1) Which of the following legal forms of organization is characterized by limited
a. Professional partnership
b. Sole proprietorship
2) The fi nancial manager may be responsible for any of the following EXCEPT
a. keeping track of quarterly tax payments.
b. analyzing quarterly budget and performance reports.
c. analyzing the effects of more debt on the fi rm’s capital structure.
d. determining whether to accept or reject a capital asset acquisition.
3) The fi nancial manager’s fi nancing decisions determine
a. both the mix and the type of assets found on the fi rm’s balance sheet.
b. both the mix and the type of assets and liabilities found on the fi rm’s balance
c. the most appropriate mix of short-term and long-term fi nancing.
d. the proportion of the fi rm’s earnings to be paid as dividend.
4) Wealth maximization as the goal of the fi rm implies enhancing the wealth of
a. the fi rm’s stockholders.
b. the Board of Directors.
c. the fi rm’s employees.
d. the federal government.
5) The amount earned during the accounting period on each outstanding share
of common stock is called
a. common stock dividend.
b. net profi ts after taxes.
c. earnings per share.
d. net income.
6) Cash fl ow and risk are the key determinants in share price. Increased cash
fl ow results in ________, other things remaining the same.
a. an unchanged share price
b. a lower share price
c. an undetermined share price
d. a higher share price
Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
7) A more recent issue that is causing major problems in the business community
a. short-term versus long-term fi nancial goals of management.
b. the privatization of ownership.
c. ethical problems.
d. environmental concerns.
8) The implementation of a pro-active ethics program is expected to result in
a. a positive corporate image and increased respect, but is not expected to affect
cash fl ows.
b. a positive corporate image and increased respect, but is not expected to affect
c. an increased share price resulting from a decrease in risk, but is not expected
to affect cash fl ows.
d. a positive corporate image and increased respect, a reduction in risk, and enhanced
cash fl ow resulting in an increase in share price.
9) The Sarbanes-Oxley Act of 2002 was passed in response to
a. the decline in technology stocks.
b. insider trading activities.
c. false disclosures in fi nancial reporting.
d. all of the above
10) The key participants in fi nancial transactions are individuals, businesses,
and governments. Individuals are net ________ of funds, and businesses are
net ________ of funds.
a. demanders; suppliers
b. purchasers; sellers
c. suppliers; demanders
d. users; providers
11) The over-the-counter (OTC) market is
a. an intangible market for unlisted securities.
b. a place where securities are bought and sold.
c. the New York Stock Exchange.
d. an organized stock exchange.
12) The two key fi nancial markets are
a. primary market and secondary market.
b. capital market and secondary market.
c. primary market and money market.
d. money market and capital market.
13) Securities exchanges create effi cient markets that do all of the following
a. ensure a market in which the price refl ects the true value of the security.
b. control the supply and demand for securities through price.
c. allocate funds to the most productive uses.
d. allow the price to be determined by supply and demand of securities.
14) The tax deductibility of various expenses such as general and administrative
expenses ________ their after-tax cost.
b. has no effect on
c. has an undetermined effect on
15) The dividend exclusion for corporations receiving dividends from another
corporation has resulted in
a. stock investments being relatively less attractive, relative to bond investments
made by one corporation in another corporation.
b. stock investments being relatively more attractive relative to bond investments
made by one corporation in another corporation.
c. a lower cost of equity for the corporation paying the dividend.
d. a higher relative cost of bond-fi nancing for the corporation paying the dividend.
16) The rule-setting body, which authorizes generally accepted accounting principles
b. Federal Reserve System.
17) Candy Corporation had pretax profi ts of $1.2 million, an average tax rate
of 34 percent, and it paid preferred stock dividends of $50,000. There were
100,000 shares outstanding and no interest expense. What were Candy Corporation’s
earnings per share?
18) The analyst should be careful when evaluating a ratio analysis that
a. the dates of the fi nancial statements being compared are the same time.
b. pre-audited statements are used.
c. neither A nor B.
d. both A and B.
19) The ________ is useful in evaluating credit and collection policies.
a. current asset turnover
b. current ratio
c. average collection period
d. average payment period
20) The ________ ratio may indicate poor collections procedures or a lax credit
a. average collection period
b. average payment period
c. inventory turnover
21) ________ are especially interested in the average payment period, since it
provides them with a sense of the bill-paying patterns of the fi rm.
a. Lenders and suppliers
b. Borrowers and buyers
22) If the inventory turnover is divided into 365, it becomes a measure of
a. sales turnover.
b. the average collection period.
c. sales effi ciency.
d. the average age of the inventory.
