5.92%
C. 6.25%
D. 6.50%
191. How does the maturity of the debt securities affect the cost of debt?
A. Longer maturity increases the cost of debt
B. Shorter maturity decreases the cost of debt
C. Maturity has no effect on the cost of debt
D. Longer maturity decreases the cost of debt
192. What is the formula for calculating the cost of equity using the Capital Asset Pricing
Model (CAPM)?
A. Cost of equity = risk-free rate + beta * (expected market return - risk-free rate)
B. Cost of equity = dividend per share / market price per share
C. Cost of equity = expected growth rate of dividends / (required rate of return -
expected growth rate)
D. Cost of equity = earnings per share / market price per share
193. A company has a beta of 1.5 and the risk-free rate is 2%. Assuming an expected
market return of 8%, what is the cost of equity using the CAPM?
A. 10%
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B. 11%
C. 12%
D. 13%
194. How does an increase in the expected growth rate of dividends impact the cost of
equity using the Dividend Growth Model?
A. Cost of equity increases
B. Cost of equity decreases
C. Cost of equity remains constant
D. Cost of equity may become negative
195. What are some limitations of using the CAPM to calculate the cost of equity?
A. It assumes that beta is a perfect measure of risk
B. It does not account for unsystematic risk
C. It may not be accurate for small companies or emerging markets
D. All of the above
196. A project has an initial investment of $500,000 and is expected to provide cash flows
of $150,000 per year for 5 years. Assuming a discount rate of 8%, what is the NPV of the
project?
A. $350,680
B. $250,680
C. $150,680
D. $50,680
197. An individual wants to retire in 20 years and will receive an annuity of $20,000 per
year for 15 years. Assuming an interest rate of 5%, what is the present value of this
annuity?
A. $216,575
B. $275,137
C. $303,021
D. $320,234
198. A company has total assets of $1,200,000 and total liabilities of $800,000. What is the
debt-to-equity ratio?
A. 0.67
B. 1.00
C. 1.50
D. 2.00
199. A company has total liabilities of $500,000 and total assets of $750,000. What is the
debt ratio?
A. 0.33
B. 0.50
C. 0.67
D. 1.50
200. A company has current assets of $200,000 and current liabilities of $100,000. What is
the current ratio?
