Multiple choice questions on basic accounts, leverage and financial instruments.

1. As mergers, acquisitions, and restructuring have increased in importance in the 1980s, agency theory has become more important in assessing whether

a.      a stock repurchase should be undertaken.

b.      shareholder goals are truly being achieved by managers in the long run.

c.       managers are actually agents or only employees of the firm.

d.      managers and owners are actually the same people with the same interests.

2. A rapid rate of growth in sales and profits may require

a.      higher dividend payments to shareholders.

b.      increased borrowing by the firm to support the sales increase.

c.       the firm to be more lenient with credit customers.

d.      sales forecasts to be made less frequently.

3. A conservative financing plan involves

a.      heavy reliance on debt.

b.      heavy reliance on equity.

c.       high degree of financial leverage.

d.      high degree of combined leverage.

4. Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return for Plan A over Plan B?

a.      $28,800

b.      $4,000

c.       $4,800

d.      $35,200

5. In general, the larger the portion of a firm's sales that are on credit, the

a.      lower will be the firm's need to borrow.

b.      higher will be the firm's need to borrow.

c.       more rapidly credit sales will be paid off.

d.      more the firm can buy raw materials on credit.

6. Which of the following techniques allows explicit consideration of more than one possible outcome?

a.      Operating leverage

b.      Present value

c.       Least-squares regression

d.      Expected value

7. Risk exposure due to heavy short-term borrowing can be compensated for by

a.      carrying highly liquid assets.

b.      carrying illiquid assets.

c.       carrying longer term, more profitable current assets.

d.      carrying more receivables to increase cash flow.

8. What is generally the largest source of short-term credit small firms?

a.      Bank loans

b.      Commercial paper

c.       Installment loans

d.      Trade credit

9. The extent to which inventory financing may be used depends on

a.      marketability of pledged goods.

b.      price stability of goods.

c.       perishability of goods.

d.      all of the above

10. Assuming a tax rate of 45%, the after-tax cost of interest expense of $200,000 is

a.      $110,000

b.      $140,000

c.       $200,000

d.      $90,000