23) The ________ ratio may indicate that the fi rm will not be able to meet interest
obligations due on outstanding debt.
a. times interest earned
b. return on total assets
c. net profi t margin
24) The ________ measures the percentage of profi t earned on each sales dollar
before interest and taxes.
a. net profi t margin
b. operating profi t margin
c. earnings available to common shareholders
d. gross profi t margin
25) In the DuPont system, the return on total assets (asset) is equal to
a. (net profi t margin) × (fi xed asset turnover).
b. (return on equity) × (total asset turnover).
c. (return on equity) × (fi nancial leverage multiplier).
d. (net profi t margin) × (total asset turnover).
26) The fi nancial leverage multiplier is an indicator of how much ________ a
corporation is utilizing.
a. long-term debt
b. total debt
c. operating leverage
d. total assets
27) Allocation of the historic costs of fi xed assets against the annual revenue they
generate is called
b. net profi ts.
d. gross profi ts.
28) The cash fl ows from operating activities section of the statement of cash
fl ows considers
a. interest expense.
b. stock repurchases.
c. dividends paid.
d. cost of raw materials.
29) The key aspects of the fi nancial planning process are
a. cash planning and investment planning.
b. cash planning and profi t planning.
c. investment planning and profi t planning.
d. cash planning and fi nancing.
30) A fi rm has projected sales in May, June, and July of $100, $200, and $300,
respectively. The fi rm makes 20 percent of sales for cash and collects the
balance one month following the sale. The fi rm’s total cash receipts in July
a. are $200.
b. are $220.
c. are $180.
d. cannot be determined with the information provided.
31) A projected excess cash balance for the month may be
a. fi nanced with long-term securities.
b. invested in marketable securities.
c. fi nanced with short-term securities.
d. invested in long-term securities.
32) In the month of August, a fi rm had total cash receipts of $10,000, total cash
disbursements of $8,000, depreciation expense of $1,000, a minimum cash
balance of $3,000, and a beginning cash balance of $500. The excess cash
balance (required fi nancing) for August is
a. required total fi nancing of $500.
b. required total fi nancing of $2,500.
c. excess cash balance of $500.
d. excess cash balance of $5,500.
33) The key inputs for preparing pro forma income statements using the simplifi
ed approaches are the
a. sales forecast for the preceding year and fi nancial statements for the coming
b. sales forecast for the coming year and the cash budget for the preceding year.
c. cash budget for the coming year and sales forecast for the preceding year.
d. sales forecast for the coming year and fi nancial statements for the preceding
34) The ________ method of developing a pro forma balance sheet estimates values
of certain balance sheet accounts while others are calculated. In this
method, the fi rm’s external fi nancing is used as a balancing, or plug, fi gure.
35) The strict application of the percent-of-sales method to prepare a pro forma
income statement assumes the fi rm has no fi xed costs. Therefore, the use of
the past cost and expense ratios generally tends to ________ profi ts when
sales are increasing.
a. have no effect on
b. accurately predict
36) A fi rm plans to retire outstanding bonds in the next planning period. The
statements that will be affected are the
a. pro forma balance sheet and cash budget.
b. pro forma income statement and pro forma balance sheet.
c. cash budget and statement of retained earnings.
d. pro forma income statement, pro forma balance sheet, cash budget, and
statement of retained earnings.
37) Utilizing past cost and expense ratios (percent-of-sales method) when preparing
pro forma fi nancial statements will tend to
a. overstate profi ts when sales are increasing.
b. neither understate nor overstate profi ts.
c. understate profi ts when sales are increasing.
d. understate profi ts when sales are decreasing.
38) In a period of rising sales utilizing past cost and expense ratios (percentof-
sales method), when preparing pro forma fi nancial statements and planning
fi nancing, will tend to
a. overstate retained earnings and understate the fi nancing needed.
b. overstate retained earnings and overstate the additional fi nancing needed.
c. understate retained earnings and overstate the fi nancing needed.
d. understate retained earnings and understate the additional fi nancing needed.
39) For positive interest rates, the future value interest factor is
a. sometimes negative.
b. always greater than 1.0.
c. never greater than 25.
d. always less than 0.
