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1) Which of the following legal forms of organization is characterized by limited

liability?

a. Professional partnership

b. Sole proprietorship

c. Corporation

d. Partnership

2) The financial 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 firms capital structure.

d. determining whether to accept or reject a capital asset acquisition.

3) The financial managers financing decisions determine

a. both the mix and the type of assets found on the firms balance sheet.

b. both the mix and the type of assets and liabilities found on the firms balance

sheet.

c. the most appropriate mix of short-term and long-term financing.

d. the proportion of the firms earnings to be paid as dividend.

4) Wealth maximization as the goal of the firm implies enhancing the wealth of

a. the firms stockholders.

b. the Board of Directors.

c. the firms 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 profits after taxes.

c. earnings per share.

d. net income.

6) Cash flow and risk are the key determinants in share price. Increased cash

flow 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

7) A more recent issue that is causing major problems in the business community

is

a. short-term versus long-term financial 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 flows.

b. a positive corporate image and increased respect, but is not expected to affect

share price.

c. an increased share price resulting from a decrease in risk, but is not expected

to affect cash flows.

d. a positive corporate image and increased respect, a reduction in risk, and


enhanced

cash flow 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 financial reporting.

d. all of the above

10) The key participants in financial 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 financial 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 efficient markets that do all of the following

EXCEPT

a. ensure a market in which the price reflects 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.

a. reduces

b. has no effect on

c. has an undetermined effect on

d. increases

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-financing for the corporation paying the dividend.

16) The rule-setting body, which authorizes generally accepted accounting


principles

is

a. FASB.

b. Federal Reserve System.

c. SEC.

d. GAAP.

17) Candy Corporation had pretax profits 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


Corporations

earnings per share?

a. $4.52

b. $7.59

c. $7.42

d. $3.91

18) The analyst should be careful when evaluating a ratio analysis that

a. the dates of the financial 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

policy.

a. average collection period

b. average payment period

c. inventory turnover

d. quick

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

c. Stockholders

d. Customers

22) If the inventory turnover is divided into 365, it becomes a measure of

a. sales turnover.

b. the average collection period.

c. sales efficiency.

d. the average age of the inventory.

23) The ________ ratio may indicate that the firm will not be able to meet interest

obligations due on outstanding debt.

a. times interest earned

b. return on total assets

c. net profit margin

d. debt

24) The ________ measures the percentage of profit earned on each sales dollar

before interest and taxes.

a. net profit margin

b. operating profit margin

c. earnings available to common shareholders

d. gross profit margin

25) In the DuPont system, the return on total assets (asset) is equal to

a. (net profit margin) (fixed asset turnover).

b. (return on equity) (total asset turnover).

c. (return on equity) (financial leverage multiplier).

d. (net profit margin) (total asset turnover).

26) The financial 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 fixed assets against the annual revenue they

generate is called

a. amortization.

b. net profits.

c. depreciation.

d. gross profits.

28) The cash flows from operating activities section of the statement of cash

flows considers

a. interest expense.

b. stock repurchases.

c. dividends paid.

d. cost of raw materials.

29) The key aspects of the financial planning process are

a. cash planning and investment planning.

b. cash planning and profit planning.

c. investment planning and profit planning.

d. cash planning and financing.

30) A firm has projected sales in May, June, and July of $100, $200, and $300,

respectively. The firm makes 20 percent of sales for cash and collects the

balance one month following the sale. The firms 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. financed with long-term securities.

b. invested in marketable securities.

c. financed with short-term securities.

d. invested in long-term securities.

32) In the month of August, a firm 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 financing) for August is

a. required total financing of $500.

b. required total financing 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 simplified
approaches are the

a. sales forecast for the preceding year and financial statements for the coming

year.

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 financial statements for the preceding

year.

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 firms external financing is used as a balancing, or plug, figure.

a. cash

b. accrual

c. judgmental

d. percent-of-sales

35) The strict application of the percent-of-sales method to prepare a pro forma

income statement assumes the firm has no fixed costs. Therefore, the use of

the past cost and expense ratios generally tends to ________ profits when

sales are increasing.

a. have no effect on

b. accurately predict

c. overstate

d. understate

36) A firm 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 financial statements will tend to

a. overstate profits when sales are increasing.

b. neither understate nor overstate profits.

c. understate profits when sales are increasing.

d. understate profits when sales are decreasing.

38) In a period of rising sales utilizing past cost and expense ratios (percent of-

sales method), when preparing pro forma financial statements and planning

financing, will tend to

a. overstate retained earnings and understate the financing needed.

b. overstate retained earnings and overstate the additional financing needed.

c. understate retained earnings and overstate the financing needed.

d. understate retained earnings and understate the additional financing 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 specified 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

a. $200.

b. $50.

c. $518.

d. $77.

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

a. $350,000.

b. $285,000.

c. $178,571.

d. $219,298.

44) The future value of $100 received today and deposited in an account for four

years paying semiannual interest of 6 percent is

a. $450.

b. $889.

c. $134.

d. $126.

45) The future value of an annuity of $1,000 each quarter for 10 years, deposited

at 12 percent compounded quarterly is

a. $75,401.

b. $17,549.

c. $93,049.

d. $11,200.

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

a. $2,641.

b. $1,125.

c. $942.

d. $1,482.

47) Ashley owns stock in a company which has consistently paid a growing dividend

over the last five years. The first year Ashley owned the stock, she received

$1.71 per share and in the fifth year, she received $2.89 per share.

What is the growth rate of the dividends over the last five 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

a. 13%.

b. 50%.

c. 7.5%.

