cf_tj2014_revisionmcq_soln.pdf

Corporate Finance Revision

1Prepared by June Neo Copyrights reserved

Question 1:A conservative financing strategy is characterised by all of the following except:

a. permanent sources of financing exceed permanent assets in trough periods.b. the firm faces a lower risk of being caught short of cash compared with a firm

that follows the pure hedging approach.c. the firm has excess liquidity during the high peaks of its asset cycle.d. the firm increases its investment in relatively low-yield assets.

Question 2:The concept of market efficiency means that we should expect securities and other assets to be:

a. underpriced given their expected risks and returns.b. overpriced given their expected risks and returns.c. fairly priced given their expected risks and returns.d. None of the above as prices cannot be predicted.

Question 3:Once a cash discount period has passed:

a. one should pay immediately.b. there is no financial incentive to pay before the final due date.c. one should pay after the due date.d. cannot be determined from the information.

Question 4:Evaluation of size, timing and risk of future cash flows is the essence of:

a. working capital management.b. profit maximization.c. capital budgeting.d. both b and c.

Question 5:When using the CPAM to estimate the cost of equity for evaluation of investment proposals, theappropriate substitute for the risk-free rate of interest is:

a. the yield on 10-year government bonds.b. the yield on 3-year government bonds.c. the yield on 90-day treasury notes.d. the yield on government security whose term to maturity matches the life of the

proposed project.

Question 6:When factoring accounts receivable, which party must bear the risk of collection of the firmsaccounts receivable?

a. The factor.b. The firm itself.c. The individual account receivable.d. The firms shareholders.



Question 7:With regard to the optimal order quantity (Q*) which of the following statement is/are correct?

i. As carrying cost per unit increases, Q* increases.ii. As total demand over the planning period increases, Q* increases.iii. As ordering cost per unit increases, Q* increases

a. i only.b. ii only.c. ii and iii.d. i, ii and iii.

Question 8:Which of the following is not an example of a capital investment?

a. The acquisition of another company.b. Building a plant.c. The collection of accounts receivable.d. Purchasing equipment.

Question 9:Of the following EOQ model assumptions, the most limiting is:

a. uniform demand.b. constant unit price.c. constant ordering costs.d. independent orders.

Question 10:Keynes segmented a firms demand for cash into the following motives:

a. risk, investment and liquidity.b. transaction, speculative and precautionary.c. transaction, liquidity and speculative.d. transaction, speculative and risky.

Question 11:Arguments against the net present value and internal rate of return methods include that:

a. they fail to use accounting profits.b. they require detailed long-term forecasts of the incremental benefits and costs.c. they fail to consider how the investment project is to be financed.d. they fail to use the cash flows of the project.

Question 12:Salvage value would most likely not be considered by:

a. net present value.b. internal rate of return.c. payback period.d. a and b.



Question 13:If the net present value (NPV) of a project is positive, the projects internal rate of return (IRR)______________ the required rate of return.

a. must be less thanb. must be greater thanc. could be greater or less thand. cannot be determined without actual cash flows

Question 14:If a firm relies on short-term debt or current liabilities in financing its asset investments, and allother things remain the same, what can be said about the firms liquidity?

a. The firm will be relatively more liquid.b. The firm will be relatively less liquid.c. The liquidity of the firm will be unchanged.d. No firm would do such thing.

Question 15:With regard to the hedging principle, which of the following assets should be financed withpermanent sources of financing?

i. Minimum level of accounts receivable required year roundii. Machinery.iii. Minimum level of cash required for year round operationsiv. Expansion of inventory to meet seasonal demands.

a. ii only.b. iv only.c. ii and iv.d. i, ii and III.

Question 16:Which of the following is not one of the guiding principles by which financial managers shouldassess the pros and cons of the various capital-budgeting criteria:

a. They should ensure that the criteria are consistent with the goal of maximizingshareholders wealth.

b. They should allow for the time value of money.c. They should reply on accounting profits rather than cash flows to measure a

projects costs and benefits.d. They should be able to account for the risks of projects.

Question 17:Ordering costs of inventory include all of the following except:

a. quantity discounts.b. production set-up costs.c. storage costs.d. shipping and handling costs.



Question 18:The operating cycle has two components. They are the:

i. accounts receivable period and accounts payable period.ii. cash cycle and accounts receivable.iii. inventory period and cash cycle.iv. inventory period and accounts payable.v. none of the above.

a. i and ii.b. i and iii.c. ii and iii.d. only V.

