MSc Operational Research, Course 305(ii), financial Management

Time: 1 hour

Marks: 30
(All question carry equal marks)
Mark the right answer by changing the font type to bold

1. The long-run objective of financial management is to:

a)
b)
c)
d)

maximize earnings per share.

maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.

2. Which of the following enjoys limited liability?

a)
b)
c)
d)

A general partnership.
A corporation.
A sole proprietorship.
None of the above.

3. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams
should you prefer?
Year1 Year2 Year3 Year4
a) $400
$300
$200
$100
b) $100
$200
$300
$400
c) $250
$250
$250
$250
d) Any of the above, since they each sum to $1,000.
4. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan
agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years.
(Payments include both principal and interest.) The annual payment that will fully pay off
(amortize) the loan is closest to
a)
b)
c)
d)

$2,674.
$2,890.
$3,741.
$4,020.

5. If a bond sells at a high premium, then which of the following relationships hold true? (P0
represents the price of a bond and YTM is the bond's yield to maturity.)
a)
b)
c)
d)

P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.

6. Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently
selling at $100 per share. What is the market's required return on this investment if the
dividend is expected to grow at 5% forever?
a)
b)
c)
d)

4 percent.
5 percent.
7 percent.
9 percent.

7. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total
assets are $8 million, and ROI is 8 percent.
a)
b)
c)
d)

1.60
2.05
2.50
4.00

8. Felton Farm Supplies, Inc. has an 8 percent return on total assets of $300,000 and a net profit
margin of 5 percent. What are its sales?
a)
b)
c)
d)

$3,750,000
$480,000
$300,000
$1,500,000

9. Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its
average collection period was 36 days, its ending accounts receivable balance is closest to
. (Assume a 365-day year.)
a)
b)
c)
d)

$26.1 million
$23.7 million
$7.4 million
$18.7 million

10. Which of the following statements (in general) is correct?

a)
b)
c)
d)

A low receivables turnover is desirable.

The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
An increase in net profit margin with no change in sales or assets means a poor ROI.
The higher the tax rate for a firm, the lower the interest coverage ratio.

11. During the latest year Ruth Corp. had sales of $300,000 and a net income of $20,000, and its yearend assets were $200,000. The firm's total debt to total assets ratio was 40 percent. Based on the Du
Pont equation, what was the firm's ROE?
a)
b)
c)
d)
e)

15.33%
16.33%
15.67%
16.67%
None of the above; the correct answer is

12. Given the following information: Cash 29,000, Accounts Receivable $114,000, Inventory
$113,000, Prepaid Expenses $6,000, Total capital assets $525,000, Total current liabilities
$142,000, Long-term debt $289,000, Total shareholders' equity $356,000' Net sales
$858,000, Cost of goods sold $513,000, Gross Margin $345,000, Net income $48,000. The
acid test ratio is:
a)
b)
c)
d)

55%
75%
1.85
1.01

13. A company has $15,000 cash at the beginning of June and anticipates $50,000 in cash
receipts and $34,500 in cash disbursements. Company requires a minimum cash balance of
$10,000 and maintains no more than $20,000 on hand. Any excess cash over the maximum is
used to pay down debts. The firm has an agreement with its bank to borrow as needed or
repay loans as funds become available. As of May 31, the company owes $15,000 to the
bank. The balance of the loan on June 30 will be?
a)
b)
c)
d)
e)

$ 4,500.
$ 9,500.
$15,000.
$19,500.
None of the above. The firm's expected loan balance on June 30 is $ ___________.

14. Profitability ratios measure:

a)
b)
c)
d)

the speed at which the firm is turning over its assets

the ability of the firm to earn an adequate return on sales, total assets, and invested capital
the firm's ability to pay off short term obligations as they are due
the debt position of the firm in light of its assets and earning power

15. To the bondholder, the most important ratio is:

a) profit margin
b) quick ratio
c) times interest earned
d) debt to total assets