1. Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years
A. $60,056
B. $21,600
C. $85,920
D. $33,548
2. If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years
A. $5,008.76
B. $3,408.88
C. $2,465.78
D. $3,525.62
3. The NPV assumes cash flows are reinvested at the
A. cost of capital
B. real rate of return
C. NPV
D. IRR
4. Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year
A. $2.96
B. $2.33
C. $2.10
D. $1.67
5. Capital markets in foreign countries
A. offer lower returns than those obtainable in the domestic capital markets
B. provide international diversification
C. in general are becoming less integrated due to the widespread availability of interest rate and currency swaps
D. all of the choices
6. _________ risk is generally considered only a paper gain or loss
A. Translation
B. Economic
C. Transaction
D. Financial
7. Which of the following categories of owners have limited liability
A. General partners
B. Sole proprietors
C. Shareholders of a corporation
D. Both a and b
8. The true owners of the corporation are the
A. common stockholders
B. board of directors of the firm
C. preferred stockholders
D. holders of debt issues of the firm
9. Which of the following best describes the goal of the firm
A. The maximization of the total market value of the firm’s common stock
B. Profit maximization
C. Risk minimization
D. None of the above
10. Which of the following statements about exchange rates is true
A. Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar
B. Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates
C. A floating-rate international currency system has been operating since 1973
D. All of the choices
11. If the quote for a forward exchange contract is greater than the computed price, the forward contract is
A. Undervalued
B. a good buy
C. overvalued
D. at equilibrium
12. A spot transaction occurs when one currency is
A. immediately exchanged for another currency
B. exchanged for another currency at a specified price
C. deposited in a foreign bank
D. traded for another at an agreed-upon future price
13. Which of the following is considered to be a spontaneous source of financing
A. Accounts payable
B. Inventory
C. Accounts receivable
D. Operating leases
14. Artie’s Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations Years 1–4 = $250,000 per year Compute the NPV of this project if the company’s discount rate is 12%
A. $9,337
B. $7,758
C. $4,337
D. $2,534
15. Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk
A. True
B. False
16. You have been asked to analyze a capital investment proposal. The project’s cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%. What is the project’s MIRR
A. 19.99%
B. 16.73%
C. 10.44%
D. 12.62%
17. Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk
A. TRUE
B. FALSE
18. The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the
A. balance of payments quantum theory
B. interest rate parity theory
C. purchasing power parity theory
D. arbitrage markets theory
19. An important (additional) consideration for a direct foreign investment is
A. political risk
B. maximizing the firm’s profits
C. attaining a high international P/E ratio
D. all of the above
20. The purchasing power parity theory states that currency exchange rates tend to vary ____________ with their respective purchasing powers in order to provide _________
A. directly; similar
B. directly; greater
C. inversely; similar
D. inversely; greater
21. PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because
A. these bonds are essentially free of business risk
B. they capture the long-term inflation expectations of investors associated with investments in long-term assets
C. these bonds are essentially free of interest rate risk
D. none of the above
22. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket
A. 7.23%
B. 9.01%
C. 9.23%
D. 11.95%
23. Given the following information, determine the risk-free rate.
| Cost of equity | = | 12% |
| Beta | = | 1.50 |
| Market risk premium | = | 3% |
A. 6.5%
B. 7.0%
C. 7.5%
D. 8.0%
24. J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm’s tax rate is 40%, what is the cost of debt to J & B
A. 5.6%
B. 8.4%
C. 14.0%
D. 12.0%
25. Lever Brothers has a debt ratio (debt to assets) of 20%. Management is wondering if its current capital structure is too conservative. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,680,000, with 457,143 shares of common stock outstanding. If the firm were to instead have a debt ratio of 40%, additional interest expense would cause profits available to stockholders to decline to $1,560,000, but only 342,857 common shares would be outstanding. What is the difference in EPS at a debt ratio of 40% versus 20%?
A. $0.88
B. $2.12
C. $1.16
D. $1.95
26. One reason for international investment is to reduce
A. price-earnings (P/E) ratios
B. advantages in a foreign country
C. portfolio risk
D. beta risk
27. Buying and selling in more than one market to make a riskless profit is called
A. arbitrage
B. international trading
C. profit maximization
D. cannot be determined from the above information
55. A bond sold simultaneously in several different foreign capital markets, but denominated in a currency different from the country in which the bond is issued, is called a(n):
A. Eurobond
B. international capital bond
C. floating bond
D. world bond
28. Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers’s present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
A. $2.00
B. $3.25
C. $1.75
D. $4.50
29. The marginal cost of preferred stock is equal to
A. the preferred stock dividend divided by the net market price
B. the preferred stock dividend divided by its par value
C. (1 - tax rate) times the preferred stock dividend divided by net price
D. the preferred stock dividend divided by market price
30. The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of retained earnings if the long-term growth in dividends is projected to be 8%?
A. 18%
B. 8%
C. 25%
D. 10%
31. Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
A. 14.2%
B. 13.0%
C. 10.0%
D. 18.0%
32. Castle Corp. generated $2 million in operating income from sales of $20 million during the latest fiscal year. The firm’s interest expense was $500,000, and the corporate income tax rate was 40%. Investors require a rate of return of 18%. Using the dependence hypothesis approach to valuation, what is the market value of Castle
A. $5.1 million
B. $7.2 million
C. $8.3 million
D. $9.6 million
33. The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
A. 9.0%
B. 10.6%
C. 14.0%
D. 11.5%
34. Which of the following statements about the MIRR is false
A. The MIRR has the same reinvestment assumption as the IRR
B. The MIRR has the same reinvestment assumption as the NPV
C. If a project’s MIRR exceeds the firm’s discount rate, the project is acceptable
D. A project’s MIRR could be lower than a project’s IRR
35 Which of the following does NOT involve underwriting by an investment banker
A. Commission basis purchases
B. Syndicated purchases
C. Negotiated purchases
D. Competitive bid purchases
36 __________ is a method of offering securities to a limited number of investors
A. Syndicated underwriting
B. Public offering
C. Private placement
D. Initial public offering
37 According to the agency problem, _________ represent the principals of a corporation
A. Shareholders
B. Managers
C. Employees
D. Suppliers
38 Difficulty in finding profitable projects is due to
A. opportunity costs
B. ethical dilemmas
C. competitive markets
D. social responsibility
39. Which of the following is NOT a principle of basic financial management
A. Incremental cash flow counts
B. Efficient capital markets
C. Profit is king
D. Risk/return tradeoff
40. Which of the following is considered to be a deficiency of the IRR?
A. It fails to properly rank capital projects
B. It could produce more than one rate of return
C. It fails to utilize the time value of money
D. It is not useful in accounting for risk in capital budgeting
41. For the NPV criteria, a project is acceptable if the NPV is __________, while for the profitability index, a project is acceptable if the profitability index is __________.
