Which of the following statements would be consistent with the bird-in-the-hand dividend theory?

11. Which of the following is always a non-cash expense?

a. salaries

b. depreciation

c. income taxes

d. None of the above.

12. Which of the following is a limitation of the “percent of sales method” of preparing pro forma

financial statements?

a. Inventory levels are seldom affected by changes in sales volume.

b. A firm’s investment in accounts receivable is seldom related to sales volume.

c. Not all assets and liabilities increase or decrease as a constant percent of sales.

d. The dividend payout ratio may change from one year to the next.

13. Spontaneous sources of funds refer to all of the below EXCEPT:

a. accounts payable

b. accruals

c. common stock

d. a bank loan

14. Selection of a source of short-term financing should include all of the following EXCEPT:

a. the effect of the use of credit from a particular source on the cost and availability of other

sources of credit

b. the floatation costs for debentures

c. the effective cost of credit

d. the availability of financing in the amount and for the time needed

15. The terminal warehouse agreement differs from the field warehouse agreement in that:

a. the cost of the terminal warehouse agreement is lower due to the lower degree of risk

b. the warehouse procedure differs for both agreements

c. the terminal agreement transports the collateral to a public warehouse

d. the borrower of the field warehouse agreement can sell the collateral without the consent

of the lender

Unit 4 Examination

193

BAM 313 Introduction to Financial Management

16. Your company buys supplies on credit terms of 2/10 net 45. Suppose the company makes a

purchase of $20,000 today. Which of the following payment options makes the most sense as

a general rule?

a. pay the bill as soon as possible to keep the supplier happy

b. pay the bill on day 10 to get the discount

c. either pay the bill on day 10 to get the discount, or wait until day 45

d. pay the bill on day 45 due to the time value of money

17. Which of the following statements about financial leverage is true?

a. Financial leverage is the responsiveness of the firm’s EBIT to fluctuations in sales.

b. Financial leverage is the responsiveness of the firm’s EPS to fluctuations in EBIT.

c. Financial leverage involves the incurrence of fixed operating costs in the firm’s income

stream.

d. Financial leverage reduces a firm’s risk.

18. Which of the following statements about combined (operating & financial) leverage is true?

a. Usage of both operating and financial leverage reduces a firm’s risk.

b. If a firm employs both operating and financial leverage, any percent change in sales will

produce a larger percent change in earnings per share.

c. High operating leverage and high financial leverage offset one another, meaning that if

sales increase by 10%, then EPS will also increase by 10%.

d. A firm that is in a capital-intensive industry should use a higher level of financial leverage

than a firm that employs low levels of operating leverage.

19. The “bird-in-the-hand dividend theory” supports which view of the effect of dividend policy on

company value?

a. constant dividends increase stock values

b. high dividends increase stock values

c. a firm’s dividend policy is irrelevant

d. low dividends increase stock values

20. All of the following will increase the discretionary financing needed EXCEPT:

a. decrease the dividend payout ratio

b. decrease the spontaneous financing

c. decrease the sales growth rate

d. decrease the net profit margin

Unit 4 Examination

194

BAM 313 Introduction to Financial Management

21. If a firm relies on short-term debt or current liabilities in financing its asset investments, and

all other things remain the same, what can be said about the firm’s liquidity?

a. The liquidity of the firm will be unchanged.

b. The firm will be relatively more liquid.

c. The firm will be relatively less liquid.

d. The firm will be more liquid only if interest rates are below the company’s weighted

average cost of capital.

22. Dakota Oil, Inc. reported that its sales and EBIT increased by 10%, but its EPS increased by

30%. The much larger change in earnings per share could be the result of:

a. high operating leverage

b. high financial leverage

c. high fixed costs of production

d. a high percentage of credit sale collections from prior years

23. Which of the following statements would be consistent with the bird-in-the-hand dividend

theory?

a. Dividends are less certain than capital gains.

b. Investors are indifferent whether stock returns come from dividend income or capital gains

income.

c. Wealthy investors prefer corporations to defer dividend payments because capital gains

produce greater after-tax income.

d. Dividends are more certain than capital gains income.

24. The term “lumpy asset” means:

a. assets that have economies of scale but not economies of scope

b. assets that must be purchased in discrete quantities

c. the same thing as assets that exhibit scale economies

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