Chapter 11

1. Basic sources (forms) of capital include which of the following?

a. Debt

b. Equity

c. Leases

d. Convertible bonds

e. Both (a) and (b)

Answer: _____

2. The cost of debt capital to a business is measured by

a. the maturity date

b. the interest rate

c. the amount borrowed

d. the cost of equity

e. none of the above

Answer: _____

3. Long-term debt is defined as having a maturity of more than six months.

a. True

b. False

Answer: _____

4. Municipal bonds are essentially the same as corporate bonds. Thus, the coupon (interest) rate set on a not-for-profit hospital bond will be the same (for all practical purposes) as the rate set on a similar for-profit hospital bond.

a. True

b. False

Answer: _____

5. Which of the following statements about debt contracts is(are) most correct?

a. Debt contracts have several different names.

b. Debt contracts typically contain restrictive covenants.

c. All debt contracts name a trustee.

d. Both (a) and (b) are correct.

e. Answers (a), (b), and (c) all are correct.

Answer: _____

6. Which of the following statements about debt ratings is most correct?

a. The ratings reflect the probability of default.

b. The ratings on outstanding debt are automatically reviewed and updated annually.

c. The ratings are important to investors but unimportant to issuers.

d. The ratings are based solely on a quantitative analysis of the issuer's financial condition.

e. The ratings run from A (for the best) to F (for the worst).

Answer: _____

7. Credit enhancement is a system of issuing municipal debt whereby several not-for-profit providers band together to obtain financing as a group; hence, the credit of the lower-rated issuers is "enhanced" by the superior credit of the higher-rated issuers.

a. True

b. False

Answer: _____

8. The liquidity premium on a US Treasury debt security is normally considered to be

a. 4 percent

b. 3 percent

c. 2 percent

d. 1 percent

e. 0 percent

Answer: _____

9. Which of the following statements about term structure is(are) most correct?

a. Term structure is the relationship between interest rates and debt maturities.

b. Term structure can be expressed either in tabular form or in graphical form.

c. A term structure graph is called the yield curve.

d. The yield curve can have a variety of shapes, but the most common is upward sloping.

e. All of the above statements are correct.

Chapter 12

1. Which of the following statements about common stock is incorrect?

a. The preemptive right gives current stockholders the right to purchase any new shares issued by the company.

b. Stockholders exercise control over the company by voting for board members.

c. Common stockholders are the owners of for-profit corporations.

d. The claim of shareholders on the cash flows of the firm is limited to the dividends they receive (i.e., they have no claim on a business's residual earnings).

e. In the event of bankruptcy and liquidation, shareholders often receive none of the proceeds.

2. Which of the following methods for raising equity capital is not available to not-for-profit corporations?

a. Retained earnings

b. Government grants

c. Private contributions

d. Religious organizations

e. Common stock sales

Answer: _____

3. Because not-for-profit corporations cannot distribute earnings to individual owners in the form of dividends, not-for-profit corporations do not have equity capital.

a. True

b. False

Answer: _____

4. Investor-owned (for-profit) firms receive the proceeds from stock sales in which of the following markets?

a. IPO market

b. Primary market

c. Secondary market

d. Answers (a) and (b)

e. Answers (a), (b), and (c)

Answer: _____

5. The value of any stock is influenced by both the dividend stream and the expected capital gains.

a. True

b. False

Answer: _____

Chapter 15

1. The ultimate goal in project risk analysis is to ensure that the cost of capital used as the discount rate in a projects return on investment analysis is as high as possible.

a. True

b. False

Answer: _____

2. What type of risk is most relevant for projects being evaluated by investor-owned businesses?

a. Stand-alone risk

b. Corporate risk

c. Market risk

d. Answers (a) and (c) are correct

e. Answers (a), (b), and (c) are correct

Answer: _____

3. When a projects returns are expected to be negatively correlated with market returns, stand-alone risk is a good proxy for market risk.

a. True

b. False

Answer: _____

4. The nature of a projects component cash flow distributions and their correlation with one another determine a projects

a. stand-alone risk.

b. corporate risk.

c. market risk.

d. Answers (a), (b), and (c) are correct.

e. None of the above answers is correct.

Answer: _____

5. Strengths of scenario analysis as compared to sensitivity analysis include which of the following?

a. Scenario analysis considers the sensitivity of net present value to changes in key variables, the likely range of variable values, and the interactions among variables.

b. Scenario analysis allows for the calculation of a projects coefficient of variation so that the riskiness of projects can be compared to the firms average project.

c. Scenario analysis provides all necessary information about both a projects risk and its profitability in a single step.

d. Answers (a) and (b) are correct.

e. Answers (a), (b), and (c) are correct.