A. greater than one, greater than zero
B. less than zero, greater than the required return
C. greater than zero, greater than one
D. greater than zero, less than one
42. Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $ 65 Year 3 = $100
A. 2.88 years
B. 3.43 years
C. 3.17 years
D. 2.6 years
43. Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
A. $4,000
B. $27,534
C. -$466
D. $8,891
44. In general, the larger the portion of a firm's sales that are on credit, the
A. lower will be the firm's need to borrow.
B. more the firm can buy raw materials on credit.
C. more rapidly credit sales will be paid off.
D. higher will be the firm's need to borrow
45. In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced
A. is higher
B. can be either higher or lower
C. is the same
D. is lower
46. The percent-of-sales method of financial forecasting
A. is more detailed than a cash budget approach.
B. provides a month-to-month breakdown of data.
C. assumes that balance sheet accounts maintain a constant relationship to sales.
D. requires more time than a cash budget approach.
47. What price must a company typically pay to buy another company? The price will
A. include some premium over the current market value of the target’s equity
B. be the market value of the target’s equity
C. be the book value of the target’s equity
D. include some discount relative to the current market value of the target’s equity
48. Which of the following most likely would cause a lease to be classified as a capital lease
A. The present value of the lease payments, calculated at the lessee’s typical rate of interest for a similar purchase loan, is more than the original purchase price of the equipment
B. The lease permits the lessee to purchase the equipment at the end of the lease for its fair market value
C. The lease is for $1 million or more
D. The lease is for five or more years
49. At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years
A. 7%
B. 5%
C. 8%
D. 6%
50. The present value of a single future sum
A. depends upon the number of discount periods
B. increases as the number of discount periods increas
C. is generally larger than the future sum
D. increases as the discount rate increases
51. The primary purpose of a cash budget is to
A. provide a detailed plan of future cash flows
B. determine accounts payable
C. determine the estimated income tax for the year
D. determine the level of investment in current and fixed assets
52. Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)?
A. 4.75%
B. 4.86%
C. 5.02%
D. 3.61%
53. In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost
A. Sole proprietorship, general partnership, limited partnership, corporation
B. Corporation, limited partnership, general partnership, sole proprietorship
C. General partnership, sole proprietorship, limited partnership, corporation
D. Sole proprietorship, general partnership, corporation, limited partnership
54. You have $10,000 to invest. You do not want to take any risk, so you will put the funds in a savings account at the local bank. Of the following choices, which one will produce the largest sum at the end of 22 years
A. An account that compounds interest daily
B. An account that compounds interest quarterly
C. An account that compounds interest monthly
D. An account that compounds interest annually
55. Which of the following is a non-cash expense
A. Depreciation expenses
B. Administrative salaries
C. Packaging costs
D. Interest expense
56. Which of the following is the formula for compound value
A. FVn = P(1+i)n
B. FVn = P(1+i)-n
C. FVn = P/(1+i)n
D. FVn = (1+i)/P
57. How long will it take $750 to double at 8% compounded annually
A. 48 months
B. 9 years
C. 12 years
D. 6.5 years
58. When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored
A. Preferred stock
B. Common stock
C. Retained earnings
D. Corporate bonds
59. If you are an investor, which of the following would you prefer?
A. Earnings on funds invested would compound monthly
B. Earnings on funds invested would compound annually
C. Earnings on funds invested would compound daily
D. Earnings on funds invested would compound quarterly
60 Why is maximizing shareholder wealth a better goal than maximizing profits
A. Maximizing shareholder wealth places greater emphasis on the short term
B. Maximizing profits ignores the uncertainty that is related to expected profits
C. Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments
D. Maximizing profits gives too much weight to the tax position of shareholders
61. Financial management is concerned with which of the following
A. Creating economic wealth
B. Making investment decisions that optimize economic value
C. Making business decisions that optimize economic wealth
D. Raising capital that is needed for growth
E. All of the above
62. The debt ratio is a measure of a firm’s
A. Leverage
B. Profitability
C. Liquidity
D. Efficiency
63. Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers’s return on equity.
A. 17.5%
B. 19.5%
C. 21.5%
D. 23.5%
64. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be referred to as what type of transactio
