Financial Management

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

  1. profit margin
  2. quick ratio
  3. times interest earned
  4. debt to total assets
Correct answer: (D)
debt to total assets

102. In preparing the pro forma balance sheet, all of the following will normally remain unchanged from the prior period except:

  1. accounts receivable
  2. marketable securities
  3. long term debt
  4. common stock
Correct answer: (A)
accounts receivable

103. The conservative firm will utilize:

  1. a high degree of operating leverage
  2. a low degree of operating leverage
  3. high fixed costs
  4. a higher profit margin
Correct answer: (B)
a low degree of operating leverage

104. The degree of financial leverage may be defined as:

  1. percent change in sales/percent change in volume
  2. percent change in EPS/percent change in net income
  3. percent change in EPS/percent change in EBIT
  4. percent change in EPS/percent change in sales
Correct answer: (C)
percent change in EPS/percent change in EBIT

105. To enhance overall operating results, a firm should prudently use which of the following:

  1. operating leverage
  2. financial leverage
  3. combined leverage
  4. conservative leverage
Correct answer: (C)
combined leverage

106. A major advantage of using short term funds is:

  1. there is no advantage
  2. there are always more easily obtained
  3. there are no governmental procedures with which to comply
  4. interest rates are normally lower
Correct answer: (D)
interest rates are normally lower

107. A collection center:

  1. involves using geographically disbursed centers to collect from non-paying customers
  2. utilizes local banks to clear local payments made to the collection center
  3. is lower in cost to the firm than a lockbox system
  4. results in checks being forwarded to a P.O. box and clearing through local bank branches
Correct answer: (B)
utilizes local banks to clear local payments made to the collection center

108. In monitoring collection policy, the firm should look at all of the following, except:

  1. average collection period
  2. ratio of bad debts to credit sales
  3. aging of accounts receivable
  4. terms of credit
Correct answer: (D)
terms of credit

109. In return for providing loans and other services, banks may require that business customers maintain

  1. a specified profit margin
  2. a compensating balance
  3. a sinking fund
  4. a specified growth rate
Correct answer: (B)
a compensating balance

110. Characteristics of pledging accounts receivable include all of the following, except:

  1. the sale of receivables to a finance company
  2. the lender stipulates which accounts are of sufficient quality
  3. 60-80% of the value of the acceptable collateral may be borrowed
  4. the interest rate is normally well in excess of prime
Correct answer: (A)
the sale of receivables to a finance company
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