MGT 201 Financial Management - 1

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Quizzes Created: 23 | Total Attempts: 31,746
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MGT Quizzes & Trivia

Financial Management


Questions and Answers
  • 1. 

    Who determine the market price of a share of common stock?

    • A. 

      The board of directors of the firm

    • B. 

      The stock exchange on which the stock is listed

    • C. 

      The president of the company

    • D. 

      Individuals buying and selling the stock

    Correct Answer
    D. Individuals buying and selling the stock
    Explanation
    The market price of a share of common stock is determined by individuals buying and selling the stock. The price is influenced by supply and demand in the market, as buyers and sellers negotiate and agree on a fair price for the stock. The board of directors, the stock exchange, and the president of the company do not directly determine the market price, although their actions and decisions may indirectly impact it.

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  • 2. 

    What should be the focal point of financial management in a firm

    • A. 

      The number and types of products or services provided by the firm

    • B. 

      The minimization of the amount of taxes paid by the firm

    • C. 

      The creation of value for shareholders

    • D. 

      The dollars profits earned by the firm

    Correct Answer
    C. The creation of value for shareholders
    Explanation
    The focal point of financial management in a firm should be the creation of value for shareholders. This means that the firm should prioritize actions and decisions that increase the value of the company's stock and returns for its shareholders. By focusing on creating value for shareholders, the firm can ensure long-term sustainability and growth, attracting more investors and maintaining a positive reputation in the market. This involves effective capital allocation, strategic planning, risk management, and maximizing the firm's profitability and cash flow.

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  • 3. 

    Which of the following would generally have unlimited liability?

    • A. 

      A limited partner in a partnership

    • B. 

      A shareholder in a corporation

    • C. 

      The owner of a sole proprietorship

    • D. 

      A member in a limited liability company (LLC)

    Correct Answer
    C. The owner of a sole proprietorship
    Explanation
    The owner of a sole proprietorship generally has unlimited liability. This means that the owner is personally responsible for all debts and liabilities of the business. Unlike a limited partner in a partnership or a shareholder in a corporation, the owner of a sole proprietorship does not have the protection of limited liability, which limits their personal liability to the amount of their investment in the business. In a sole proprietorship, the owner's personal assets can be used to satisfy business debts and obligations.

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  • 4. 

    Which of the following is equal to the average tax rate?

    • A. 

      Total tax liability divided by taxable income

    • B. 

      Rate that will be paid on the next dollar of taxable income

    • C. 

      Median marginal tax rate

    • D. 

      Percentage increase in taxable income from the previous period

    Correct Answer
    A. Total tax liability divided by taxable income
    Explanation
    The average tax rate is calculated by dividing the total tax liability by the taxable income. This rate represents the proportion of income that is paid in taxes. By dividing the total tax liability by the taxable income, we can determine the average tax rate for a given period.

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  • 5. 

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

    • A. 

      Rs.3, 750,000

    • B. 

      Rs.480, 000

    • C. 

      Rs.300, 000

    • D. 

      Rs.1, 500,000

    Correct Answer
    B. Rs.480, 000
    Explanation
    Since ROI=8% on $300,000 of assets, then net profit is Rs.24,000 (8% ×

    Rs.300,000). Using the net profit and given that the NPM=5%, sales equals

    Rs.480,000 (Rs.24,000 / 5%).

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  • 6. 

    Which of the following would not improve the current ratio?

    • A. 

      Borrow short term to finance additional fixed assets

    • B. 

      Issue long-term debt to buy inventory

    • C. 

      Sell common stock to reduce current liabilities

    • D. 

      Sell fixed assets to reduce accounts payable

    Correct Answer
    A. Borrow short term to finance additional fixed assets
    Explanation
    Borrowing short term to finance additional fixed assets would not improve the current ratio. The current ratio is a measure of a company's ability to pay its short-term liabilities with its short-term assets. By borrowing short term to finance additional fixed assets, the company would increase its liabilities without a corresponding increase in assets that can be easily converted to cash in the short term. This would result in a decrease in the current ratio, as the company's ability to meet its short-term obligations would be reduced.