A. A primary market transaction
B. A secondary market transaction
C. A money market transaction
D. A futures market transaction
65. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
A. $25,000
B. $15,000
C. $35,000
D. None of the above
66. Which of the following would not be found in a cash budget
A. Interest expense
B. Taxes
C. Depreciation
D. All of the above would be found in a cash budget.
67. You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
A. $25,000
B. $31,060
C. $38,720
D. $34,310
68. Which of the following is NOT an example of variable costs
A. Packaging
B. Depreciation
C. Direct labor
D. Freight costs on products
69. In general, as the level of sales rises above the break-even point, the degree of operating leverage
A. increases.
B. decreases.
C. remains constant.
D. none of the above.
70. The NPV method
A. is consistent with the goal of shareholder wealth maximization.
B. recognizes the time value of money.
C. uses cash flows.
D. all of the above.
71. If you are an investor, which of the following would you prefer
A. Earnings on funds invested would compound monthly
B. Earnings annually
C. Earnings quarterly
D. Earnings daily
72. Which of the following best illustrates the hedging principle as it applies to the management of working capital?
A. Don’t place all your eggs in one basket
B. Temporary current assets of the firm should be financed with short-term sources of funds
C. Permanent current assets of the firm should be financed with short-term sources of funds
D. All current assets should be financed with short-term sources of funds
73. What is the most important ingredient in developing a firm’s financial plan?
A. A forecast of sales revenues
B. Determining the amount of dividends to pay shareholders
C. Projecting the rate of interest on proposed new debt
D. Deciding upon which method of depreciation a firm should utilize
74. Capital market instruments include:
A. negotiable certificates of deposit.
B. corporate equities.
C. preferred stock
D. both b and c.
75. The debt ratio is a measure of a firm’s:
A. leverage
B. profitability
C. liquidity
D. efficiency.
76. Elimination of all foreign exchange risk:
A. should be the objective of a prudent financial manager.
B. should be analyzed on a cost benefit basis.
C. is possible through diversification.
D. both a and c.
77. Which of the following has the least interest rate risk
A. A six-month unsecured promissory note from International Harvester
B. An eight-year investment certificate from a federally insured bank
C. A 15-year U.S. Treasury bond
D. An AT&T bond maturing in 2010
78. Which of the following statements about the percent-of-sales method of financial forecasting is true
A. It is a much more precise method of financial forecasting than a cash budget would be
B. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues
C. It projects all liabilities as a fixed percentage of sales
D. It is the least commonly used method of financial forecasting
79. All of the following are found in the cash budget EXCEPT
A. Inventory
B. cash disbursements
C. new financing needed
D. a net change in cash for the period
80. Which of the following is NOT a basic function of a budget
A. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures
B. Budgets compare historical costs of the firm with its current cost performance
C. Budgets allow for performance evaluation
D. Budgets indicate the need for future financing
81. A plant can remain operating when sales are depressed
A. if the selling price per unit exceeds the variable cost per unit
B. unless variable costs are zero when production is zero
C. in an effort to cover at least some of the variable cost
D. to help the local economy
82. The break-even model enables the manager of a firm to
A. set appropriate equilibrium thresholds
B. determine the quantity of output that must be sold to cover all operating costs
C. determine the optimal amount of debt financing to use
D. calculate the minimum price of common stock for certain situations
83. Dorning Shade Company will use an estimated 50,000 gumbands in its manufacturing process next year. The carrying cost of gumband inventory is $.04 per unit, and the cost of reordering gumbands is $50 per order. What is Dorning Shade’s economic ordering quantity for gumbands (round to the nearest 100 gumbands)?
A. 11,200
B. 10,700
C. 9,700
D. 8,100
84. Purchasing a security of a company that is issuing their stock for the first time publicly would be considered
A. a secondary market transaction
B. an initial public offering
C. a seasoned new issue
D. both a and b
85. The preparation of a cash budget serves which of the following purposes?
A. To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm’s common stock
B. To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period
C. To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period
D. To estimate the amount of sales volume that would be required in order to achieve the break-even point
86. The first step involved in predicting financing needs is:
A. projecting the firm’s sales revenues and expenses over the planning period.
B. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C. determining the firm’s financing needs throughout the planning period.
D. none of the above.
87. What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
A. $893
B. $3,106
C. $429
D. $833
88. The future value of $500 deposited into an account paying 8% annually for three years is:
A. $500.
B. $630.
C. $700.
D. $620.
89. Tom’s Trashbins, Inc. has fixed costs of $225,000. Tom’s trashbins sell for $45 and have a unit variable cost of $20. What is Tom’s break-even point in units?
A. 8,500
B. 8,750
C. 9,000
D. 9,250
90. Under a field warehouse financing agreement:
A. collateral inventories are physically separated from other inventories of the borrower.
B. collateral inventories are placed under the control of a third party.
C. a warehouse receipt is issued which might or might not be negotiable.
D. all of the above.
91. Which of the following generally have maturities of one year or less?
A. Treasury bills
B. Money market mutual fund
C. Commercial paper
D. Both a and c
E. All of the above
92. Which of the following is a category of inventory?
A. Raw materials
B. Work-in-progress
C. Finished goods
D. All of the above
93. Which of the following influences the amount of investment a firm will have tied up in accounts receivable?
A. Terms of sale
B. Volume of credit sales
C. Collection efforts
D. Credit-worthiness of customers
E. All of the above
94. Which of the following is NOT considered a permanent source of financing
A. Commercial paper
B. Preferred stock
C. Common stock
D. Corporate bonds
95. A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with
A. preferred stock
B. trade credit
C. selling equipment
D. common stock
96. We compute the profitability index of a capital-budgeting proposal by
A. multiplying the cash inflow by the IRR
B. dividing the present value of the annual after-tax cash flows by the cost of the project
C. dividing the present value of the annual after-tax cash flows by the cost of capital
D. multiplying the IRR by the cost of capital
97. Your company is considering a project with the following cash flows: Initial outlay = $1,748.80 Cash flows Years 1–6 = $500 Compute the IRR on the project
A. 24%
B. 18%
C. 11%
D. 9%
98. Which of the following statements is correct?
A. In general, a firm with low operating leverage has a small proportion of its total costs in the form of fixed costs.
B. An increase in the personal tax rate would not affect firms’ capital structure decisions.
C. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else is equal.
D. All of the above are correct.
E. None of the above is correct.
99. If fixed interest expense is present in a firm’s cost structure, so is:
A. financial leverage.
B. capital leverage.
C. operating leverage.
D. net operating profit after tax.
100. If the IRR is greater than the required rate of return, the:
A. present value of all the cash inflows will be greater than the initial outlay.
B. payback will be less than the life of the investment
C. project should be rejected.
D. both a and b.
101. A quite risky working capital management policy would have a high ratio of:
A. short-term debt to bonds and equity.
B. short-term debt to total debt.
C. bonds to property, plant, and equipment.
D. short-term debt to equity.
102. Why are domestic cash management systems less complicated than international cash management systems?
A. Domestic systems do not have to allow for currency fluctuations.
B. International cash management systems are not affected by interest rate differences.
C. International cash management systems actually are less complicated because the rest of the world’s major countries are more attuned to the advantages of electronic funds transfer.
D. International cash management systems actually are less complicated because transactions are fewer but for larger sums of money.
103. Which of the following would decrease free cash flows? A decrease in:
A. depreciation expense.
B. interest expense.
C. incremental sales
D. both a & c.
104. An increase in ___________ would increase the weighted average cost of capital.
A. flotation costs
B. projected dividends
C. the tax rate
D. both a and
E. all of the above
105. Which of the following best describes a firm’s cost of capital?
A. The average yield to maturity on debt
B. The average cost of the firm’s assets
C. The rate of return that must be earned on its investments in order to satisfy the firm’s investors
D. The coupon rate on preferred stock
106. Given the following information for PepsiCo, determine the company’s weighted average cost of capital.
Value Cost of Capital
Restaurant Division $ 5 Billion 13%
Snack Foods Division 7 Billion 12%
Beverages Division 13 Billion 8%
A. 10.12%
B. 11.00%
C. 12.10%
D. 13.00%
107. A __________ is a business combination of two companies in which the new company maintains the identity of the acquiring company.
