Financial Management – Midterm Exam Study Guide
and Practice Questions
Which one of the following is a working capital decision?
a.) How should the firm raise additional capital to fund its expansion?
b.) What debt-equity ratio is best suited to the firm?
c.) What is the cost of debt financing?
d.) Should the firm borrow money for five or ten years?
e.) How much cash should the firm keep in reserve? - ANS✔✔ How much cash should the firm
keep in reserve?
Which one of the following is a capital structure decision?
a.) Determining the optimal inventory level
b.) Establishing the preferred debt-equity level
c.) Selecting new equipment to purchase
d.) Setting the terms of sale for credit sales
e.) Determining when suppliers should be paid - ANS✔✔ Establishing the preferred debt-equity
level
Working capital management includes which one of the following?
a.) Deciding which new projects to accept
b.) Deciding whether to purchase a new machine or fix a currently owned machine
c.) Determining which customers will be granted credit
d.) Determining how many new shares of stock should be issued
e.) Establishing the target debt-equity ratio - ANS✔✔ Determining which customers will be
granted credit
,The daily financial operations of a firm are primarily controlled by managing the:
a.) total debt level
b.) working capital
c.) capital structure
d.) capital budget
e.) long-term liabilities - ANS✔✔ working capital
One advantage of the corporate form of organization is the:
a.) taxation of the corporate profits.
b.) unlimited liability for its shareholders.
c.) double taxation of profits.
d.) ability to raise larger sums of equity capital than other organizational forms.
e.) ease of formation compared to other organizational forms. - ANS✔✔ ability to raise larger
sums of equity capital than other organizational forms.
The Sarbanes-Oxley Act of 2002 has:
a.) reduced the annual compliance costs of all publicly traded firms in the U.S.
b.) decreased senior management's involvement in the corporate annual report.
c.) greatly increased the number of U.S. firms that are going public for the first time.
d.) decreased the number of U.S. firms going public on foreign exchanges.
e.) essentially made officers of publicly traded firms personally responsible for the firm's
financial statements. - ANS✔✔ essentially made officers of publicly traded firms personally
responsible for the firm's financial statements.
The primary goal of financial management is most associated with increasing the:
a.) dollar amount of each sale
,b.) traffic flow within the firm's stores
c.) fixed costs while lowering the variable costs
d.) firm's liquidity
e.) market value of the firm - ANS✔✔ market value of the firm
Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of
2002?
a.) Decrease the number of corporations that can be publicly traded
b.) Increase the protections against corporate fraud
c.) Limit secondary issues of corporate securities
d.) Increase the dividends paid to shareholders
e.) Increase the number of firms that "go dark" - ANS✔✔ Increase the protections against
corporate fraud
Which one of the following situations is most apt to create an agency conflict?
a.) Compensating a manager based on his or her division's net income
b.) Giving all employees a bonus if a certain level of efficiency is maintained
c.) Hiring an independent consultant to study the operating efficiency of the firm
d.) Basing management bonuses on the length of employment
e.) Laying off employees during a slack period - ANS✔✔ Basing management bonuses on the
length of employment
One example of a primary market transaction would be the:
a.) sale of 100 shares of stock by Maria to her best friend.
b.) purchase by Theo of 5,000 shares of stock from his father.
c.) sale of 1,000 shares of newly issued stock by Alt Company to Miquel.
d.) sale by Terry of 50,000 shares of stock to his brother.
, e.) sale of 5,000 shares of stock owned by a corporate CEO to his son. - ANS✔✔ sale of 1,000
shares of newly issued stock by Alt Company to Miquel.
Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt
and equity is referred to as the firm's:
a.) capital structure.
b.) capital budget.
c.) asset allocation.
d.) working capital.
e.) risk structure. - ANS✔✔ capital structure.
Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to
these accounts are referred to as:
a.) capital structure decisions.
b.) capital budgeting decisions.
c.) working capital management.
d.) operating management.
e.) fixed account structure. - ANS✔✔ working capital management
Vera opened a used bookstore and is both the 100 percent owner and the store's manager.