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A. 0.50
B. 1.00
C. 1.50
D. 2.00
201. Which of the following best defines business risk?
A. The risk associated with a company's ability to pay its debts
B. The risk associated with fluctuations in interest rates
C. The risk associated with the company's operations and the industry it operates in
D. The risk associated with changes in the value of the company's assets
202. Which of the following is an example of financial risk?
A. A company's inability to meet its debt obligations
B. A company's exposure to changes in interest rate
C. A company's dependence on a single supplier
D. A company's inability to meet customer demand
203. Which of the following is a way to mitigate business risk?
A. Diversifying the company's product line
B. Increasing the company's debt-to-equity ratio
C. Investing in riskier assets
D. Reducing the company's liquidity
204. Which of the following is a way to mitigate financial risk?
A. Reducing the company's liquidity
B. Increasing the company's exposure to interest rate fluctuations
C. Reducing the company's debt-to-equity ratio
D. Investing in riskier assets
205. Which of the following is an example of systematic risk?
A. A company's exposure to changes in interest rates
B. A company's dependence on a single supplier
C. A change in government regulations that affect the company's operations
D. A company's inability to meet customer demand
206. Which of the following best defines operating leverage?
A. The degree to which a company uses debt financing
B. The degree to which a company's costs are fixed versus variable
C. The degree to which a company is exposed to changes in interest rates
D. The degree to which a company is exposed to changes in exchange rates
207. Which of the following is a way to increase operating leverage?
A. Increasing the company's variable costs
B. Increasing the company's fixed costs
C. Reducing the company's sales volume
D. Reducing the company's revenue
208. Which of the following is true of high operating leverage?
A. It increases a company's risk of bankruptcy
B. It reduces a company's risk of bankruptcy
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C. It has no effect on a company's risk of bankruptcy
D. It increases a company's liquidity
209. Which of the following best defines financial risk?
A. The risk associated with a company's operations and the industry it operates in
B. The risk associated with a company's financial structure and financing decisions
C. The risk associated with changes in interest rates and exchange rates
D. The risk associated with changes in consumer demand and competition
210. Which of the following best defines financial leverage?
A. The degree to which a company uses debt financing
B. The degree to which a company's costs are fixed versus variable
C. The degree to which a company is exposed to changes in interest rates
D. The degree to which a company is exposed to changes in exchange rates
211. Which of the following is a way to reduce financial risk?
A. Increasing the company's debt-to-equity ratio
B. Diversifying the company's product line
C. Investing in riskier assets
D. Reducing the company's liquidity
212. Which of the following is a way to increase financial leverage?
A. Reducing the company's debt-to-equity ratio
B. Increasing the company's variable costs
C. Increasing the company's fixed costs
D. Reducing the company's sales volume
213. Which of the following is true of high financial leverage?
A. It increases a company's risk of bankruptcy
B. It reduces a company's risk of bankruptcy
C. It has no effect on a company's risk of bankruptcy
D. It increases a company's liquidity
214. Which of the following best defines the optimal capital structure?
A. The capital structure that maximizes the company's profitability
B. The capital structure that minimizes the company's risk
C. The capital structure that balances the company's risk and profitability
D. The capital structure that maximizes the company's liquidity
215. Which of the following is a factor that affects a company's optimal capital structure?
A. Market conditions
B. Company size
C. Industry risk
D. All of the above
216. Which of the following is a way to determine the optimal capital structure?
A. Analyzing the company's financial statements
B. Conducting a cost of capital analysis
C. Comparing the company's capital structure to industry peers
D. All of the above
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217. Which of the following is a benefit of using more debt financing?
A. Lower financial risk
B. Higher profitability
C. Lower cost of capital
D. Higher liquidity
218. Which of the following is a drawback of using more debt financing?
A. Higher financial risk
B. Lower profitability
C. Higher cost of capital
D. Lower liquidity
219. Which of the following is not one of the assumptions made by Modigliani and Miller
in their capital structure irrelevance theory?
A. Investors have access to the same information
B. There are no taxes
C. There are no transaction costs
D. The firm's earnings are constant
220. According to Modigliani and Miller, which of the following statements is true
regarding the cost of equity?
A. It increases as the amount of debt in the firm's capital structure increases
B. It is unaffected by changes in the firm's capital structure
C. It decreases as the amount of debt in the firm's capital structure increases
D. It is always higher than the cost of debt
221. If a firm's cost of debt is 8% and its cost of equity is 12%, what is the weighted
average cost of capital (WACC) according to Modigliani and Miller's capital structure
irrelevance theory if the firm's capital structure is 100% equity?
A. 8%
B. 10%
C. 12%
D. 14%
222. Which of the following statements is true regarding Modigliani and Miller's capital
structure irrelevance theory?
A. The value of a firm is not affected by its capital structure
B. The cost of equity is always higher than the cost of debt
C. The optimal capital structure is one that maximizes the value of the firm
D. The cost of capital is always equal to the cost of equity
223. Which of the following criticisms of Modigliani and Miller's capital structure
irrelevance theory is most valid?
A. It assumes that investors have access to the same information
B. It does not take into account the impact of taxes
C. It assumes that the firm's earnings are constant
D. It ignores the impact of market imperfections on the firm's cost of capital
224. Which of the following best describes M&M Proposition I with taxes?
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A. The total market value of a firm is independent of its capital structure.