A. Consolidation
B. holding company
C. conglomerate
D. merger
108. Which of the following is not a potential advantage of a merger in the United States?
A. A better financing structure
B. A better use of tax-loss carry-forwards
C. A more secure monopolization of an industry
D. A lower operating risk through diversification
109. If one security has a greater risk than another security, how will investors respond?
A. They will require a lower rate of return for the investment that has greater risk.
B. They would be indifferent regarding their expectation of rates of return for either investment.
C. They will require a higher rate of return for the investment that has greater risk
D. None of the above
110. Which of the following is a characteristic of an efficient market?
A. Small number of individuals
B. Opportunities exist for investors to profit from publicly available information.
C. Security prices reflect fair value of the firm.
D. Immediate response occurs for new public information
111. If a company’s average collection period is higher than the industry average, then the company might be:
A. enforcing credit conditions upon its customers which are too stringent.
B. allowing its customers too much time to pay their bills.
C. too tough in collecting its accounts.
D. too liquid.
112. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be referred to as what type of transaction?
A. A primary market transaction
B. A secondary market transaction
C. A money market transaction
D. A futures market transaction
113. Which of the following is NOT a basic function of a budget?
A. Budgets indicate the need for future financing.
B. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
C. Budgets compare historical costs of the firm with its current cost performance.
D. Budgets allow for performance evaluation.
114. Break-even analysis can be useful in:
A. capital expenditure analysis.
B. bond refunding decisions.
C. rights offering decisions.
D. all of the above.
115. What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?
A. $4,030.50
B. $7,500.00
C. $3,500.00
D. $7,000.00
116. Which of the following transactions does not affect the quick ratio?
A. Land held for investment is sold for cash.
B. Equipment is purchased and is financed by a long-term debt issue.
C. Inventories are sold for cash.
D. Inventories are sold on a credit basis.
117. Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith’s acid-test ratio?
A. 1.69
B. 0.54
C. 0.74
D. 1.35
118. Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.
A. 4.86
B. 2.47
C. 2.66
D. 1.68
119. Organized security exchanges provide which of the following benefits?
A. A continuous market
B. Established and publicized fair security prices
C. Help businesses raise new capital
D. All of the above
120. The NPV assumes cash flows are reinvested at the:
A. IRR
B. NPV
C. real rate of return
D. cost of capital
121. With regard to the hedging principle, which of the following assets should be financed with current liabilities?
A. Minimum level of cash required for year-round operations
B. Expansion of accounts receivable to meet seasonal demands
C. Machinery used to produce a firm’s inventory
D. Both a and b
122. With respect to working capital policy, firms most often employ:
A. a cautious approach which finances short-term assets with long-term financing.
B. the hedging principle.
C. an aggressive approach which finances long-term assets with short-term financing.
D. a mixture of all of the above.
123. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
A. Training expense
B. Working capital investment
C. Installation costs of an asset
D. Before-tax selling price of old machine
124. XYZ, Inc. is considering adding a product line that would utilize unused floor place of their manufacturing plant. The floor space would be considered a(n):
A. variable cost
B. opportunity cost
C. sunk cost
D. irrelevant cash flow.
125. What is the capital budgeting term that is used to refer to more than one investment alternative that performs the same function?
A. Simulated
B. Capital rationed
C. Mutually exclusive
D. Opportunistic
126. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
A. Cash flows have a greater present value than accounting profits.
B. Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
C. Cash flows are more stable than accounting profits.
D. Cash flows improve the tax position of a firm more than accounting profits.
127. The most expensive source of capital is:
A. preferred stock.
B. new common stock.
C. debt.
D. retained earnings.
128. A company has a capital structure that consists of 50% debt and 50% equity. Which of the following is true?
A. The weighted average cost of capital is less than the cost of equity financing.
B. The cost of equity financing is greater than the cost of debt financing.
C. The weighted average cost of capital is calculated on a before-tax basis.
D. Both a and b.
129. Typically, Delta, Inc. maintains $1 million in cash and marketable securities. The firm currently is expecting an economic recession and projects that its net cash flows from operations during the period will be $2.5 million. Delta expects annual interest and sinking fund payments will be $3 million during the period. If the recession occurs, Delta’s cash balance at the end of the period will be:
A. $6.5 million.
B. $1 million.
C. $500,000.
D. $3.5 million.
130. Which of the following is not a component of a firm’s capital structure?
A. Preferred stock
B. Bonds
C. Common stock
D. Accounts payable
E. Retained earnings
131. Diversification increases when ________ decreases.
A. Variability
B. Return
C. Risk
D. a and c
132. Purchases of plant and equipment can be determined from the
A. pro forma income statement
B. current cash budget
C. use of ratio analysis
D. previous period’s balance sheet
133. Which of the following does not affect earnings per share (EPS) when a merger is concluded?
A. The exchange ratio for the shares of the acquired firm
B. The relative total asset/equity ratios of the firms
C. The premium paid above market value for the acquired fir
D. The relative earnings growth rates of the firms
134. Verigreen Lawn Care products just paid a dividend of $1.85. This dividend is expected to grow at a constant rate of 3% per year, so the next expected dividend is $1.90. The stock price is currently $12.50. New stock can be sold at this price subject to flotation costs of 15%. The company’s marginal tax rate is 40%. Compute the cost of internal (retained) earnings and the cost of external equity (new common stock).