Answer: _____

Chapter 16

6. Which of the following statements best describes the revenue cycle?

a. It focuses on cash management.

b. It focuses on inventory management.

c. It focuses on receivables management.

d. It focuses on cash, inventory, and receivables management.

e. It focuses on all activities associated with billing and collecting for services.

Answer: _____

7. The revenue cycle is composed of

a. before service activities

b. at-service activities

c. after-service activities

d. continuous activities

e. all of the above activities

Answer: _____

8. Two important keys to successful revenue cycle management are information technology and electronic claims processing.

a. True

b. False

Answer: _____

9. Which of the following techniques is(are) used to monitor a business's receivables?

a. Average collection period

b. Aging schedule

c. Collections budget

d. Answers (a) and (b)

e. Answers (a), (b), and (c).

Answer: _____

10. Float is the difference between the balance shown on the bank's books and the balance on the business's own checkbook.

a. True

b. False

Answer: _____

11. A business's float is maximized by accelerating disbursements and slowing receipts.

a. True

b. False

Answer: _____

12. Businesses hold short-term securities for which of the following reasons?

a. As a substitute for cash

b. As a temporary repository for cash being accumulated for a specific purpose

c. As a buffer against bad debt losses

d. Answers (a) and (b)

e. Answers (a), (b), and (c)

Answer: _____

13. In general, short-term securities are chosen on the basis of safetythat is, protection of principal takes precedence over amount of return.

a. True

b. False

Answer: _____

14. The goal of inventory management is to ensure that the stock-out rate is less than 10 percent, which means that the business runs out of less than 10 percent of its inventory items in any given year.

a. True

b. False

Answer: _____

15. Which of the following inventory management techniques do healthcare providers currently use?

a. Just-in-time systems

b. Stockless systems

c. Consigned inventory systems

d. Answers (a) and (b)

e. Answers (a), (b), and (c)

Answer: _____

16. One goal of current asset management is to accumulate as much cash as possible within a firm.

a. True

b. False

Answer: _____

17. Mercy Hospital is looking for ways to cut costs given current economic conditions. Which of the following would most likely reduce Mercy Hospital's carrying cost of receivables?

a. An increase in the volume of services provided on credit

b. An increase in average daily billings

c. An increase in the average collection period

d. A decrease in the interest rate on short-term debt

e. None of the above

Answer: _____

18. Which of the following activities fall(s) under supply chain management?

a. Procurement of supplies

b. Storage of supplies

c. Preservice insurance verification to determine coverage for supplies used in patient care

d. Answers (a) and (b)

e. Answers (a), (b), and (c)

Answer: _____

19. MedSupplies Plus currently sells surgical supplies to its customers on credit terms of 3/10 net 30. If MedSupplies Plus changes its credit terms to 4/10 net 30, which of the following is true?

a. The periodic interest rate increases.

b. The approximate annual cost of trade credit decreases.

c. The net price of supplies increases.

d. The discount period decreases.

e. The amount of available free trade credit falls to zero.

Answer: _____

20. Advantages of short-term financing (as compared to long-term financing) include which of the following?

a. Loans can be obtained faster.

b. The interest rate on borrowed funds is generally lower.

c. Interest costs are relatively stable over time.

d. Answers (a) and (b) are correct.

e. Answers (a), (b), and (c) are correct.

Answer: _____

21. Which of the following is not a type of short-term financing?

a. Trade credit

b. Domestic stock

c. Accounts receivable financing

d. Line of credit

e. Accruals

Answer: _____

22. The revenue cycle refers to the length of time it takes an organization to convert short-term assets into cash.

a. True

b. False

Answer: _____

23. The choice between short-term and long-term financing often involves a trade-off between risk and cost.

a. True

b. False

Answer: _____

Chapter 17

24. Which of the following statements about financial condition analysis is(are) most correct?

a. Financial condition analysis focuses on whether an organization has the financial capacity to accomplish its mission.

b. Financial condition analysis often results in a list of financial strengths and weaknesses.

c. Financial statement analysis uses data contained in an organization's financial statements to assess financial condition.

d. Operating analysis uses operating data to explain financial condition.

e. All of the above statements are correct.

Answer: _____

25. In ratio analysis, a single value has little meaning. Therefore, analysts use trend and comparative analyses to help "interpret the numbers."

a. True

b. False

Answer: _____

26. The primary difference between financial statement analysis and operating analysis is that operating analysis does not use benchmarking while financial statement analysis does.

a. True

b. False

Answer: _____

27. To create common size financial statements, all income statement items and balance sheet accounts are divided by total assets.

a. True

b. False

Answer: _____

28. Which of the following statements about the limitations of financial condition analysis is(are) most correct?

a. Comparison with industry averages is difficult if the organization operates in several different lines of business.

b. Seasonal factors can distort ratios.

c. Inflation effects can distort ratios.

d. Answers (a) and (b) are correct.

e. Answers (a), (b), and (c) are correct.