B. The cost of equity is directly proportional to the firm's debt-to-equity ratio.
C. The value of a firm is maximized when it uses 100% debt financing.
D. The cost of capital is equal to the weighted average cost of debt and equity.
225. Which of the following statements is true regarding M&M Proposition II with taxes?
A. The cost of equity increases as the firm's debt-to-equity ratio increases.
B. The value of a firm increases as the firm's debt-to-equity ratio increases.
C. The cost of debt decreases as the firm's debt-to-equity ratio increases.
D. The value of a firm is independent of its capital structure.
226. If a firm has a tax rate of 30%, what is the after-tax cost of debt if the before-tax cost
of debt is 8%?
A. 5.6%
B. 8%
C. 11.2%
D. 30%
227. Which of the following factors could cause M&M Proposition I with taxes to not hold
true?
A. Corporate tax rates are zero.
B. Bankruptcy costs are high.
C. Investors are indifferent between debt and equity.
D. The cost of equity is higher than the cost of debt.
228. A firm is considering two different capital structures: one with 60% debt and one with
40% debt. Which capital structure should the firm choose according to M&M Proposition
I with taxes?
A. The 60% debt structure
B. The 40% debt structure
C. There is not enough information to determine which structure is better.
D. The firm should use 100% debt financing.
229. Which of the following dividend theories suggests that investors prefer higher
dividends over lower dividends?
A. Bird-in-hand theory
B. Tax preference theory
C. Residual theory
D. Modigliani-Miller theory
230. Which of the following dividend theories suggests that companies should only pay
dividends when they have excess cash?
C. Residual theory
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231. A company has a large amount of profitable investment opportunities. According to
the _____ theory of dividends, the company should reinvest its earnings rather than pay
dividends.
C. Residual theory
232. Using the dividend discount model, which of the following factors has the greatest
impact on the value of a company's stock?
A. The current dividend payment
B. The expected future dividend payments
C. The company's risk level
D. The current stock price
233. Which of the following dividend policies is most appropriate for a company that has a
stable earnings stream and a large number of conservative investors?
A. High dividend payout ratio
B. Low dividend payout ratio
C. No dividend payout
D. Irregular dividend payout ratio
234. Which of the following is NOT a type of dividend policy?
A. Stable dividend policy
B. Residual dividend policy
C. Target payout ratio policy
D. Debt-to-equity ratio policy
235. What is the difference between a stable dividend policy and a residual dividend
policy?
A. A stable dividend policy maintains a consistent dividend payout, while a residual
dividend policy pays out dividends only after all other expenses are covered.
B. A stable dividend policy pays out dividends only after all other expenses are covered,
while a residual dividend policy maintains a consistent dividend payout.
C. A stable dividend policy pays out dividends based on a target payout ratio, while a
residual dividend policy pays out dividends based on the availability of funds.
D. A stable dividend policy pays out dividends based on the availability of funds, while a
residual dividend policy pays out dividends based on a target payout ratio.
236. If a company has a target payout ratio of 40% and earnings per share of $2, how much
will it pay in dividends per share?
A. $0.40
B. $0.80
C. $1.20
D. $1.60
237. What are the advantages and disadvantages of a high dividend payout ratio?
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A. Advantages: attracts investors, signals confidence in the company; Disadvantages:
limits reinvestment opportunities, may signal lack of growth opportunities.
B. Advantages: allows for reinvestment opportunities, signals confidence in the
company; Disadvantages: may not attract investors, may signal lack of growth
opportunities.
C. Advantages: may attract investors, allows for reinvestment opportunities;
Disadvantages: signals lack of confidence in the company, limits growth
opportunities.
D. Advantages: signals confidence in the company, allows for growth opportunities;
Disadvantages: may not attract investors, limits reinvestment opportunities.
238. Should a company always pay out dividends to its shareholders? Why or why not?
A. Yes, because dividends are a sign of a healthy and successful company.
B. No, because reinvesting profits into the company may lead to higher growth and
returns for shareholders in the long run.