A. 0, 17.8%
B. 15.2%, 17.8%
C. 18.2%, 20.9%
D. 18.2%, 16.21%
135. Cost of capital is:
A. the coupon rate of debt.
B. a hurdle rate set by the board of directors
C. the rate of return that must be earned on additional investment if firm value is to remain unchanged
D. the average cost of the firm’s assets
136. Investors prefer $1 today versus $1 in the future due to
A. time value of money
B. opportunity cost
C. agency problems
D. a and b
137. Corporations receive money from investors with
A. initial public offerings
B. seasoned new issues
C. primary market transactions
D. a and b
138. Difficulty in finding profitable projects is due to
A. social responsibility
B. competitive markets
C. ethical dilemmas
D. opportunity costs
139. Foregoing the earning potential of a dollar today is referred to as the
A. time value of money
B. opportunity cost concept
C. risk/return tradeoff
D. creation of wealth
140. Why do investors prefer receiving cash sooner rather than later, according to finance theory
A. Incremental profits are greater than accounting profits
B. Money received earlier can be reinvested and returns can be increased
C. Tax considerations are important when investing
D. Diversification leads to increased value
141. In general, as the level of sales rises above the break-even point, the degree of operating leverage
A. increases
B. decreases
C. remains constant
D. none of the above
142. Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be
A. 25,000
B. 20,000
C. 15,000
D. 10,000
143. In the basic model, the optimal inventory level is the point at which
A. total cost is minimized
B. total revenue is maximized
C. carrying costs are minimized
D. ordering costs are minimized
144. The management of inventory is important because
A. carrying too much inventory can result in a loss of efficiency and profitability
B. carrying excessive inventory can result in a loss of sales
C. carrying too little inventory can decrease the average collection period
D. carrying too little inventory will adversely affect the firm’s CAPM
145. An operating lease usually
A. is for a shorter length of time than a financial lease
B. is for high-tech equipment that might become obsolete rapidly
C. has the income tax advantage that the entire lease payment is a deductible expense
D. all the above
146. If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer
A. $1,000 in five years because they are not good at saving money
B. $1,000 today because it will be worth more than $1,000 received in five years
C. $1,000 in five years because it will be worth more than $1,000 received today
D. Investors would be indifferent to when they would receive the $1,000
147. How could you compensate an investor for taking on a significant amount of risk
A. Increase the expected rate of return
B. Raise more debt capital
C. Offer stock at a higher price
D. Increase sales
148. If one security has a greater risk than another security, how will investors respond
A. They will require a lower rate of return for the investment that has greater risk
B. They would be indifferent regarding their expectation of rates of return for either investment
C. They will require a higher rate of return for the investment that has greater risk
D. None of the above
149. Financial management is concerned with which of the following
A. Creating economic wealth
B. Making investment decisions that optimize economic value
C. Making business decisions that optimize economic wealth
D. Raising capital that is needed for growth
E. All of the above
150. Which of the following should be considered when assessing the financial impact of business decisions
A. The amount of projected earnings
B. The risk-return tradeoff
C. The timing of projected earnings; i.e., when they are expected to occur
D. The amount of the investment in a given project
E. All of the above
151. Which of the following goals is in the best long-term interest of stockholders
A. Profit maximization
B. Risk minimization
C. Maximizing of the market value of the existing shareholders’ common stock
D. Maximizing sales revenues
152. Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose
A. Corporation
B. General Partnership
C. Sole proprietorship
D. Limited partnership
153. Which of the following is not an advantage of the sole proprietorship
A. Limited liability
B. No time limit imposed on its existence
C. No legal requirements for starting the business
D. None of the above
154. In finance, we assume that investors are generally
A. neutral to risk
B. averse to risk
C. fond of risk
D. none of the above
155. Which of the following goals of the firm is equivalent to the maximization of shareholder wealth
A. Profit maximization
B. Risk minimization
C. Maximization of the total market value of the firm’s common stock
D. None of the above
156. Which of the following statements best represents what finance is about
A. How political, social, and economic forces affect corporations
B. Maximizing profits
C. Creation and maintenance of economic wealth
D. Reducing risk
157. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship
A. Unlimited liability of shareholders
B. Access to the capital markets
C. Limited life
D. Elimination of double taxation on corporate income
158. How could you compensate an investor for taking on a significant amount of risk
A. Increase the expected rate of return
B. Raise more debt capital
C. Offer stock at a higher price
D. Increase sales
159. Which of the following is not a reason why financial analysts use ratio analysis
A. Ratios help to pinpoint a firm's strengths
B. Ratios restate accounting data in relative terms
C. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices
D. Some of a firm’s weaknesses can be identified through the usage of ratios
160. The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of
A. liquidity ratios
B. profitability ratios
C. coverage ratios
D. leverage ratios
161. The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of
A. cash
B. work in process inventory
C. marketable securities
D. accruals
162. Which of the following is not a limitation related to the usage of ratios when reviewing a firm’s performance
A. Many firms experience seasonality in their operations
B. Ratios cannot be used to compare firms that are in the same industry if one firm’s sales are higher than another firm’s
C. Some firms operate in a variety of business lines, which makes it difficult to make comparisons
D. Accounting practices differ widely among firms
163. The _______ is the federal agency primarily responsible for regulating the securities industry
A. FTC
B. SEC
C. FRB
D. SCC
164. __________ is a financial specialist who underwrites and distributes new securities of public corporations
A. An investment banker
B. The SEC
C. A commercial banker
D. The Federal Reserve Board
165. What is the role of the SEC as it relates to the issuance of new securities by U.S. corporations
A. To guaranty the sale of securities to the public
B. To ensure accurate and complete disclosure of information about the issuing firm to the public
C. To reduce the cost of issuing securities to the public
D. To provide investment advice to the purchasing public
166. The Omega Corp. plans to borrow $10,000 for a 60-day period. At maturity, Omega will repay the $10,000 principal plus interest at an annual rate of 12%. What is the effective rate of interest on this loan?