Answer: _____

29. KPI stands for

a. Kerrigan patient index

b. key patient income

c. key performance indicator

d. key person insurance

e. known performance index

Answer: _____

30. It is always easy to determine whether a given ratio value is "good" or "bad."

a. True

b. False

Answer: _____

31. Suppose that two hospitals are identical in all ways except that Hospital N is relatively new while Hospital O is relatively old. Which of the following statements about a comparative financial statement analysis is most correct? (Hint: Think about the differences in the amount of net fixed assets carried on the balance sheet and the amount of depreciation expense reported on the income statement.)

a. Hospital N will report higher net income.

b. Hospital N will have higher total asset turnover.

c. Hospital N will have higher fixed asset turnover.

d. Hospital N will have lower gross fixed assets.

e. None of the above statements is correct.

Answer: _____

32. Which of the following statements about financial statement analysis is most correct?

a. The current ratio is the best available measure of liquidity.

b. Du Pont analysis is based on the fact that ROE can be expressed as the sum of four other ratios.

c. It is relatively easy to interpret a ratio in the absence of comparative data.

d. There are no limitations to financial statement analysis, so analysts always can be confident of their conclusions.

e. None of the above statements is correct.

Answer: _____

33. The days cash on hand ratio and current ratio both are rough measures of liquidity. The best way to assess the liquidity of an organization is to construct a cash budget.

a. True

b. False

Answer: _____

34. Which of the following statements about debt management ratios is false?

a. There are two types of debt management ratios: capitalization ratios and coverage ratios.

b. Capitalization ratios use balance sheet data to measure the relative amount of debt financing used.

c. Coverage ratios use income statement data to measure the extent to which earnings (or cash flow) cover interest (or fixed financial) obligations.

d. The debt ratio is a capitalization ratio, while the debt-to-equity ratio is a coverage ratio.

e. The debt ratio is defined as total debt divided by total assets.

Answer: _____

35. Which of the following statements is not a limitation of ratio analysis?

a. There are an insufficient number of ratios available.

b. Seasonal factors can distort ratios.

c. Different organizations can use different, but allowed under GAAP, accounting conventions.

d. It often is hard to tell whether a given ratio is "good" or "bad."

e. Inflation effects can distort ratios.

Answer: _____

36. Because financial statements are based on historical data, financial statement analysis is typically used only to evaluate an organization's past financial condition.

a. True

b. False

Answer: _____

37. Because the statement of cash flows provides information about an organization's operating profitability and use of operating cash flow, analysis of the statement of cash flows can provide information about the financial viability of the organization.

a. True

b. False

Answer: _____

38. If an organization's nonoperating activities are profitable in a given year, which of the following statements is most likely to be true?

a. Total margin will be less than operating margin.

b. Total margin will be greater than operating margin.

c. Total margin will be equal to operating margin.

d. Total margin will be indeterminate.

e. None of the above statements is true.

Answer: _____

39. Because not-for-profits are not owned by shareholders, the ROE ratio is irrelevant for not-for-profits.

a. True

b. False

Answer: _____

40. If an organization's total margin and return on assets are greater than the industry averages, it can be inferred that the organization's return on equity also will be greater than the industry average.

a. True

b. False

Answer: _____

41. Assume an organization's debt-to-equity ratio is less than 1.0. Which of the following statements is(are) most correct?

a. The organization's creditors have provided less than $1 in capital per dollar of equity capital.

b. The organization has more equity than debt in its capital structure.

c. An increase in the debt-to-equity ratio would increase the riskiness of the creditors' position.

d. Answers (a) and (b) are correct.

e. Answers (a), (b), and (c) are correct.

Answer: _____

42. Assume a supply vendor is evaluating a hospital's ability to pay for the supplies when the bill comes due. Which group of ratios would the vendor most likely be interested in?

a. Profitability ratios

b. Liquidity ratios

c. Capital structure ratios

d. Activity ratios

e. Price/earnings ratios

Answer: _____

43. All else held constant, which of the following would be expected to improve a company's economic value added (EVA)?

a. An increase in revenues

b. A decrease in costs

c. A decrease in assets

d. A decrease in the corporate cost of capital

e. All of the above

Answer: _____

44. For profitability and liquidity ratios, higher values are always better than lower values, while for debt management ratios, lower values are always better than higher values.

a. True

b. False

Answer: _____