Multiple Choice Answers


Question 1
Working capital management is primarily concerned with the management and financing of:
A. cash and inventory.
B. current assets and current liabilities.
C. current assets.
D. receivables and payables.

Question 2
Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
A. No external financing is required.
B. $100,000
C. $200,000
D. $300,000

Question 3
Retail companies like Target and Limited Brands are more likely to have:
A. stable sales and earnings per share.
B. cyclical sales but less volatile earnings per share.
C. cyclical sales and more volatile earnings per share.
D. cyclical sales but stable accounts receivable and inventory.

Question 4
The term structure of interest rates:
A. changes daily to reflect current competitive conditions in the money and capital markets.
B. plots returns for securities of different risk.
C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc.
D. depicts interest rates for T-bills over the last year.

Question 5
A “normal” term structure of interest rates would depict:
A. short-term rates higher than long-term rates.
B. long-term rates higher than short-term rates.
C. no general relationship between short- and long-term rates.
D. medium rates (1-5 years) lower than both short-term and long-term rates.

Question 6
Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A. Illiquid assets and heavy short-term borrowing
B. Illiquid assets and heavy long-term borrowing
C. Liquid assets and heavy long-term borrowing
D. Liquid assets and heavy short-term borrowing

Question 7
Genetech has $2,000,000 in assets, have decided to finance 30% with long-term financing (13% rate) and 70% with short-term financing (9%) rate. What will be their annual interest costs?
A. $78,000
B. $126,000
C. $440,000
D. $204,000

Question 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

Question 9
The cost of not taking the discount on trade credit of 2/20, net 60 is equal to:
A. 18.36%.
B. 16.32%.
C. 18.00%.
D. 17.41%

Question 10
A. a resource used in production.
B. an interest rate paid on Eurodollar loans in the London market.
C. an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks.
D. the interest rate paid by the British government on its long-term bonds.

Question 11
In determining the cost of bank financing, which is the important factor?
A. Prime rate
B. Nominal rate
C. Effective rate
D. Discount rate

Question 12
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.
A. 11.18%
B. 19.00%
C. 22.35%
D. 8.08%

Question 13
Which of the following is the largest category of asset-backed securities?
A. Student Loans
B. Automobile Loans
C. Home Equity Loans
D. Manufactured Housing Loans

Question 14
What is the effective rate on an $10,000 installment loan with bi-monthly payments, $1,600 in interest, for 2 years?
A. 16%
B. 7.4%
C. 29.5%
D. 14.8%

Question 15
During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from:
A. Russia’s difficulty in transforming its economy into a capitalistic one.
B. Japan’s prolonged recession and banking crisis.
C. the Euro-zone countries comprising the European Monetary Union and a single currency.
D. the huge Chinese economy and its billion plus people.

Question 16
In general when interest rates are expected to rise, financial managers:
A. try to lock in long-term financing at low cost.
B. balance the company’s debt structure with more short-term debt and less long-term debt.
C. accept more risk.
D. rely more on internal sources of funds rather than external sources.

Question 17
The major supplier of funds for investment in the whole economy is:
A. businesses.
B. households.
C. government.
D. financial institutions.

Question 18
What type of trading accounts for over 90% of stocks traded on the Chicago and Pacific regional exchanges?
A. Dealer Trading
B. Dual Trading
C. Options Trading
D. None of the above

Question 19
The Securities Act of 1933 is primarily concerned with:
A. original issues of securities.
B. secondary trading of securities.
C. national securities market.
D. protecting customers of bankrupt securities firms.

Question 20
Financial intermediaries include all of the following EXCEPT:
A. commercial banks.
B. life insurance companies.
C. corporations.
D. pension plans.