Sample Questions and Answers
1. Which of the following is the primary goal of financial management?
A) Maximize profits
B) Maximize shareholder wealth
C) Minimize costs
D) Minimize taxes
Answer: B) Maximize shareholder wealth
2. The primary market is where securities are:
A) Bought and sold by investors
B) Created for the first time
C) Traded by the government
D) Managed by investment banks
Answer: B) Created for the first time
3. A firm’s capital structure refers to the mix of:
A) Equity and debt financing
B) Short-term and long-term investments
C) Current and fixed assets
D) Current liabilities and fixed liabilities
Answer: A) Equity and debt financing
4. Which of the following is an example of a long-term liability?
A) Accounts payable
B) Bonds payable
C) Wages payable
D) Notes payable due in 3 months
Answer: B) Bonds payable
5. Which of the following is NOT a component of working capital?
A) Cash
B) Accounts receivable
C) Fixed assets
D) Inventory
Answer: C) Fixed assets
6. The weighted average cost of capital (WACC) is used to:
A) Determine the cost of equity only
B) Evaluate the profitability of new projects
C) Measure the firm’s financial leverage
D) Calculate the cost of capital for all projects
Answer: B) Evaluate the profitability of new projects
7. Which of the following is a characteristic of preferred stock?
A) Voting rights
B) Guaranteed dividends
C) Maturity date
D) Fixed dividend rate
Answer: D) Fixed dividend rate
8. The price-earnings (P/E) ratio is used to measure:
A) The return on equity
B) The market value of a firm’s equity
C) The firm’s earnings relative to its stock price
D) The firm’s debt relative to its equity
Answer: C) The firm’s earnings relative to its stock price
9. Which of the following best describes the risk-return trade-off?
A) The higher the risk, the lower the potential return
B) The higher the risk, the higher the potential return
C) The lower the risk, the lower the potential return
D) There is no correlation between risk and return
Answer: B) The higher the risk, the higher the potential return
10. Which of the following is a function of the capital budgeting process?
A) Deciding how to allocate profits
B) Determining the optimal debt-to-equity ratio
C) Evaluating long-term investment projects
D) Managing day-to-day expenses
Answer: C) Evaluating long-term investment projects
11. The internal rate of return (IRR) is the discount rate that makes the:
A) Net present value (NPV) equal to zero
B) Cash flows equal to the initial investment
C) Investment profitable
D) Firm’s profitability maximized
Answer: A) Net present value (NPV) equal to zero
12. Which of the following is the most accurate method for estimating the cost of equity?
A) Dividend discount model
B) Capital asset pricing model (CAPM)
C) Cost of debt model
D) Internal rate of return
Answer: B) Capital asset pricing model (CAPM)
13. Which of the following is an example of a project with high operating leverage?
A) A firm with few fixed costs
B) A firm with many fixed costs relative to variable costs
C) A firm with fluctuating sales
D) A firm with low debt
Answer: B) A firm with many fixed costs relative to variable costs
14. Which of the following best describes a bond’s yield to maturity (YTM)?
A) The annual interest rate paid on a bond
B) The total return anticipated on a bond if held until maturity
C) The price of the bond relative to its face value
D) The coupon rate of a bond
Answer: B) The total return anticipated on a bond if held until maturity
15. Which of the following would be a consequence of a firm using too much debt financing?
A) Increased financial risk
B) Lower interest expenses
C) Reduced cost of capital
D) Increased shareholder equity
Answer: A) Increased financial risk
16. The quick ratio is a measure of:
A) A firm’s ability to pay its short-term liabilities with its most liquid assets
B) The long-term solvency of the firm
C) The firm’s profitability
D) The firm’s efficiency in utilizing its inventory
Answer: A) A firm’s ability to pay its short-term liabilities with its most liquid assets
17. Which of the following is a non-cash expense that is included in the operating activities section of the statement of cash flows?
A) Depreciation
B) Interest payments
C) Dividends paid
D) Capital expenditures
Answer: A) Depreciation
18. A firm’s cost of debt is typically:
A) Lower than its cost of equity
B) Higher than its cost of equity
C) Equal to its cost of equity
D) Unrelated to its capital structure
Answer: A) Lower than its cost of equity
19. Which of the following is most likely to be an example of systematic risk?
A) A company’s decision to increase its dividend
B) A change in the overall interest rate environment
C) A firm’s management team being replaced
D) A firm’s product recall
Answer: B) A change in the overall interest rate environment
20. Which of the following is an advantage of using debt financing?
A) It reduces the firm’s financial risk
B) It avoids interest payments
C) It allows the firm to retain full control over the company
D) Interest payments are tax-deductible
Answer: D) Interest payments are tax-deductible
21. What does the term “capital budgeting” refer to?
A) Managing day-to-day operations
B) Allocating funds for the purchase of fixed assets
C) Deciding how to distribute profits to shareholders
D) Planning the firm’s capital structure
Answer: B) Allocating funds for the purchase of fixed assets
22. Which of the following would most likely reduce a firm’s risk exposure?
A) Increasing the debt ratio
B) Diversifying investments across industries
C) Reducing the dividend payout ratio
D) Increasing the number of equity shareholders
Answer: B) Diversifying investments across industries
23. The market value of a firm is determined by:
A) Its historical cost of assets
B) Its book value
C) The present value of its expected future cash flows
D) Its income statement earnings
Answer: C) The present value of its expected future cash flows
24. Which of the following is considered a non-operating activity in the statement of cash flows?
A) Cash from sales
B) Cash from borrowing
C) Cash from product sales
D) Cash for paying salaries
Answer: B) Cash from borrowing
25. Which of the following best describes the dividend discount model (DDM)?
A) A model used to calculate the cost of debt
B) A model for estimating the price of a stock based on its dividends
C) A model used to calculate the firm’s cost of equity
D) A model for forecasting future sales growth
Answer: B) A model for estimating the price of a stock based on its dividends
26. The dividend payout ratio is calculated as:
A) Dividends per share / Earnings per share
B) Earnings per share / Dividends per share
C) Total dividends / Net income
D) Net income / Total dividends
Answer: A) Dividends per share / Earnings per share
27. Which of the following statements is TRUE regarding the time value of money?
A) A dollar received today is worth more than a dollar received in the future
B) A dollar received in the future is worth more than a dollar received today
C) Time has no effect on the value of money
D) Time value of money applies only to long-term investments
Answer: A) A dollar received today is worth more than a dollar received in the future
28. Which of the following is true about a firm’s balance sheet?
A) It provides a snapshot of the firm’s financial performance over a period of time
B) It lists the firm’s assets, liabilities, and shareholders’ equity as of a specific date
C) It is only useful for internal management
D) It does not include non-current assets
Answer: B) It lists the firm’s assets, liabilities, and shareholders’ equity as of a specific date
29. Which of the following would be considered a disadvantage of debt financing?
A) It lowers the cost of capital
B) It increases the firm’s financial risk
C) It provides tax-deductible interest payments
D) It gives shareholders more control
Answer: B) It increases the firm’s financial risk
30. The capital asset pricing model (CAPM) is used to:
A) Estimate the risk of a specific investment
B) Determine the cost of equity
C) Calculate the risk-free rate of return
D) Evaluate a firm’s capital structure
Answer: B) Determine the cost of equity
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