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  • 7. 

    With continuous compounding at 8 percent for 20 years, what is the approximate future value of a Rs.20,000 initial investment?

    • A. 

      Rs.52,000

    • B. 

      Rs.93,219

    • C. 

      Rs.99,061

    • D. 

      Rs.915,240

    Correct Answer
    C. Rs.99,061
    Explanation
    Rs.20,000[ e(.08 × 20) ] = Rs.20,000(4.9530324) = Rs.99,061.

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  • 8. 

    In 2 years you are to receive Rs.10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.

    • A. 

      Fall

    • B. 

      Rise

    • C. 

      Remain unchanged

    • D. 

      Incomplete information

    Correct Answer
    B. Rise
    Explanation
    If the interest rate were to suddenly decrease, the present value of the future amount would rise. This is because a lower interest rate would make the future amount more valuable in today's terms. With a lower interest rate, the discount rate used to calculate the present value would be lower, resulting in a higher present value.

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  • 9. 

    Cash budgets are prepared from past:

    • A. 

      Balance sheets

    • B. 

      Income statements

    • C. 

      Income tax and depreciation data

    • D. 

      None of the given options

    Correct Answer
    D. None of the given options
    Explanation
    Cash budgets are not prepared from past balance sheets, income statements, income tax, or depreciation data. Cash budgets are forward-looking financial plans that project the inflows and outflows of cash for a specific period of time. They are typically based on sales forecasts, production plans, and other operational data. Therefore, none of the given options are correct.

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  • 10. 

    Which of the following is part of an examination of the sources and uses of funds?

    • A. 

      A forecasting technique

    • B. 

      A funds flow analysis

    • C. 

      A ratio analysis

    • D. 

      Calculations for preparing the balance sheet

    Correct Answer
    B. A funds flow analysis
    Explanation
    A funds flow analysis is a method used to examine the sources and uses of funds within a company. It involves analyzing the movement of funds over a specific period of time, tracking how funds are generated and where they are being allocated. This analysis helps to understand the financial health of a company, identify any cash flow issues, and make informed decisions about resource allocation. Therefore, a funds flow analysis is an essential part of examining the sources and uses of funds.

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  • 11. 

    An annuity due is always worth _____ a comparable annuity.

    • A. 

      Less than

    • B. 

      More than

    • C. 

      Equal to

    • D. 

      Can not be found

    Correct Answer
    B. More than
    Explanation
    An annuity due is always worth more than a comparable annuity because it has an additional payment at the beginning of each period, while a regular annuity has payments at the end of each period. The additional payment in an annuity due allows for more time for the money to earn interest, resulting in a higher value compared to a regular annuity.

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  • 12. 

    As interest rates go up, the present value of a stream of fixed cash flows _____.

    • A. 

      Goes down

    • B. 

      Goes up

    • C. 

      Stays the same

    • D. 

      Can not be found

    Correct Answer
    A. Goes down
    Explanation
    When interest rates go up, the present value of a stream of fixed cash flows goes down. This is because higher interest rates increase the discount rate used to calculate the present value of future cash flows. As a result, the value of each cash flow decreases, leading to a decrease in the overall present value of the stream of cash flows.

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  • 13. 

    ABC company is expected to generate Rs.125 million per year over the next three years in free cash flow. Assuming a discount rate of 10%, what is the present value of that cash flow stream?

    • A. 

      Rs.375 million

    • B. 

      Rs.338 million

    • C. 

      Rs.311 million

    • D. 

      Rs. 211 million

    Correct Answer
    C. Rs.311 million
    Explanation
    $311 million. The The cash flow stream would look like this: 125.00 x 0.9090 =
    113.63; 125.00 x 0.8264 = 103.30; 125.00 x 0.7513 = 93.91. The sum of the three is
    $310.84, or $311 million.

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  • 14. 

    If we were to increase ABC company cost of equity assumption, what would we expect to happen to the present value of all future cash flows?

    • A. 

      An increase

    • B. 

      A decrease

    • C. 

      No change

    • D. 

