Question 1

Which of the following is correct pertaining to a risk-averse manager?

Accepted Answer

The manager requires no change in return for an increase in risk.

Answer

The manager requires greater return when risk decreases.

Answer

The manager requires increase in risk for an increase in return.

Answer

The manager requires return to decrease for an increase in risk

Question 2

Which of the following is best describes a systematic risk?

Accepted Answer

A risk that reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.

Answer

a risk that is the relevant portion of an asset's risk attributable to market factors that affect all firms.

Answer

A risk combining two negatively correlated assets to reduce risk.

Answer

a risk that is attributable to firm-specific, random causes.

Question 3

Which of the following is best describes a diversifiable risk?

Accepted Answer

It represents the portion of an asset's risk that can be eliminated by combining assets with less than perfect positive correlation

Answer

It is the relevant portion of risk attributable to market factors that affect all firms

Answer

It results in lower required returns for each level of risk, whereas a reduction in risk represents portion of an asset's risk that is attributable to firm-specific, random causes that would cause the required return for each level of risk to increase.

Answer

War, inflation, and the condition of the foreign markets are all examples of diversifiable risk.

Question 4

Which of the following best describes standard deviation?

Accepted Answer

It measures the dispersion around the expected value.

Answer

A continuous probability distribution shows all possible outcomes and associated probabilities for a given event.

Answer

The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value

Answer

It is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Question 5

It is based on an assumed efficient market in which there are many small investors, each having the same information and expectations with respect to securities; there are no restrictions on investment, no taxes, and no transactions costs; and all investors are rational, view securities similarly, and are risk-averse, preferring higher returns and lower risk.

Accepted Answer

Capital Asset Pricing Model

Answer

Constant Growth Model

Answer

Security Market Line

Answer

Gordon Model

Question 6

In comparing an ordinary annuity and an annuity due, which of the following is true

Accepted Answer

the future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.

Answer

the future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.

Answer

the future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.

Answer

all things being equal one would prefer to receive an ordinary annuity compared to an annuity due

Question 7

It is the amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount.

Accepted Answer

present value

Answer

present value interest factor

Answer

future value interest factor

Answer

future value.

Question 8

The future value interest factor is

Accepted Answer

always greater than 1.0

Answer

sometimes negative.

Answer

always less than 0.

Answer

never greater than 25

Question 9

Statement 1. Since individuals are always confronted with opportunities to earn positive rates of return on their funds, the timing of cash flows does not have any significant economic consequences.

Statement 2. Time-value of money is based on the belief that a peso that will be received at some future date is worth more than a peso today

Accepted Answer

False, False

Answer

True, True

Answer

True, False

Answer

False, True

Question 10

Statement 1. Everything else being equal, the higher the discount rate, the higher the present value.

Statement 2. Everything else being equal, the longer the period of time, the lower the present value

Accepted Answer

False, True

Answer

True, False

Answer

False, False

Answer

True, True

Question 11

Statement I; The time value of money is ignored both in the rate of return and the payback methods.

Statement II; Capital budgeting involves various methods of obtaining cash for business operations.

Accepted Answer

False, False

Answer

False, True

Answer

True, True

Answer

True&#44; True

Question 12

Statement 1. The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

Statement 2. The IRR is the discount rate that equates the NPV of an investment opportunity with Php 0.

Accepted Answer

False, True

Answer

True, False

Answer

True&#44; True

Answer

False, False

Question 13

Statement 1. The IRR is the compound annual rate of return that the firm will earn if it invests in the project and receives the given cash inflows.
Statement 2. An IRR greater than the cost of capital guarantees that the firm earns at least its required return. Such an outcome should enhance the market value of the firm and therefore the wealth of its owners.

Accepted Answer

True, True

Answer

False, True

Answer

False, False

Answer

True, False

Question 14

Statement 1. For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision, but differences in their underlying assumptions can cause them to rank projects differently.
Statement 2. Conflicting rankings using NPV and IRR result from differences in the magnitude and timing of cash flows.

