Reference no: EM1317400

Objective type questions on cost of capital and capital structure

1.   The mixture of debt and equity which a firm uses to finance its operations is called:

1. Working capital management.
2. Financial depreciation.
3. Agency cost analysis.
4. Capital budgeting.
5. Capital structure.

2.   The management of the firm's current assets and liabilities is called:

1. Working capital management.
2. Financial depreciation.
3. Agency cost analysis.
4. Capital budgeting.
5. Capital structure.

3. Which one of the following means of management compensation is designed to help eliminate the agency problem?

1. Providing cost of living adjustments
2. Increasing health care benefits
3. Stock options
4. Providing annual raises
5. Providing a corporate jet

4.   Which of the following assets would most likely be considered the least liquid?

1. A share of common stock in Enbridge
2. A bond issued by Corel
3. A share of preferred stock in Sears Canada
4. A Lethbridge, Alberta municipal bond
5. A Canadian Treasury bill

5.   For which of the following balance sheet items will the book value and market value most likely be closest?

1. Net fixed assets
2. Common stock
3. Accounts receivable
4. Long-term debt
5. Retained earnings

6.   If operating cash flow is negative, then __________________.

1. the firm is bankrupt
2. the firm can pay no dividends
3. cash flow to bondholders must be negative
4. cash flow to stockholders must be positive
5. cash flow from assets may be positive

7.   Which of the following would usually be true?

1. If a current asset account and a current liability account both increase by the same amount, there is a net use of funds.
2. If net fixed assets decrease by the amount of depreciation for the year, there is a net use of funds.
3. Changes in income and expense accounts do not affect sources and uses of funds.
4. If a liability account increases and an asset account decreases by the same amount, there is a net source of funds.
5. If the common stock outstanding increases there is a use of funds

8.   Problems with financial statement analysis include all of the following EXCEPT:

1. Many firms are conglomerates whose combined operations don't fit any neat industry classification.
2. The financial statements of firms outside US and Canada do not necessarily conform to GAAP, making it difficult to compare them to US and Canadian firms.
3. Firms may use different accounting procedures for inventory, making it difficult to compare them using standard financial ratios.
4. If two firms with seasonal operations end their fiscal years at different times, their financial statements may be difficult to compare.
5. Financial statements have little value since they cannot be used to calculate a firm's tax liability.

9. Return on equity will increase if the _________________.

1. profit margin decreases
2. return on assets increases
3. debt-equity ratio decreases
4. accounts receivable turnover increases
5. total asset turnover decreases

10.   A financial plan should contain ______________ which provide a model of the firm's asset structure for the years to come.

1. pro forma sales forecasts
2. pro forma income statements
3. pro forma financial requirements
4. pro forma balance sheets
5. common-size balance sheets