      Incomplete information

    Correct Answer
    B. A decrease
    Explanation
    If we were to increase ABC company's cost of equity assumption, we would expect the present value of all future cash flows to decrease. This is because an increase in the cost of equity assumption would result in a higher discount rate being applied to the future cash flows, reducing their present value. As a result, the overall value of the cash flows would decrease.

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  • 15. 

    In proper capital budgeting analysis we evaluate incremental __________ cash flows.

    • A. 

      Accounting

    • B. 

      Operating

    • C. 

      Before-tax

    • D. 

      Financing

    Correct Answer
    B. Operating
    Explanation
    In proper capital budgeting analysis, we evaluate incremental operating cash flows. This means that we focus on the cash flows directly related to the operations of the project or investment being considered. These cash flows include revenues, expenses, and taxes associated with the day-to-day operations of the business. By evaluating the operating cash flows, we can determine the profitability and viability of the project or investment.

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  • 16. 

    A capital budgeting technique through which discount rate equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow is known as:

    • A. 

      Payback period

    • B. 

      Internal rate of return

    • C. 

      Net present value

    • D. 

      Profitability index

    Correct Answer
    B. Internal rate of return
    Explanation
    Internal rate of return (IRR) is a capital budgeting technique that calculates the discount rate at which the present value of future net cash flows from an investment project is equal to the project's initial cash outflow. In other words, IRR is the rate of return that makes the net present value of the project zero. It is used to assess the profitability and feasibility of an investment project.

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  • 17. 

     Discounted cash flow methods provide a more objective basis for evaluating and selecting an investment project. These methods take into account:

    • A. 

      Magnitude of expected cash flows

    • B. 

      Timing of expected cash flows

    • C. 

      Both timing and magnitude of cash flows

    • D. 

      None of the given options

    Correct Answer
    C. Both timing and magnitude of cash flows
    Explanation
    Discounted cash flow methods consider both the timing and magnitude of expected cash flows when evaluating and selecting an investment project. By discounting the future cash flows to their present value, these methods provide a more objective basis for decision-making. This approach recognizes that the timing of cash flows can significantly impact the project's profitability, as well as the magnitude of the cash flows. Therefore, considering both factors allows for a more comprehensive analysis of the investment's potential.

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  • 18. 

    Which of the followings make the calculation of NPV difficult?

    • A. 

      Estimated cash flows

    • B. 

      Discount rate

    • C. 

      Anticipated life of the business

    • D. 

      All of the given options

    Correct Answer
    D. All of the given options
    Explanation
    All of the given options make the calculation of NPV difficult. Estimated cash flows are crucial in determining the net present value, as they represent the expected future cash inflows and outflows. The discount rate is also a key factor as it determines the present value of future cash flows. Lastly, the anticipated life of the business affects the time period over which the cash flows are discounted, which can significantly impact the NPV calculation. Therefore, all three options contribute to the complexity of calculating NPV.

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  • 19. 

    From which of the following category would be the cash flow received from sales revenue and other income during the life of the project?

    • A. 

      Financing activity

    • B. 

      Operating activity

    • C. 

      Investing activity

    • D. 

      All of the given options

    Correct Answer
    B. Operating activity
    Explanation
    The cash flow received from sales revenue and other income during the life of the project would be categorized as operating activity. Operating activities refer to the day-to-day business operations that generate revenue for the company. Sales revenue is a direct result of the company's core operations, and therefore falls under the operating activity category.

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  • 20. 

    Which of the following technique would be used for a project that has non –normal cash flows?

    • A. 

      Multiple internal rate of return

    • B. 

      Modified internal arte of return

    • C. 

      Net present value

    • D. 

      Internal rate of return

    Correct Answer
    A. Multiple internal rate of return
    Explanation
    Multiple internal rate of return (MIRR) would be used for a project that has non-normal cash flows. MIRR is a technique that takes into account the timing and magnitude of cash flows, and it assumes that cash flows are reinvested at a specific rate of return. This technique is used when there are multiple changes in the direction of cash flows, such as alternating periods of positive and negative cash flows. MIRR helps to provide a more accurate measure of the project's profitability by considering both the inflows and outflows of cash over the project's lifespan.

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