Financial Management

51. On the pro forma income statement, the increase in retained earnings is derived:

  1. earnings before taxes - taxes
  2. earnings aftertaxes - dividends
  3. operating profit - taxes
  4. operating profit - dividends
Correct answer: (B)
earnings aftertaxes - dividends

52. Most break-even analysis:

  1. is conducted on the basis of cash flows
  2. is theoretical only and has little impact on the firm
  3. excludes fixed costs
  4. is done on the basis of accounting flows
Correct answer: (D)
is done on the basis of accounting flows

53. The indifference point identifies:

  1. equality of impact on eps between two financing plans
  2. equality of impact on EBIT between two financing plans
  3. equality of impact on revenue between two financing plans
  4. equality of impact on number of shares between two financing plans
Correct answer: (A)
equality of impact on eps between two financing plans

54. The key to current asset planning is:

  1. ensuring that the firm remains current on its obligation
  2. maintaining an inventory surplus to ensure liquidity
  3. forecasting sales accurately and matching production with the forecast
  4. maintaining the proper rate of asset growth
Correct answer: (C)
forecasting sales accurately and matching production with the forecast

55. Which of the following would not be important in examining the firm's build-up of accounts receivable/cash/current assets:

  1. sales forecast
  2. cash receipts and cash payments schedules
  3. income statement
  4. a brief cash budget
Correct answer: (C)
income statement

56. An inverted yield curve often foreshadows:

  1. an inflationary period
  2. a recessionary period
  3. a large government bond issue
  4. nothing at all
Correct answer: (B)
a recessionary period

57. If a firm has an average daily, remittance of $4,000,000 and 1.5 days in the collection process may be saved through a lockbox system, has the firm freed up any real funds for other investment?

  1. No, these funds are theoretical in nature only
  2. Yes, approximately $2,666,667 has been freed up
  3. Yes, approximately $6,000,000 has been freed up
  4. Cannot be determined from information provided
Correct answer: (C)
Yes, approximately $6,000,000 has been freed up

58. The level of accounts receivable for the firm:

  1. should be judged based on historical standards of industry norms
  2. should be judged as to whether the return earned on A/R equals or exceeds the potential gain from other investments
  3. is irrelevant as long as sales are increasing
  4. is not the concern of the financial manager
Correct answer: (B)
should be judged as to whether the return earned on A/R equals or exceeds the potential gain from other investments

59. The net credit position of the firm is defined as:

  1. its credit rating
  2. the extent to which the firm has utilized its credit line
  3. the difference between short and long term debt
  4. the difference between accounts receivable and accounts payable
Correct answer: (D)
the difference between accounts receivable and accounts payable

60. The major disadvantage of commercial paper is:

  1. the continued availability of funds is less certain than with bank financing
  2. that there is no secondary market for commercial paper
  3. firms must maintain an account balance equal to the paper outstanding
  4. commercial paper is normally issued with a floating interest rate
Correct answer: (A)
the continued availability of funds is less certain than with bank financing
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