1. Financial management is concerned with which of the following?
a. Creating economic wealth
b. Making investment decisions that optimize economic value
c. Making business decisions that optimize economic wealth
d. Raising capital that is needed for growth
e. All of the above
2. Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:
a. a secondary market transaction.
b. an initial public offering.
c. a seasoned new issue.
d. both a and b.
An IPO is the process companies take when there are listing on an exchange for the first time.
3. Which of the following transactions does not affect the quick ratio?
a. Land held for investment is sold for cash.
b. Equipment is purchased and is financed by a long-term debt issue.
c. Inventories are sold for cash.
d. Inventories are sold on a credit basis.
The quick ratio is a test of how much coverage, a firms current assets gives over its current liabilities. The relationship is expressed as Current Assets/Current Liabilities. Inventories and cash are part of current assets. Any changes would affect the ratio.
4. Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith’s acid-test ratio?
The acid-test ratio is similar to the quick ratio in many regards. However, the ratio looks at only the” liquid” assets. Liquidity is a measure of how quick an asset can be transformed into cash. Quick Ratio = (Current assets – Inventory)/Current Liabilities. Current liabilities will be given by $11400/2.6=$4385. the quick ratio will then be (114000 – 4000)/4385 =
5. Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.
Average debtors collection period = Average debtors/Sales * 360 = 74. Accounts receivable turnover = average debtors/sales.
6. Organized security exchanges provide which of the following benefits?
a. A continuous market
b. Established and publicized fair security prices
c. Help businesses raise new capital
d. All of the above
An example of an organized security exchange is the New York Stock exchange (NYSE), London Stock Exchange. These exchanges are regulated by the Security Exchange commission and have all the characteristics listed above.
7. Which of the following is NOT a basic function of a budget?
a. Budgets indicate the need for future financing.
b. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
c. Budgets compare historical costs of the firm with its current cost performance.
d. Budgets allow for performance evaluation.
8. The preparation of a cash budget serves which of the following purposes?
a. To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm’s common stock
b. To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period
c. To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period
d. To estimate the amount of sales volume that would be required in order to achieve the break-even point
A cash budget is a financial estimate of future actions. The creation, of a cash budget, involves the identification of all inflows and outflows. Once this has been matched, the financing requirements can then be estimated. Financing requirements show how much a company must borrow in order to continue its operations.
9. The first step involved in predicting financing needs is:
a. projecting the firm’s sales revenues and expenses over the planning period.
b. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
d. none of the above.
Financing needs are the amount a company must borrow in order not to be short of cash. To determine financing needed the company must first evaluate its inflows and outflows for adequacy.
10. What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
The formula for determining present value, with compounding is PV = FV/ (1+(r/t)) NT. N= the number of years, T= the number of compounding periods = 12, and r = 8.5%