A. 12.62%
B. 12.13%
C. 11.47%
D. 11.22%
167. Which of the following techniques may not consider ALL cash flows of a project?
A. Net present value
B. Internal rate of return
C. Payback period
D. Modified internal rate of return
168. In the basic model, the optimal inventory level is the point at which:
A. total cost is minimized.
B. total revenue is maximized.
C. carrying costs are minimized
D. ordering costs are minimized
169. A company is technically insolvent when:
A. cash outflows in a given period are greater than cash inflows.
B. earnings before interest payments are less than the interest payments.
C. it lacks the necessary liquidity to promptly pay its current debt obligations.
D. the current ratio is less than 1.0.
170. An increase in ___________________ would increase a firm’s liquidity.
A. notes payable
B. inventories
C. casH
D. both b and c
171. What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for Years 3 through 5?
A. 3 ½
B. 4 ½
C. 4 2/3
D. 5
172. Which costs should be included when calculating the degree of operating leverage?
A. Depreciation
B. Administrative expense
C. Real estate taxe
D. Both b and c
173. Which of the following statements about the percent-of-sales method of financial forecasting is true?
A. It is the least commonly used method of financial forecasting.
B. It is a much more precise method of financial forecasting than a cash budget would be.
C. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues
D. It projects all liabilities as a fixed percentage of sales
174. Which of the following statements is false
A. All risk can be diversified away
B. Measuring a project’s risk is difficult
C. Projects should focus on incremental cash flows
D. Taxes play a significant role in project analysis
175. Which of the following has the least interest rate risk?
A. A six-month unsecured promissory note from International Harvester
B. An eight-year investment certificate from a federally insured bank
C. A 15-year U.S. Treasury bond
D. An AT&T bond maturing in 2010
176. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October
A. $25,000
B. $15,000
C. $35,000
D. None of the above
177. The first step involved in predicting financing needs is
A. projecting the firm’s sales revenues and expenses over the planning period
B. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales
C. determining the firm’s financing needs throughout the planning period
D. none of the above
178. A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, how much can your friend spend in four years on the purchase? Round off to the nearest $1
A. $1,444
B. $1,604
C. $1,764
D. $1,283
179. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment
A. .055
B. .010
C. .110
D. .220
180. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payments
A. $282.43
B. $390.52
C. $369.82
D. $353.05
181. Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina’s plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1
A. $1,497
B. $5,281
C. $75
D. $3,622
182. Which of the following is true regarding an initial public offering
A. The corporation gets proceeds from the investor
B. Investors get proceeds from other investors
C. The security is sold for the first time to the public
D. Both a and c
183. All else equal, which of the following is the most likely to occur if actual sales are much less than forecasted sales?
A. The company will be in a better position to pay down most of its debt.
B. The firm’s actual investment in inventory will be unchanged from the amount forecasted.
C. Accounts receivable will rise significantly above the forecast.
D. The company might face a cash flow crunch
184. Given that short-term interest rates typically fluctuate more than long-term rates, interest rate risk is least for:
A. Treasury bills
B. common stock.
C. long-term government bonds.
D. medium-term corporate bonds.
185. Money market funds:
A. are one of the oldest forms of mutual funds.
B. typically invest in a diversified portfolio of short-term, high-grade debt instruments.
C. are generally very profitable but fail to provide liquidity to the small investor
D. typically sell shares to the public in $5,000 denominations
186. The break-even model enables the manager of the firm to
A. calculate the minimum price of common stock for certain situations
B. set appropriate equilibrium thresholds
C. determine the quantity of output that must be sold to cover all operating costs
D. determine the optimal amount of debt financing to use
187. If a lease is extended for a length of time that is equal to the entire useful life of the equipment, the lease
A. is referred to as an operating lease
B. carries no income tax deduction
C. is a financial lease
D. will be terminated by the IRS
188. Which of the following would decrease free cash flows? A decrease in
A. depreciation expense
B. interest expense
C. incremental sales
D. both a & c
189. An increase in the ____________ is likely to encourage a corporation to increase its debt ratio
A. corporate tax rate
B. personal tax rate
C. company’s degree of operating leverage
D. expected cost of bankruptcy
190. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies’ strong similar product lines is referred to as a
A. conglomerate merger
B. vertical merger
C. horizontal merger
D. diversification merger
191. Which of the following relationships is true, regarding the costs of issuing the below securities
A. Common stock > bonds > preferred stock
B. Preferred stock > common stock > bonds
C. Bonds > common stock > preferred stock
D. Common stock > preferred stock > bonds
192. According to the SEC, the correct sequence of events for a security issue is
A. red herring, final prospectus, SEC registration
B. SEC registration, red herring, final prospectus
C. final prospectus, SEC registration, red herring
D. red herring, SEC registration, final prospectus
193. What is the most important ingredient in developing a firm’s financial plan
A. A forecast of sales revenues
B. Determining the amount of dividends to pay shareholders
C. Projecting the rate of interest on proposed new debt
D. Deciding upon which method of depreciation a firm should utilize
194. The firm should accept independent projects if
A. the payback is less than the IRR
B. the profitability index is greater than 1.0
C. the IRR is positive
D. the NPV is greater than the discounted payback
195. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,520.
Year Net Cash Flow
1 $1,000
2 $1,500
3 $ 500
A. 48%
B. 40%
C. 32%
D. 28%
196. An increase in ___________ would increase net working capital
A. plant and equipment
B. accounts payable
C. accounts receivable
D. both b and c
197. In order to maximize firm value, management should invest in new assets when the internal rate of return is
A. greater or equal to the firm’s marginal cost of capital
B. greater than the cost of debt financing
C. less than or equal to the accounting rate of return
D. less than or equal to the firm’s marginal cost of capital
198. If the NPV of a project is positive, then the project’s IRR ____________ the required rate of return
A. must be less than
B. must be greater than
C. could be greater or less than
D. cannot be determined without actual cash flows
199. Once a cash discount period has passed
A. one should pay immediately
B. there is no financial incentive to pay before the final due date
C. one should pay after the final due date
D. cannot be determined from the information
200. A managerial benefit of a lock box arrangement is
A. better audit control of the documents received
B. elimination of clerical functions
C. less chance of losing documents
D. all of the above
201. A firm expects total demand for its product over the planning period to be 10,000 units with an ordering cost per order of $400 and a carrying cost per unit of $2. This firm’s economic ordering quantity is
A. 1,000
B. 2,000
C. 3,000
D. 4,000
202. Safety stock
A. is used to deal with the two most limited assumptions of the EOQ model
B. must be higher the more certain are the inflows and outflows from the inventory
C. will be lower when costs of carrying additional inventory are low
D. does not affect average inventory levels
203. Which of the following statements is consistent with long-term financing leases
A. They are not reported on the balance sheet
B. They are addressed in the footnotes to the annual report
C. They result in interest expense on the company’s income statement
D. Both b and c
204. Suppose you determine that the NPV of a project is $1,525,855. What does that mean
A. In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000
B. The project would add value to the firm
C. Under all conditions, the project’s payback would be less than the profitability index
D. The project’s IRR would have to be less that the firm’s discount rate
205. Which of the following would increase the need for external equity
A. A reduction in corporate profits
B. Inadequate investment opportunities
C. A seasonal reduction in sales revenues
D. A slow-down in economic growth
206. Which of the following is not a driving force of the operating profit margin
A. The average selling price for each product
B. The ability to control all of the firm's expenses
C. The ability to control general and administrative expenses
D. The number of units of product sold
207. The IRR is
A. the discount rate that makes the NPV positive
B. the discount rate that equates the present value of the cash inflows with the cost of the project
C. the discount rate that makes the NPV negative and the profitability index greater than one
D. the rate of return that makes the NPV positive
208. The focus of current asset management is on
A. property, plant, and equipment acquisition
B. cash, accounts receivable, and inventory levels
C. investments in marketable securities
D. both a and c
209. A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have __________ earnings per share fluctuations resulting from changes in levels of sales
A. no
B. constant
C. large
D. small
210. A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answerwer to the nearest $10.)
A. $490
B. $570
C. $900
D. -$150
211. What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
A. $893
B. $3,106
C. $429
D. $833
212. Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% over the life of the IRA. How much will he have at the end of 35 years?