Question 19:For the net present value (NPV) criterion, a project is acceptable if NPV is ___________, whilefor the profitability index (PI), a project is acceptable if PI is _____________.

a. less than zero; greater than the required return.b. greater than zero; greater than one.c. greater than one; greater than zero.d. greater than zero; less than one.

Question 20:The easing of a firms credit policy can lead to:

a. a decrease in sales and gross profits from customers.b. additional funds being tied up in accounts receivable and inventory.c. a decrease in bad debts.d. lower costs from customer taking a cash discount.

Question 21:What will happen to the share price if the constant growth rate exceeds the discount rate?

a. Share price becomes zero.b. Share price would become negative.c. Share price cannot be calculated.d. Share price is infinitely large.

Question 22:Which of the following dividend policies will cause dividends per share to fluctuate the most?

a. Constant dividend payout ratio.b. Stable dollar dividend.c. Small, low, regular dividend plus a year-end extra.d. No difference between the various dividend policies.



Question 23:A dividend increase that is less than expected by investors would result in:

a. an increase in share price.b. an decrease in share price.c. no change in share price.d. a reduction in the cost of ordinary equity.

Question 24:Dividend policy is influenced by:

a. a companys investment opportunities.b. a firms capital structure mix.c. a companys availability of internally generated funds.d. all of the above.

Question 25:If the risk associated with an investment is greater than the risk involved in a typical endeavour,the discount rate should be:

a. adjusted upward to compensate for the added risk.b. adjusted downward to compensate for the added risk.c. not changed from the firms discount rate, regardless of the level of the risk.d. changed to reflect the risk associated with other firms who have undertaken

similar investments.

Question 26:For a company, the cost of capital is:

a. the minimum rate that it must earn on investment projects in order to satisfy itsinvestors.

b. the maximum return that the firm can earn given its financing structure.c. the maximum discount rate that can be used to evaluate capital budgeting

proposals.d. the minimum return that must be earned on any equity investments.

Question 27:If the firm earned exactly its cost of capital on an investment project, it would be expected thatthe price of its ordinary shares would:

a. increase following the acceptance of the project.b. decrease following the acceptance of the project.c. increase only if the project was not accepted.d. remain unchanged following the acceptance of the project.

Question 28:A firms cost of capital is influence by:

a. the risk-free rate.b. business risk.c. financial risk.d. all of the above.



Question 29:The discount rate used for making capital budgeting decisions should never be:

a. the firms cost of capital.b. the cost of a single source of financing.c. the firms required rate of return.d. a hurdle rate for new investments.

Question 30:It is a mathematical fact that the covariance of an asset with itself:

a. is the variance of the market.b. is the covariance of the market.c. is the variance of the expected return.d. is the variance of the asset.

Question 31:If the firm departs from its existing capital structure for all future investment projects, then thefirm must _______________.

a. recomputed the cost of capital.b. adopt new target capital-structure weights.c. a and b.d. use the current cost of capital.

Question 32:Which of the following activities will increase financial risk?

a. Decreasing dividends.b. Increasing ordinary shares.c. Increasing debt.d. Both a and c.

Question 33:Increased depreciation expenses affect tax-related cash flows by:

a. increasing taxable income, thus increasing taxes.b. decreasing taxable income, thus reducing taxes.c. decreasing taxable income , with no effect on cash flow since depreciation is a

non-cash expense.d. none of the above.

Question 34:Working capital requirements are considered an incremental cash flow for the purposes ofproject evaluation. Which of the following represents a typical form of working capital?

a. Increased use of accounts payable.b. The re-engineering of a production facility.c. The testing of a particular machine prior to purchase.d. Sales captured from competitors.



Question 35:If the firms current business consists of a single activity and if the new capital budgeting projectis deemed to be a continuation of that activity and faces the same operating and financial risks,the current investors required rate of return:

a. is too high to be used in the assessment of the risk of the firms new project.b. is too low to be used in the assessment of the risk of the firms new project.c. incorporates an appropriate assessment of the risk of the firms new project.d. is totally unrelated to the risk factor that must be used when evaluating the firms

new project.

Question 36:When considering the effect of inflation on capital budgeting decisions, if inflation is to increase:

a. cash inflows will increase and cash outflows will decrease.b. the salvage value of the project will not be affected.c. the required rate of return on the project will rise.d. there will be no impact on the net present value of the project.