40) The amount of money that would have to be invested today at a given interest
rate over a specifi ed period in order to equal a future amount is called
a. present value.
b. future value.
c. future value interest factor.
d. present value interest factor.
41) The present value of $200 to be received 10 years from today, assuming an
opportunity cost of 10 percent, is
42) The future value of a dollar ________ as the interest rate increases and
________ the farther in the future an initial deposit is to be received.
a. increases; increases
b. decreases; increases
c. decreases; decreases
d. increases; decreases
43) The present value of a $25,000 perpetuity at a 14 percent discount rate is
44) The future value of $100 received today and deposited in an account for four
years paying semiannual interest of 6 percent is
45) The future value of an annuity of $1,000 each quarter for 10 years, deposited
at 12 percent compounded quarterly is
46) Adam borrows $4,500 at 12 percent annually compounded interest to be
repaid in four equal annual installments. The actual end-of-year payment is
47) Ashley owns stock in a company which has consistently paid a growing dividend
over the last fi ve years. The fi rst year Ashley owned the stock, she received
$1.71 per share and in the fi fth year, she received $2.89 per share.
What is the growth rate of the dividends over the last fi ve years?
a. 7 percent
b. 5 percent
c. 14 percent
d. 12 percent
48) Julian was given a gold coin originally purchased for $1 by his great-grandfather
50 years ago. Today the coin is worth $450. The rate of return realized
on the sale of this coin is approximately equal to
d. cannot be determined with given information.
49) Aunt Bertha borrows $19,500 from the bank at 8 percent annually compounded
interest to be repaid in 10 equal annual installments. The interest
paid in the third year is ________.
50) What annual rate of return would Grandma Zoe need to earn if she deposits
$1,000 per month into an account beginning one month from today in order
to have a total of $1,000,000 in 30 years?
51) ________ is the chance of loss or the variability of returns associated with a
52) The goal of an effi cient portfolio is to
a. minimize profi t in order to minimize risk.
b. maximize risk for a given level of return.
c. maximize risk in order to maximize profi t.
d. minimize risk for a given level of return.
53) Combining negatively correlated assets having the same expected return
results in a portfolio with ________ level of expected return and ________
level of risk.
a. the same; a lower
b. a lower; a higher
c. a higher; a lower
d. the same; a higher
54) The purpose of adding an asset with a negative or low positive beta is to
a. reduce risk.
b. increase profi t.
c. reduce profi t.
d. increase risk.
55) The portion of an asset’s risk that is attributable to fi rm-specifi c, random
causes is called
a. unsystematic risk.
b. systematic risk.
c. nondiversifi able risk.
d. none of the above
56) ________ risk represents the portion of an asset’s risk that can be eliminated
by combining assets with less than perfect positive correlation.
c. Nondiversifi able
d. Diversifi able
57) Nico owns 100 shares of stock X which has a price of $12 per share and 200
shares of stock Y which has a price of $3 per share. What is the proportion of
Nico’s portfolio invested in stock X?
58) As risk aversion increases
a. investors’ required rate of return will decrease.
b. a fi rm’s beta will decrease.
c. a fi rm’s beta will increase.
d. investors’ required rate of return will increase.
59) The ________ rate of interest creates equilibrium between the supply of savings
and the demand for investment funds.
a. infl ationary
60) The ________ rate of interest is typically the required rate of return on a
three-month U.S. Treasury bill.
61) An upward-sloping yield curve that indicates generally cheaper short-term
borrowing costs than long-term borrowing costs is called
a. fl at yield curve.
b. normal yield curve.
c. inverted yield curve.
d. none of the above.
62) The cost of long-term debt generally ________ that of short-term debt.
a. has no relation to
b. is less than
c. is equal to
d. is greater than
63) ________ is a paid individual, corporation, or commercial bank trust department
that acts as a third party to a bond indenture to ensure that the issuer
does not default on its contractual responsibilities to the bondholders.
a. A trustee
b. A bond rating agency
c. A bond issuer
d. An investment banker
64) An example of a standard debt provision is the
a. constraints on subsequent borrowing.
b. requirement to pay taxes and other liabilities when due.
c. limiting of the corporation’s annual cash dividend payments.
d. restricting the corporation from disposing of fi xed assets.
65) Another name for a deeply discounted bond that pays no coupon interest is a
a. fl oating rate bond.
b. junk bond.
c. subordinated debenture.
d. zero coupon bond.