Which type of business entity does Vera own if she is personally liable for all the store's debts?
a.) Sole proprietorship
b.) Limited partnership
c.) Corporation
d.) Joint stock company
e.) General partnership - ANS✔✔ Sole proprietorship
and Practice Questions
Which one of the following is a working capital decision?
a.) How should the firm raise additional capital to fund its expansion?
b.) What debt-equity ratio is best suited to the firm?
c.) What is the cost of debt financing?
d.) Should the firm borrow money for five or ten years?
e.) How much cash should the firm keep in reserve? - ANS✔✔ How much cash should the firm
keep in reserve?
Which one of the following is a capital structure decision?
a.) Determining the optimal inventory level
b.) Establishing the preferred debt-equity level
c.) Selecting new equipment to purchase
d.) Setting the terms of sale for credit sales
e.) Determining when suppliers should be paid - ANS✔✔ Establishing the preferred debt-equity
level
Working capital management includes which one of the following?
a.) Deciding which new projects to accept
b.) Deciding whether to purchase a new machine or fix a currently owned machine
c.) Determining which customers will be granted credit
d.) Determining how many new shares of stock should be issued
e.) Establishing the target debt-equity ratio - ANS✔✔ Determining which customers will be
granted credit
,The daily financial operations of a firm are primarily controlled by managing the:
a.) total debt level
b.) working capital
c.) capital structure
d.) capital budget
e.) long-term liabilities - ANS✔✔ working capital
One advantage of the corporate form of organization is the:
a.) taxation of the corporate profits.
b.) unlimited liability for its shareholders.
c.) double taxation of profits.
d.) ability to raise larger sums of equity capital than other organizational forms.
e.) ease of formation compared to other organizational forms. - ANS✔✔ ability to raise larger
sums of equity capital than other organizational forms.
The Sarbanes-Oxley Act of 2002 has:
a.) reduced the annual compliance costs of all publicly traded firms in the U.S.
b.) decreased senior management's involvement in the corporate annual report.
c.) greatly increased the number of U.S. firms that are going public for the first time.
d.) decreased the number of U.S. firms going public on foreign exchanges.
e.) essentially made officers of publicly traded firms personally responsible for the firm's
financial statements. - ANS✔✔ essentially made officers of publicly traded firms personally
responsible for the firm's financial statements.
The primary goal of financial management is most associated with increasing the:
a.) dollar amount of each sale
,b.) traffic flow within the firm's stores
c.) fixed costs while lowering the variable costs
d.) firm's liquidity
e.) market value of the firm - ANS✔✔ market value of the firm
Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of
2002?
a.) Decrease the number of corporations that can be publicly traded
b.) Increase the protections against corporate fraud
c.) Limit secondary issues of corporate securities
d.) Increase the dividends paid to shareholders
e.) Increase the number of firms that "go dark" - ANS✔✔ Increase the protections against
corporate fraud
Which one of the following situations is most apt to create an agency conflict?
a.) Compensating a manager based on his or her division's net income
b.) Giving all employees a bonus if a certain level of efficiency is maintained
c.) Hiring an independent consultant to study the operating efficiency of the firm
d.) Basing management bonuses on the length of employment
e.) Laying off employees during a slack period - ANS✔✔ Basing management bonuses on the
length of employment
One example of a primary market transaction would be the:
a.) sale of 100 shares of stock by Maria to her best friend.
b.) purchase by Theo of 5,000 shares of stock from his father.
c.) sale of 1,000 shares of newly issued stock by Alt Company to Miquel.
d.) sale by Terry of 50,000 shares of stock to his brother.
, e.) sale of 5,000 shares of stock owned by a corporate CEO to his son. - ANS✔✔ sale of 1,000
shares of newly issued stock by Alt Company to Miquel.
Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt
and equity is referred to as the firm's:
a.) capital structure.
b.) capital budget.
c.) asset allocation.
d.) working capital.
e.) risk structure. - ANS✔✔ capital structure.
Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to
these accounts are referred to as:
a.) capital structure decisions.
b.) capital budgeting decisions.
c.) working capital management.
d.) operating management.
e.) fixed account structure. - ANS✔✔ working capital management
Vera opened a used bookstore and is both the 100 percent owner and the store's manager.
Which type of business entity does Vera own if she is personally liable for all the store's debts?
a.) Sole proprietorship
b.) Limited partnership
c.) Corporation
d.) Joint stock company
e.) General partnership - ANS✔✔ Sole proprietorship