C. It depends on the company's financial situation and goals.
D. It depends on the preferences of individual shareholders.
239. Which of the following is an example of a current asset?
A. Land
B. Building
C. Inventory
D. Patents
240. What is the formula for calculating working capital?
A. Current assets - current liabilities
B. Total assets - total liabilities
C. Gross profit - operating expenses
D. Revenue - cost of goods sold
241. Why is working capital management important for a business?
A. To increase long-term investments
B. To decrease short-term liabilities
C. To improve profitability
D. To reduce taxes
242. Which of the following is NOT a strategy to manage working capital?
A. Increasing inventory levels
B. Reducing accounts payable
C. Accelerating cash collections
D. Delaying payments to suppliers
243. How does a decrease in working capital impact a company's financial statements?
A. Decreased net income
B. Increased cash flow
C. Decreased liquidity
D. Increased debt-to-equity ratio
244. Which of the following is not a working capital strategy?
A. Cash management
B. Inventory management
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C. Credit management
D. Capital budgeting
245. Which of the following is a disadvantage of aggressive working capital management?
A. Increased profitability
B. Increased liquidity risk
C. Reduced cash conversion cycle
D. Increased inventory turnover
246. Which of the following is not a component of working capital?
A. Accounts receivable
B. Accounts payable
C. Inventory
D. Fixed assets
247. Which of the following is a benefit of conservative working capital management?
A. Reduced liquidity risk
B. Increased inventory turnover
C. Reduced cash conversion cycle
D. Increased profitability
248. Which of the following is not a cash management technique?
A. Lockbox system
B. Zero-based budgeting
C. Cash pooling
D. Concentration banking
249. Which of the following is NOT a common financial statement used in financial
forecasting?
A. Income statement
B. Balance sheet
C. Cash flow statement
D. Customer feedback report
250. What is the purpose of financial forecasting?
A. To predict the future financial health of a company
B. To analyze the past financial performance of a company
C. To compare the financial performance of multiple companies
D. To determine the price of a company's stock
251. Using the trend analysis method, what would be the forecast for sales in year 5 if sales
in year 1 were $100,000 and the annual growth rate is 10%?
A. $110,000
B. $161,000
C. $259,374
D. $1,000,000
252. Which of the following factors would have the greatest impact on a company's
financial forecasting accuracy?
A. The use of multiple forecasting methods
B. The size of the company
C. The experience of the financial analyst
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D. The accuracy of the historical data used in the forecast
253. Which of the following financial forecasting methods would be most appropriate for a
startup company with little historical data?
A. Trend analysis
B. Regression analysis
C. Expert opinion
D. Time-series analysis
254. What is the primary objective of inventory management?
A. To minimize inventory holding costs
B. To maximize inventory turnover
C. To achieve a balance between inventory holding costs and stockouts
D. To reduce the cost of goods sold
255. Which of the following is NOT a type of inventory?
A. Raw materials
B. Work-in-progress
C. Finished goods
D. Accounts receivable
256. What is the economic order quantity (EOQ) formula used for?
A. To calculate the optimal order quantity for a product
B. To forecast demand for a product
C. To determine the reorder point for a product
D. To calculate the holding cost of inventory
257. What is the purpose of safety stock?
A. To reduce the risk of stockouts
B. To increase the inventory turnover rate
C. To reduce the cost of goods sold
D. To increase the order size for a product
258. Which of the following is NOT a cost associated with inventory management?
A. Holding costs
B. Ordering costs
C. Stockout costs
D. Advertising costs
259. What is the primary objective of EOQ?
A. To minimize the ordering cost and carrying cost
B. To maximize the inventory holding cost
C. To minimize the stockout cost
D. To maximize the ordering cost
260. Which of the following is the assumption of EOQ model?
A. The demand rate is constant and known with certainty.
B. The lead time is zero.
C. The ordering cost is independent of the order quantity.
D. All of the above.
261. Which of the following is the limitation of EOQ model?
A. It assumes that the demand rate is constant.
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B. It does not consider the stockout cost.