Question 37:Of all the capital-budgeting criteria, _______________ is the only one that provides a directestimate of the addition to owner or shareholders wealth.

a. internal rate of return.b. payback period.c. profitability index.d. net present value.

Question 38:Inaccurate estimations of cash flow projections originate from a number of different sources.The most significant of these arise from:

a. unbiased overestimation of cash inflows and underestimation of cash outflowsb. unbiased underestimation of cash inflows and overestimation of cash outflowsc. unintentionally biased overestimation of cash inflows and unintentionally biased

underestimation of cash outflowsd. unintentionally biased underestimation of cash inflows and unintentionally biased

overestimation of cash outflows

Question 39:Which of the following is not considered a relevant factor in estimating the incremental cashflows of a proposed capital project?

a. pre-startup expendituresb. financing costsc. incremental working capital requirementsd. taxes on incremental expenses and earnings



Question 40:To evaluate a proposed capital project effectively, it is important to understand the fundamentalconcept of incremental cash flows. Incremental cash flows would be viewed as cash flows:

a. in addition to the company's normal businessb. separate from the company's normal businessc. occurring only if the project is undertakend. all of the above

Question 41:Certain expenditures associated with a project should not be included in capital budgeting cashflows. Such expenditures, referred to as sunk costs, include:

a. an appropriate cost of any resource that will be given up and used for anotherpurpose

b. a costly market study previously undertaken to determine whether the capitalproject should be undertaken

c. both a and bd. either a or b

Question 42:When cash flow estimation is concerned only with the value of projects, irrespective of how thecash flows are financed:

a. interest expense incurred to finance the cash flows is always considered in thecash flow estimates

b. interest expense is considered in the cash flow estimates only if the financing isprincipally from debt

c. interest expense is never considered in the cash flow estimatesd. none of the above

Question 43:Which of the following best describes trade credit?

a. Short-term credit supplied to other businesses.b. Credit extended to individuals through credit cards.c. Credit extended to individuals in the ordinary course of business.d. Credit extended to customers without a formal debt contract.

Question 44:The cost of capital for a project would be the same as the cost of capital for the firm if:

a. the company was financed solely by equity.b. all the companys projects had the same beta.c. the beta of the companys assets was the same as that for the project.d. all of the above.



Question 45:Which of the following is a consequence of holding insufficient levels of inventory?

a. Potentially lost sales.b. Frequent reordering.c. Increased shipping costs.d. All of the above.

Question 46:The constant chain of replacement makes which of the following assumptions regarding projectreplacement?

a. Projects are replaced with a zero NPV project.b. Projects are replaced with an identical project.c. Projects are replaced with a zero IRR project.d. Projects are replaced up to a common life between the two projects.

Question 47:The economic order quantity refers to the:

a. quantity of inventory on hand that minimises the total cost of inventory.b. inventory order quantity that minimises the total cost of inventory.c. optimum time period between the placement of orders.d. quantity of inventory on hand that minimises stockout costs.

Question 48:What are sunk costs?

a. Costs associated with research and development.b. Costs associated with exploration.c. Costs that are past outlays that should not influence the decision to continue or

terminate a project.d. Costs associated with negative net present value projects.

Question 49:Which of the following statements is correct?

a. A large portfolio of randomly selected stocks will always have a standarddeviation of returns that is less than the standard deviation of a portfolio withfewer stocks, regardless of how the stocks in the smaller portfolio are selected.

b. Diversifiable risk can be reduced by forming a large portfolio, but normally evenhighly-diversified portfolios are subject to market (or systematic) risk.

c. A large portfolio of randomly selected stocks will have a standard deviation ofreturns that is greater than the standard deviation of a 1-stock portfolio if that onestock has a beta less than 1.0.

d. If you add enough randomly selected stocks to a portfolio, you can completelyeliminate all of the market risk from the portfolio.



Question 50:Firms generally choose to finance temporary current operating assets with short-term debtbecause

a. matching the maturities of assets and liabilities reduces risk under somecircumstances, and also because short-term debt is often less expensive thanlong-term capital.

b. short-term interest rates have traditionally been more stable than long-terminterest rates.

c. a firm that borrows heavily on a long-term basis is more apt to be unable to repaythe debt than a firm that borrows short term.

d. the yield curve is normally downward sloping.e. short-term debt has a higher cost than equity capital.

cf_tj2014_revisionmcq_soln.pdf

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