Accepted Answer

True, True

Answer

False, False

Answer

False, True

Answer

True, False

Question 15

The annual rate of return method is based on

Accepted Answer

accounting data

Answer

time value of money

Answer

market values

Answer

cash flow data

Question 16

Statement 1. Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

Statement 2. Operating leverage is concerned with the relationship between the firm's sales revenue and its operating expenses,

Accepted Answer

False, False

Answer

False, True

Answer

True, False

Answer

True&#44; True

Question 17

Statement 1. Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

Statement 2. The breakeven point in pesos can be computed by dividing the contribution margin into the fixed operating costs.

Accepted Answer

False, True

Answer

True&#44; True

Answer

False, False

Answer

True, False

Question 18

Statement 1. Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the breakeven analysis.
Statement 2. Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT) on the firm's earnings per share (EPS).

Accepted Answer

True, False

Answer

True&#44; True

Answer

False, True

Answer

False, False

Question 19

Statement 1. Total leverage exists whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales.

Statement 2. The degree of operating leverage depends on the base level of sales used as a point of reference. The closer the base sales level used is to the operating breakeven point, the greater the operating leverage

Accepted Answer

True, True

Answer

True, False

Answer

False, True

Answer

False, False

Question 20

Statement 1. The firm's financial breakeven point is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = 0.
Statement 2. If a firm's fixed operating costs decrease, the firm's operating breakeven point will decrease

Accepted Answer

False, True

Answer

True&#44; True

Answer

True, False

Answer

False, False

Question 21

The primary goal of a financial manager is to

Accepted Answer

maximize wealth

Answer

minimize risk

Answer

minimize return

Answer

maximize profit

Question 22

Which of the following is the best measure to ensure that management decisions are in the best interest of the stockholders?

Accepted Answer

tie management compensation to the performance of the company's common stock price

Answer

fire managers who are inefficient

Answer

remove management's perquisites

Answer

tie management compensation to the level of dividend per share

Question 23

The receivable turnover and inventory turnover ratios are used to analyze

Accepted Answer

liquidity

Answer

leverage

Answer

profitability

Answer

long-term solvency

Question 24

The debt to total assets ratio measures

Accepted Answer

the company's profitability.

Answer

the percentage of the total assets provided by creditors.

Answer

whether interest can be paid on debt in the current year

Answer

the proportion of interest paid relative to dividends paid

Question 25

Which of the following is most consistent with the hedging principle in working capital
management?

Accepted Answer

Fixed assets should be financed with short-term notes payable.

Answer

Accounts receivable should be financed with short-term lines of credit

Answer

Inventory should be financed with preferred stock

Answer

Borrow on a floating rate basis to finance investments in permanent assets.

Question 26

All of the following statements in regard to working capital are correct, except

Accepted Answer

Financing permanent inventory buildup with long-term debt an example of an aggressive working capital policy.

Answer

Profitability varies inversely with liquidity

Answer

The hedging approach for financing involves matching maturities of debt with financing needs.

Answer

Current liabilities are an important source of financing for small firms.

Question 27

Which of the following types of financing offers the firm the greatest degree of flexibility?

Accepted Answer

Short-term lines of credit

Answer

Preferred stock

Answer

Bonds

Answer

Long-term notes payable

Question 28

Short-term, self-liquidating loans are intended to

Accepted Answer

cover seasonal peaks in financing caused by inventory and receivable buildups

Answer

provide one-time loan to the borrower who needs funds for a specific purpose

Answer

provide maximum amount to the firm that it can owe to the bank

Answer

recapitalize the firm

Question 29

As sales increase, a company needs more inventory and more employees resulting in more accounts payable and accruals, and therefore increasing its spontaneous liabilities.

Accepted Answer

more accounts payable and accruals, and therefore increasing its spontaneous liabilities.

Answer

less accounts payable and accruals, and therefore increasing its spontaneous liabilities.

Answer

more accounts payable and accruals, and therefore decreasing its spontaneous liabilities.

Answer

less accounts payable and accruals, and therefore decreasing its spontaneous liabilities.

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