C. It does not consider the cost of capital.
D. All of the above.
262. What is Economic Order Quantity (EOQ)?
A. The minimum amount of inventory that should be ordered
B. The maximum amount of inventory that should be ordered
C. The optimal amount of inventory that should be ordered
D. The total amount of inventory that should be ordered
263. What factors are considered while calculating EOQ?
A. Ordering costs, carrying costs, and demand
B. Production costs, labor costs, and overhead costs
C. Marketing costs, sales costs, and distribution costs
D. None of the above
264. What is the significance of EOQ?
A. It helps businesses to minimize inventory costs
B. It helps businesses to maximize inventory costs
C. It helps businesses to increase production costs
D. It has no significance for businesses
265. A company wants to order a certain material for production. The demand for the
material is 500 units per month, and the cost of placing an order is $50. The carrying cost
per unit is $2. The company wants to minimize the total cost of ordering and carrying the
material. What is the economic order quantity (EOQ)?
A. 100 units
B. 388 units
C. 500 units
D. 1,000 units
266. What is the primary purpose of the Miller-Orr model?
A. to minimize cash holdings
B. to maximize cash holdings
C. to reduce the cost of holding cash
D. to increase the cost of holding cash
267. What is the difference between the upper and lower control limits in the Miller-Orr
model?
A. there is no difference
B. the upper limit is higher than the lower limit
C. the lower limit is higher than the upper limit
D. the difference depends on the company's cash needs
268. What happens when the cash balance in the Miller-Orr model falls below the lower
control limit?
A. cash is invested in marketable securities
B. cash is borrowed to meet the shortfall
C. cash is used to pay down debt
D. cash is distributed to shareholders
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269. Which factor is NOT considered when calculating the target cash balance in the
Miller-Orr model?
A. the cost of holding cash
B. the cost of investing in marketable securities
C. the variance of daily cash flows
D. the company's credit rating
270. What is the main advantage of using the Miller-Orr model of cash management?
A. it is easy to implement
B. it ensures a constant cash balance
C. it reduces the cost of holding cash
D. it maximizes the return on investment
271. Which of the following best describes the Miller Orr model?
A. It is a cash management model that helps organizations minimize their cash balances
B. It is a cash management model that helps organizations maximize their cash balances
C. It is a cash management model that helps organizations maintain their cash balances
within a target range
D. It is a cash management model that helps organizations invest their excess cash
balances
272. How does the Miller Orr model help organizations manage their cash balances?
A. By reducing the cost of holding cash
B. By increasing the interest earned on cash balances
C. By maintaining cash balances within a target range
D. By investing excess cash balances in profitable ventures
273. Suppose an organization has a target cash balance of $100,000, a standard deviation
of daily cash flows of $20,000, and a transaction cost of $10 per transaction. What is the
optimal transfer amount according to the Miller Orr model?
A. $0
B. $10,000
C. $20,000
D. $30,000
274. How does the Miller Orr model compare to other cash management models, such as
the Baumol model?
A. The Miller Orr model is more effective at minimizing the cost of holding cash
B. The Baumol model is more effective at maintaining cash balances within a target
range
C. The Miller Orr model is more effective at minimizing the transaction costs of cash
management
D. The Baumol model is more effective at maximizing interest earned on cash balances
275. What are the advantages and disadvantages of using the Miller Orr model for cash
management in large organizations?
A. Advantages: Efficient use of cash resources, reduced transaction costs.
Disadvantages: Complexity, requires accurate cash flow forecasting.
B. Advantages: Simplicity, easy to implement. Disadvantages: Inefficient use of cash
resources, may not maintain cash balances within a target range.
37
C. Advantages: Maximizes interest earned on cash balances. Disadvantages: High
transaction costs, may not be effective for large cash balances.
D. Advantages: Minimizes the cost of holding cash, easy to understand. Disadvantages:
May not be effective for managing large cash balances, requires accurate cash flow
forecasting.
