QUIZ NO: 03

FINANCIAL MANAGEMENT
MGT 201-Semester Fall 2006
Marks Obtained:

Max Marks: 10

NOTE: 1. ATTEMPT ALL QUESTIONS.

2. HIGHLIGHT THE CORRECT ANSWER OUT OF THE FOUR
GIVEN CHOICES FOR EACH QUESTION:
1. In calculating the costs of the individual components of a firm's financing, the
corporate tax rate is important to which of the following component cost
formulas?
a. Common stock.
b. Debt.
c. Preferred stock
d. None of the given options
2. Optimal capital structure refers to the particular combination that minimizes
the------------while maximizing the------------.
a. Operating cost, sales
b. Taxes, Interest expense
c. Cost of capital, Stock price
d. None of the given options
3.
a.
b.
c.
d.

The dividend-payout ratio is equal to:

The dividend yield plus the capital gains yield.
Dividends per share divided by earnings per share.
Dividends per share divided by par value per share.
Dividends per share divided by current price per share.

4. Which of the following would be consistent with a more aggressive approach to

financing working capital?
a. Financing short-term needs with short-term funds.
b. Financing permanent inventory buildup with long-term debt.
c. Financing seasonal needs with short-term funds.
d. Financing some long-term needs with short-term funds.
5.
a.
b.
c.
d.

The opportunity cost of holding cash rises when:

Interest rates are high
Interest rates are low
Central bank issue more bank notes
None of the given options

6.
a.
b.
c.
d.

Which of the following source of financing involve no transactions costs?

Common shares
Preferred shares
Retained earnings
All of the given options

7. Texas Products Inc. has a division that makes plastic composite bags for the
space industry. The division has fixed costs of $45,000 per month, and it expects
to sell 45,000 bags per month. If the variable cost per bag is $6.00, what price
must the division charge in order to break even?
a. $6.00
b. $7.00
c. $8.00
d. $9.00
8. The Free Indeed Company manufactures ladies shoes that are sold through
discount houses. The shoes are sold for $20 each pair; the fixed costs are
$110,000 for up to 30,000 pairs of shoes; variable costs are $13 per pair of shoes.
What is the firms breakeven point in units sold?
a. 30,000 pairs of shoes
b. 15,714 pairs of shoes
c. 8,462 pairs of shoes
d. 5,500 pairs of shoes
9. Suppose you know that your firm is facing relatively poor prospects but needs
new capital. If you also know that investors do not have this information,
signaling theory would predict that you would:
a. Issue debt to maintain the returns of equity holders.
b. Issue equity to share the burden of decreased equity returns between old and
new shareholders.
c. Both a and b are correct
d. None of the given option is correct
10. The extent to which fixed costs are used in a firms operations is called its:
a. Financial leverage.
b. Operating leverage.
c. Financial leverage.
d. Foreign risk exposure.
THE END