A. $363,000
B. $125,250
C. $414,405
D. $250,321
213. Which of the following statements about a financial lease is generally true
A. Only the portion of the lease payment that is applied to interest is tax-deductible
B. It has no income tax deductibility
C. Only the portion of the lease payment that reduces the principal may be used as an income tax deduction
D. The entire lease payment is used as an income tax deduction
214. The number of pounds you can purchase per U.S. dollar is
A. 1.5609
B. 0.6207
C. 0.6404
D. 1.5615
215. Money market instruments include
A. bankers’ acceptances
B. preferred stock
C. corporate bonds
D. common stock
216. Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio
A. 40%
B. 50%
C. 60%
D. 30%
217. What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.
A. $5,790
B. $11,574
C. $9,210
D. $17,010
218. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is
A. 2%
B. 8%
C. 18%
D. 12%
219. If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
A. $10,065
B. $10,193
C. $22,334
D. $21,731
220. Farar, Inc. projects operating income of $4 million next year. The firm's income tax rate is 40%. Farar presently has 750,000 shares of common stock, no preferred stock, and no debt. The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years. If Farar issues the bonds this year, what will projected EPS be next year?
A. $2.33
B. $1.53
C. $3.12
D. $1.98
E. $2.72
221. Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management
A. Quick ratio
B. Current ratio
C. Return on investment
D. Gross profit margin
222. Another name for the acid test ratio is the
A. quick ratio
B. inventory turnover ratio
C. average collection period
D. current ratio
223. Which of the following statements about the percent-of-sales method of financial forecasting is true
A. It is the least commonly used method of financial forecasting
B. It is a much more precise method of financial forecasting than a cash budget would be
C. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues
D. It projects all liabilities as a fixed percentage of sales
224. The accounting rate of return on stockholders’ investments is measured by
A. return on equity
B. operating income return on investment
C. realized rate of inflation
D. return on assets
225. When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997
A. $3,489,097
B. $1,025,000
C. $4,085,920
D. $2,525,548
226. Exchange rate risk
A. arises from the fact that the spot exchange rate on a future date is a random variable
B. applies only to certain types of international businesses
C. has been phased out due to recent international legislation
D. both a and b
227. Accounts receivable and inventory self-liquidate through the __________ cycle
A. sales-to-receivables collection
B. cash conversion
C. net working capital
D. spontaneous account
228. Fluctuations in EBIT result in
A. fluctuations in EPS, which might be larger or smaller as financial leverage increases
B. smaller fluctuations in EPS, the greater the degree of financial leverage
C. greater fluctuations in EPS, the greater the degree of financial leverage
D. equal fluctuations in EPS, the greater the degree of financial leverage
229. Based on the data contained in Table 1, what is the degree of combined leverage
A. 6.33
B. 6.67
C. 7.33
D. 7.67
230. Given the following information, determine the risk-free rate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
A. 8.0%
B. 7.5%
C. 7.0%
D. 6.5%
231. A firm’s business risk is influenced by the
A. competitive position of the firm within the industry
B. demand characteristics of the firm’s products
C. financing structure of the firm
D. both a and b
232. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s cost of capital
A. 13.5%
B. 11.1%
C. 7.2%
D. 12.5%
233. You are in charge of one division of Bigfella Conglomerate Inc. Your division is subject to capital rationing. Your division has four indivisible projects available, detailed as follows:
Project Initial Outlay IRR NPV
1 2 million 18% 2,500,000
3 1 million 10% 600,000
2 1 million 15% 950,000
4 3 million 9% 2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which set of projects should be accepted so as to maximize firm value
A. Projects 1, 2, and 3
B. Project 1 only
C. Projects 1 and 4
D. Projects 2, 3, and 4
234. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
A. $25,000
B. $15,000
C. $35,000
D. None of the above
235. Which of the following refers to the institutions and procedures that provide for transactions in short-term debt instruments
A. Capital market
B. Commercial banks
C. Money market
D. Stock market
236. Where is the availability of prices most continuous
A. Organized exchange
B. OTC
C. FRB
D. NASDAQ
237. Cost advantages in competitive markets
A. have the potential to create large profits
B. deter new entrants from entering
C. can be created by economies of scale
D. all of the above.
238. Which of the following decrease new competition in competitive markets
A. Economies of scale
B. Proprietary technology
C. Product differentiation
D. All of the above
239. Which of the following statements is true regarding competitive markets
A. Large profits exist over the long run
B. Product differentiation produces insulation for competitors
C. Cost advantages attract new entrants
D. Both b and c
240. When calculating the average cost of capital, which of the following has to be adjusted for taxes
A. Common stock
B. Retained earnings
C. Debt
D. Preferred stock
241. When selecting the best project from a group of mutually exclusive projects you should choose the project with the highest
A. net present value
B. internal rate of return
C. accounting rate of return
D. payback
242. The net present value always provides the correct decision provided that
A. the internal rate of return is positive
B. capital rationing is not imposed
C. the required rate of return is greater than the internal rate of return
D. cash flows are constant over the asset's life
243. The purpose of carrying inventory is to
A. improve the current ratio
B. have collateral for loans
C. make sales more independent of the production process
D. make different production processes more dependent on sales
244. The primary concern in the management of cash and marketable securities for an operating company is to
A. be profitable
B. balance liquidity needs against investment opportunities
C. keep enough cash on hand to buy a competitor if it becomes available
D. both a and c
245. The precautionary motive for holding cash assumes that balances are held
A. to satisfy the need for cash that arises in the ordinary course of doing business
B. to satisfy possible but as yet indefinite needs
C. as a precaution against missing possible profit-making opportunities
D. for speculative purposes
246. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?
A. 16%
B. 13%
C. 21%
D. 15%
247. Financial leverage means financing some of a firm's assets with
A. commercial paper
B. preferred stock
C. corporate bonds
D. all of the above
248. Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years
A. 500(1+.08)5
B. 500(1+.08)20
C. 500(1+.02)5
D. 500(1+.02)20
249. At 8% compounded annually, how long will it take $750 to double
A. 6.5 years
B. 48 months
C. 9 years
D. 12 years
250. Which of the following is a characteristic of a limited partnership
A. It allows one or more partners to have limited liability
B. It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply
C. It prohibits the limited partners from participating in the management of the partnership
D. all of the above
251. Coplon, Inc., an industrial firm, earned $180,000 in dividends in 1993 on their stock holding in the Finco Company. How much of the dividends are excluded from Coplon's taxable income?