276. Which of the following is a characteristic of aggressive financing strategies?
A. High-risk, high-reward approach
B. Conservative and risk-averse approach
C. Focus on long-term stability
D. Avoidance of debt
277. What is the primary goal of aggressive financing strategies?
A. Minimizing risk
B. Maximizing short-term profits
C. Building a sustainable business model
D. Maintaining a steady cash flow
278. Which of the following is an example of aggressive financing?
A. Issuing bonds to raise capital
B. Taking out a bank loan with a low interest rate
C. Selling equity shares to investors
D. Using credit cards to finance business expenses
279. What are the potential risks of aggressive financing strategies?
A. Increased debt and interest payments
B. Loss of control over the business
C. Negative impact on credit rating
D. All of the above
280. Which types of businesses are most likely to use aggressive financing strategies?
A. Startups with high growth potential
B. Established companies with stable revenue streams
C. Non-profit organizations
D. Government agencies
281. Which of the following is a characteristic of conservative financing policies?
A. High-risk, high-reward approach
B. Conservative and risk-averse approach
C. Focus on short-term gains
D. Prioritization of growth over stability
282. What is the primary goal of conservative financing policies?
A. Maximizing short-term profits
B. Building a sustainable business model
C. Taking on high levels of debt
D. Pursuing aggressive growth strategies
283. Which of the following is an example of conservative financing?
A. Issuing bonds to raise capital
B. Taking out a high-interest bank loan
C. Selling equity shares to investors
38
D. Using personal savings to finance business expenses
284. What are the potential benefits of conservative financing policies?
A. Lower levels of debt and interest payments
B. Greater stability and financial security
C. Improved credit rating
D. All of the above
285. Which types of businesses are most likely to use conservative financing policies?
A. Startups with high growth potential
B. Established companies with stable revenue streams
C. Non-profit organizations
D. Government agencies
286. Which of the following is NOT a common method for managing accounts receivable?
A. Offering early payment discounts
B. Factoring receivables
C. Extending credit terms to customers
D. Writing off bad debts
287. What is the purpose of an aging schedule in accounts receivable management?
A. To track the collection of cash from customers
B. To determine the creditworthiness of new customers
C. To identify overdue accounts and prioritize collection efforts
D. To calculate the allowance for doubtful accounts
288. A company has an accounts receivable turnover ratio of 8.2. If the company's credit
sales for the year were $500,000, what is the average accounts receivable balance during
the year?
A. $60,975
B. $61,000
C. $62,500
D. $65,000
289. If a company has a high percentage of past due accounts, what steps can it take to
improve its accounts receivable management?
A. Tighten credit policies and procedures
B. Increase advertising and marketing efforts
C. Reduce the number of collection calls to customers
D. Offer longer payment terms to customers
290. Which of the following is the most effective method for collecting overdue accounts
receivable?
A. Sending a friendly reminder email to the customer
B. Hiring a collection agency to handle the account
C. Offering a settlement or payment plan to the customer
D. Threatening legal action against the customer
291. What is External Funds Required (EFR)?
A. The amount of funds a company needs to maintain its current level of operations
B. The amount of funds a company needs to finance a new project
39
C. The amount of funds a company needs to pay off its debts
D. The amount of funds a company needs to meet its dividend obligations
292. What factors can lead to an increase in External Funds Required (EFR)?
A. An increase in sales
B. An increase in profit margin
C. An increase in fixed assets
D. An increase in retained earnings
293. A company has a projected sales growth rate of 15%, a profit margin of 10%, and
assets that are expected to grow by 20%. If the company has a dividend payout ratio of
30%, what is the External Funds Required (EFR) for the year?
A. 5%
B. 10%
C. 15%
D. 20%
294. A company has an External Funds Required (EFR) of $500,000. If the company's
projected net income is $1,000,000 and its retention ratio is 60%, what is the company's
projected total asset growth rate?
A. 50%
B. 60%
C. 100%
D. 150%
295. Which of the following is the most effective way to reduce External Funds Required
(EFR)?