66) A debenture is
a. a secured bond that is secured by unspecifi ed assets.
b. a lengthy legal document stating the conditions under which a bond has been
c. an unsecured bond that only creditworthy fi rms can issue.
d. a bond secured by specifi c asset.
67) In utilizing a ________ the issuer can annually deduct the current year’s interest
accrual without having to actually pay the interest until the bond matures.
a. junk bond
b. extendible notes
c. zero coupon bond
d. fl oating rate bond
68) The less certain a cash fl ow, the ________ the risk, and the ________ the
present value of the cash fl ow.
a. higher; higher
b. lower; lower
c. higher; lower
d. lower; higher
69) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zerocoupon
bonds. If each bond is priced to yield 7 percent, how much will Jia
Hua receive (ignoring issuance costs) when the bonds are fi rst sold?
70) If bankruptcy were to occur, stockholders would have prior claim on assets
a. preferred stockholders.
b. unsecured creditors.
c. secured creditors.
d. no one.
71) The advantages of issuing preferred stock from the common stockholder’s
perspective include all of the following EXCEPT
a. increased leverage.
b. fl exibility.
c. use in mergers.
d. seniority of preferred stockholder’s claim over common stockholders.
72) All of the following features may be characteristic of preferred stock EXCEPT
b. no maturity date.
d. tax-deductible dividends.
73) Preferred stockholders
a. do have preference over bondholders in the case of liquidation.
b. do not have preference over bondholders in the case of liquidation.
c. do not have preference over common stockholders in the case of liquidation.
d. two of the above are true statements
74) The opportunity for management to purchase a certain number of shares of
their fi rm’s common stock at a specifi ed price over a certain period of time
a. stock option.
b. stock right.
c. pre-emptive right.
75) Stock rights provide the stockholder with
a. cumulative voting privileges.
b. the opportunity to receive extraordinary earnings.
c. the right to elect the board of directors.
d. certain purchase privileges of additional stock shares in direct proportion
based on their number of owned shares.
76) Tangshan China Company’s stock is currently selling for $80.00 per share.
The expected dividend one year from now is $4.00 and the required return is
13 percent. What is Tangshan’s dividend growth rate assuming that dividends
are expected to grow at a constant rate forever?
77) Which of the following valuation methods is superior to the others in the list
since it considers expected earnings?
a. P/E multiple
b. liquidation value
c. book value
d. present value of the interest
78) Nico Corporation expects to generate free-cash fl ows of $200,000 per year
for the next fi ve years. Beyond that time, free cash fl ows are expected to grow
at a constant rate of 5 percent per year forever. If the fi rm’s average cost of
capital is 15 percent, the market value of the fi rm’s debt is $500,000, and
Nico has a half million shares of stock outstanding, what is the value of
79) A capital expenditure is all of the following EXCEPT
a. an outlay for current asset expansion.
b. an outlay made for the earning assets of the fi rm.
c. commonly used to expand the level of operations.
d. expected to produce benefi ts over a period of time greater than one year.
80) ________ projects have the same function; the acceptance of one ________
the others from consideration.
a. Mutually exclusive; eliminates
b. Replacement; does not eliminate
c. Capital; eliminates
d. Independent; does not eliminate
81) In international capital budgeting decisions, political risks can be minimized
using all of the following strategies EXCEPT
a. structuring the fi nancing of such investments as equity rather than as debt.
b. structuring the fi nancing of such investments as debt rather than as equity.
c. structuring the investment as a joint venture and selecting well-connected
d. none of the above
82) When evaluating a capital budgeting project, the change in net working capital
must be considered as part of
a. the initial investment.
b. the incremental operating cash infl ows.
c. the operating cash infl ows.
d. the operating cash outfl ows.
83) The tax treatment regarding the sale of existing assets that are sold for their
book value results in
a. recaptured depreciation taxed as ordinary income.
b. no tax benefi t or liability.
c. an ordinary tax benefi t.
d. a capital gain tax liability and recaptured depreciation taxed as ordinary income.
84) A corporation is selling an existing asset for $1,000. The asset, when purchased,
cost $10,000, was being depreciated under MACRS using a fi veyear
recovery period, and has been depreciated for four full years. If the as
sumed tax rate is 40 percent on ordinary income and capital gains, the tax
effect of this transaction is
a. $3,600 tax liability.
b. $280 tax benefi t.
c. $0 tax liability.
d. $1,100 tax liability.