A. $27,000
B. None
C. $126,000
D. $153,000
252. Which of the following is not true for limited partnerships
A. Limited partners can only manage the business
B. One general partner must exist who has unlimited liability
C. Only the name of general partners can appear in the name of the firm
D. Limited partners may sell their interest in the company
253. What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form
A. Sole proprietorships are subject to double taxation of profits
B. Owners have unlimited liability
C. Inadequate profit sharing
D. The cost of formation
254. Profit maximization does not adequately describe the goal of the firm because
A. profit maximization does not require the consideration of risk
B. profit maximization ignores the timing of a project's return
C. maximization of dividend payout ratio is a better description of the goal of the firm
D. a and b
255. Which of the following expenses should be included as a cash outlay in the preparation of a cash budget
A. The payment of accounts payable
B. The payment of depreciation expense
C. The payment of accrued income taxes
D. All of the above
E. None of the above
256. Which of the following is a source of external capital
A. Retained earnings
B. Inventory
C. Long-term debt
D. Operating income (earnings before interest and taxes)
257. Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
A. 17.5%
B. 19.5%
C. 21.5%
D. 23.5%
258. IBM issuing new shares of common stock would be classified as
A. a new seasoned issue
B. an initial public offering
C. a secondary market transaction
D. a and b
259. Which of the following is true regarding accounting profits
A. Received by the firm and reinvested
B. Reflects money in hand
C. Represents actual money received and paid out
D. Equals cash in the bank
260. In measuring value, the focus should be on
A. cash flow
B. accounting profits
C. time value of money
D. earnings per share
261. A limited liability company (LLC) is
A. able to retain limited liability for owners
B. taxed like a corporation
C. a cross between a partnership and a corporation
D. a and c
262. What does the agency problem refer to
A. The conflict that exists between the board of directors and the employees of the firm
B. The problem associated with financial managers and Internal Revenue agents
C. The conflict that exists between stockbrokers and investors
D. The problem that results from potential conflicts of interest between the manager of a business and the stockholders
263. Which of the following would be most likely to align the interests of managers and shareholders
A. Fixed but high salaries
B. Large bonuses
C. Stock options
D. All of the above
264. Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States
A. Corporations have limited life
B. Stockholders have unlimited liability
C. Corporations are subject to less government regulation than the other forms of business organization
D. Corporations have the ability to raise larger sums of capital than the other forms of business organization
265. The TQM view argues that
A. the costs of achieving higher quality are more than economists projected
B. better quality products drive higher sales
C. lost sales result from a poor-quality reputation
D. both b and c
266. Carrying cost on inventory includes
A. the required rate of return on investment in total assets
B. wages of warehouse employees
C. cost associated with inventory shrinkage
D. both b and c
267. If you compare the yield of a municipal bond with that of a Treasury bond, what is the equivalent before-tax yield of a municipal bond yielding 6% per year for an investor in the 36% tax bracket (round to nearest .1%)?
A. 9.4%
B. 8.1%
C. 7.7%
D. 6.3%
268. Which forms of organization are free of initial legal requirements
A. Sole proprietorship
B. General partnership
C. Corporation
D. Both a and b
269. Which of the following types of business forms is the most ideal in terms of attracting new capital
A. Sole proprietorship
B. Limited partnership
C. General partnership
D. A public corporation
270. The firm should accept independent projects if
A. the NPV is greater than the discounted payback
B. the IRR is positive
C. the profitability index is greater than 1.0
D. the payback is less than the IRR
271. ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.)
A. $6,577
B. $7,621
C. $4,568
D. $1,056
272. The most expensive source of capital is
A. retained earnings
B. debt
C. new common stock
D. preferred stock
273. Given that short-term interest rates typically fluctuate more than long-term rates, interest rate risk is least for
A. Treasury bills
B. common stock
C. long-term government bonds
D. medium-term corporate bonds
274. Which of the following forms of business organization is the dominant economic force in the United States
A. The sole proprietorship
B. The general partnership
C. The limited partnership
D. The corporation
275. Which of the following should be considered when assessing the financial impact of business decisions
A. The amount of projected earnings
B. The risk-return tradeoff
C. The timing of projected earnings; i.e., when they are expected to occur
D. The amount of the investment in a given project
E. All of the above
276. Which of the following is a significant disadvantage of a general partnership
A. The cost of forming it is high
B. Each partner is fully responsible for the liabilities incurred by the partnership
C. There is a risk associated with the industry in which it operates
D. Forming the business is very complex
277. For these types of organization, no distinction is made between business and personal assets
A. Sole proprietorship
B. General partnership
C. Limited partnership
D. All of the above
E. Both a and b
278. Cost of capital is
A. the average cost of the firm’s assets
B. the rate of return that must be earned on additional investment if firm value is to remain unchanged
C. a hurdle rate set by the board of directors
D. the coupon rate of debt
279. The average cost associated with each additional dollar of financing for investment projects is
A. beta
B. risk-free rate
C. the marginal cost of capital
D. the incremental return
280. Which of the statements below is true
A. The sole proprietorship and the general partnership both feature unlimited liability
B. It is very complicated (legally) to establish a corporation
C. No legal criterion exists for a general partnership
D. All of the above are true
281. Corporations receive money from investors with
A. initial public offerings
B. seasoned new issues
C. primary market transactions
D. a and b
282. Difficulty in finding profitable projects is due to
A. social responsibility
B. competitive markets
C. ethical dilemmas
D. opportunity costs
283. Foregoing the earning potential of a dollar today is referred to as the
A. time value of money
B. opportunity cost concept
C. risk/return tradeoff
D. creation of wealth
284. The true owners of the corporation are the
A. common stockholders
B. board of directors of the firm
C. preferred stockholders
D. holders of debt issues of the firm
285. Which of the following best describes the goal of the firm
A. The maximization of the total market value of the firm’s common stock
B. Profit maximization
C. Risk minimization
D. None of the above
286. Which of the following statements about exchange rates is true
A. Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar
B. Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates
C. A floating-rate international currency system has been operating since 1973
D. All of the choices
287. If the quote for a forward exchange contract is greater than the computed price, the forward contract is
A. Undervalued
B. a good buy
C. overvalued
D. at equilibrium