A. Increase the sales growth rate
B. Increase the profit margin
C. Decrease the dividend payout ratio
D. Decrease the asset growth rate
296. Which of the following best describes the percentage of sale method?
A. A financial forecasting technique based on historical data
B. A method for calculating the cost of goods sold
C. A technique for estimating future financial statements based on a percentage of sales
revenue
D. A method for determining the break-even point
297. How does the percentage of sale method work?
A. By estimating expenses and assets as a percentage of sales revenue
B. By calculating the net income of a company
C. By projecting future sales revenue based on historical data
D. By analyzing the cash flow statement of a company
298. A company expects to generate $1,000,000 in sales revenue for the coming year. If
historical data shows that its cost of goods sold typically represents 60% of sales revenue,
what is the estimated cost of goods sold for the coming year?
A. $600,000
B. $400,000
40
C. $200,000
D. $1,600,000
299. What are the limitations of the percentage of sale method for financial forecasting?
A. It assumes that expenses and assets will always be proportional to sales revenue
B. It does not account for changes in the company's business operations
C. It may be less accurate if historical data is limited
D. All of the above
300. Compare the percentage of sale method to the time-series method for financial
forecasting. Which technique do you think is more accurate and why?
A. The percentage of sale method is more accurate because it is based on historical data
B. The time-series method is more accurate because it takes into account trends and
patterns over time
C. Both techniques have their strengths and weaknesses and may be appropriate
depending on the specific circumstances of the company
D. Neither technique is accurate and other methods should be used instead
301. Which of the following best describes the cash conversion cycle?
A. The time it takes for a company to collect payments from its customers
B. The time it takes for a company to convert inventory into cash
C. The time it takes for a company to pay its suppliers and vendors
D. The time it takes for a company to generate a profit
302. What is the primary goal of managing the cash conversion cycle?
A. To increase sales revenue
B. To decrease the cost of goods sold
C. To maximize the time it takes to pay suppliers
D. To minimize the time it takes to convert inventory into cash
303. Which of the following would be the most effective way to reduce the cash
conversion cycle?
A. Increase the payment terms with suppliers
B. Decrease the time it takes to collect payments from customers
C. Increase the amount of inventory held in stock
D. Decrease the frequency of orders with suppliers
304. Which of the following would be the most effective way to improve a company's cash
flow?
A. Increase the cash conversion cycle
B. Decrease the payment terms with suppliers
C. Increase the time it takes to collect payments from customers
D. Decrease the amount of inventory held in stock
305. Suppose a company has a high cash conversion cycle, which of the following
strategies would be the most effective to improve cash flow?
B. Decrease the time it takes to collect payments from customers
C. Increase the amount of inventory held in stock
D. Decrease the frequency of orders with suppliers.
41
306. How is the operating cycle related to the cash conversion cycle?
A. The operating cycle is shorter than the cash conversion cycle
B. The operating cycle is longer than the cash conversion cycle
C. The operating cycle and cash conversion cycle are the same thing
D. The operating cycle and cash conversion cycle are not related
307. Calculate the operating cycle of a company with an inventory turnover of 5 times per
year, an average collection period of 30 days, and an average payment period of 45 days.
A. 40 days
B. 50 days
C. 70 days
D. 80 days
308. How can a company improve its operating cycle?
A. By increasing the time it takes to pay suppliers
B. By decreasing the time it takes to collect payments from customers
C. By increasing the amount of inventory held in stock
D. By decreasing the frequency of orders with suppliers
309. Suppose a company has a high operating cycle, which of the following strategies
would be the most effective to improve cash flow?
B. Decrease the payment terms with customers
C. Increase the frequency of orders with suppliers
D. Decrease the amount of inventory held in stock
42

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Jimma University

C0llege of Business and Economics

Department of Accounting and Finance

Financial management I and II

General direction: Choice the best answer.

1. What is the goal of financial management?

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