85) Unsophisticated capital budgeting techniques do not
a. examine the size of the initial outlay.
b. take into account an unconventional cash fl ow pattern.
c. explicitly consider the time value of money.
d. use net profi ts as a measure of return.
86) Should Tangshan Mining company accept a new project if its maximum payback
is 3.5 years and its initial after tax cost is $5,000,000 and it is expected
to provide after-tax operating cash infl ows of $1,800,000 in year 1,
$1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
c. It depends
d. None of the above
87) The minimum return that must be earned on a project in order to leave the
fi rm’s value unchanged is
a. the compound rate.
b. the cost of capital.
c. the interest rate.
d. the internal rate of return.
88) A fi rm would accept a project with a net present value of zero because
a. the project would enhance the wealth of the fi rm’s owners.
b. the return on the project would be positive.
c. the project would maintain the wealth of the fi rm’s owners.
d. the return on the project would be zero.
89) What is the NPV for the following project if its cost of capital is 15 percent
and its initial after tax cost is $5,000,000 and it is expected to provide
after-tax operating cash infl ows of $1,800,000 in year 1, $1,900,000 in year
2, $1,700,000 in year 3 and $1,300,000 in year 4?
d. None of the above
90) What is the NPV for the following project if its cost of capital is 0 percent and
its initial after tax cost is $5,000,000 and it is expected to provide aftertax
operating cash infl ows of $1,800,000 in year 1, $1,900,000 in year 2,
$1,700,000 in year 3 and $1,300,000 in year 4?
d. None of the above
91) The ________ is the compound annual rate of return that the fi rm will earn if
it invests in the project and receives the given cash infl ows.
a. internal rate of return
b. cost of capital
c. discount rate
d. opportunity cost
92) When evaluating projects using internal rate of return,
a. the discount rate and magnitude of cash fl ows do not affect internal rate of
b. projects having higher early-year cash fl ows tend to be preferred at lower
c. projects having higher early-year cash fl ows tend to be preferred at higher
d. projects having lower early-year cash fl ows tend to be preferred at higher
93) Diagrams that permit the mapping of the various investment decision alternatives
and payoffs as well as their probabilities of occurrence are called
a. multiple regression analysis.
c. decision trees.
d. sensitivity analysis.
94) The advantage of using simulation in the capital budgeting process is
a. the availability of a continuum of risk-return trade-offs which may be used as
the basis for decision-making.
b. that it generates a continuum of risk-return trade-offs rather than a singlepoint
c. dependability of predetermined probability distributions.
d. ease of calculation.
95) Breakeven cash infl ow refers to
a. the minimum level of cash infl ow necessary for a project to be acceptable,
that is, IRR < cost of capital.
b. the minimum level of cash infl ow necessary for a project to be acceptable,
that is, NPV > $0.
c. the minimum level of cash infl ow necessary for a project to be acceptable,
that is, NPV < $0.
d. none of the above is correct
96) A behavioral approach that evaluates the impact on the fi rm’s return of simultaneous
changes in a number of project variables is called
a. simulation analysis.
b. scenario analysis.
c. sensitivity analysis.
d. none of the above
97) The ________ refl ects the return that must be earned on the given project to
compensate the fi rm’s owners adequately according to the project’s variability
of cash fl ows.
a. internal rate of return
b. cost of capital
c. average rate of return
d. risk-adjusted discount rate
98) An approach to capital rationing that involves graphing project returns in
descending order against the total dollar investment to determine the group
of acceptable projects is called the
a. net present value approach.
b. the internal rate of return approach.
c. the profi tability index approach.
d. the payback approach.
99) The cost to a corporation of each type of capital is dependent upon
a. the risk-free rate of each type of capital plus the business risk and the fi nancial
risk of the fi rm.
b. the risk-free rate of each type of capital plus the business risk of the fi rm.
c. the risk-free rate of each type of capital plus the fi nancial risk of the fi rm.
d. the risk-free rate of bonds plus the business risk of the fi rm.
100) The before-tax cost of debt for a fi rm which has a 40 percent marginal taxrate
is 12 percent. The after-tax cost of debt is
a. 12 percent.
b. 7.2 percent.
c. 4.8 percent.
d. 6.0 percent.