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 ________.

a. $1,947.10

b. $1,336.00

c. $2,906.11

d. $1,560.14

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?

a. 5.98%

b. 5.28%

c. 6.23%

d. 4.55%

51) ________ is the chance of loss or the variability of returns associated with a
given asset.
a. Value
b. Probability
c. Risk
d. Return

52) The goal of an efficient portfolio is to


a. minimize profit in order to minimize risk.
b. maximize risk for a given level of return.
c. maximize risk in order to maximize profit.
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
Final Examination
54) The purpose of adding an asset with a negative or low positive beta is to
a. reduce risk.
b. increase profit.
c. reduce profit.
d. increase risk.

55) The portion of an assets risk that is attributable to firm-specific, random


causes is called
a. unsystematic risk.
b. systematic risk.
c. nondiversifiable risk.
d. none of the above

56) ________ risk represents the portion of an assets risk that can be eliminated
by combining assets with less than perfect positive correlation.
a. Systematic
b. Total
c. Nondiversifiable
d. Diversifiable

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
Nicos portfolio invested in stock X?
a. 50%
b. 77%
c. 67%
d. 33%

58) As risk aversion increases


a. investors required rate of return will decrease.
b. a firms beta will decrease.
c. a firms 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
b. risk-free

c. real
d. nominal

60) The ________ rate of interest is typically the required rate of return on a
three-month U.S. Treasury bill.
a. premium
b. real
c. nominal
d. risk-free

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 corporations annual cash dividend payments.
d. restricting the corporation from disposing of fixed assets.

65) Another name for a deeply discounted bond that pays no coupon interest is a
a. floating rate bond.
b. junk bond.
c. subordinated debenture.
d. zero coupon bond.
Final Examination

66) A debenture is
a. a secured bond that is secured by unspecified assets.
b. a lengthy legal document stating the conditions under which a bond has been
issued.
c. an unsecured bond that only creditworthy firms can issue.
d. a bond secured by specific asset.

67) In utilizing a ________ the issuer can annually deduct the current years interest

accrual without having to actually pay the interest until the bond matures.
a. junk bond
b. extendible notes
c. zero coupon bond
d. floating rate bond

68) The less certain a cash flow, the ________ the risk, and the ________ the
present value of the cash flow.
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 first sold?
a. $12,393
b. $15,505
c. $18,880
d. $11,212
e. $20,000

70) If bankruptcy were to occur, stockholders would have prior claim on assets
over
a. preferred stockholders.
b. unsecured creditors.

c. secured creditors.
d. no one.
Final Examination
71) The advantages of issuing preferred stock from the common stockholders
perspective include all of the following EXCEPT
a. increased leverage.
b. flexibility.
c. use in mergers.
d. seniority of preferred stockholders claim over common stockholders.

72) All of the following features may be characteristic of preferred stock EXCEPT
a. convertible.
b. no maturity date.
c. callable.
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 firms common stock at a specified price over a certain period of time
is a
a. stock option.

b. stock right.
c. pre-emptive right.
d. warrant.

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.
Final Examination

76) Tangshan China Companys 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 Tangshans dividend growth rate assuming that dividends
are expected to grow at a constant rate forever?
a. 9%
b. 10%
c. 8%
d. 11%

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 flows of $200,000 per year
for the next five years. Beyond that time, free cash flows are expected to grow
at a constant rate of 5 percent per year forever. If the firms average cost of
capital is 15 percent, the market value of the firms debt is $500,000, and
Nico has a half million shares of stock outstanding, what is the value of
Nicos stock?
a. $0.00
b. $1.43
c. $3.43
d. $2.43

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 firm.
c. commonly used to expand the level of operations.
d. expected to produce benefits 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 financing of such investments as equity rather than as debt.
b. structuring the financing of such investments as debt rather than as equity.
c. structuring the investment as a joint venture and selecting well-connected
local partner.
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 incrementaloperating cash inflows.
c. the operating cash inflows.
d. the operating cash outflows.

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 benefit 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 five year
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 benefit.
c. $0 tax liability.
d. $1,100 tax liability.

85) Unsophisticated capital budgeting techniques do not


a. examine the size of the initialoutlay.
b. take into account an unconventional cash flow pattern.
c. explicitly consider the time value of money.
d. use net profits as a measure of return.
Final Examination
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 inflows 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?
a. Yes
b. No
c. It depends
d. None of the above

87) The minimum return that must be earned on a project in order to leave the
firms value unchanged is
a. the compound rate.
b. the cost of capital.
c. the interest rate.

d. the internal rate of return.

88) A firm would accept a project with a net present value of zero because
a. the project would enhance the wealth of the firms owners.
b. the return on the project would be positive.
c. the project would maintain the wealth of the firms 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 inflows 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?
a. ($137,053)
b. $371,764
c. $1,700,000
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 inflows 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?
a. $1,700,000
b. $137,053
c. $371,764
d. None of the above

91) The ________ is the compound annual rate of return that the firm will earn if
it invests in the project and receives the given cash inflows.
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 flows do not affect internal rate of
return.
b. projects having higher early-year cash flows tend to be preferred at lower
discount rates.
c. projects having higher early-year cash flows tend to be preferred at higher
discount rates.
d. projects having lower early-year cash flows tend to be preferred at higher
discount rates.

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.
b. simulations.
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
estimate.
c. dependability of predetermined probability distributions.
d. ease of calculation.

95) Breakeven cash inflow refers to


a. the minimum level of cash inflow necessary for a project to be acceptable,
that is, IRR < cost of capital.
b. the minimum level of cash inflow necessary for a project to be acceptable,
that is, NPV > $0.
c. the minimum level of cash inflow necessary for a project to be acceptable,
that is, NPV < $0.
d. none of the above is correct
Final Examination
96) A behavioral approach that evaluates the impact on the firms 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 ________ reflects the return that must be earned on the given project to
compensate the firms owners adequately according to the projects variability
of cash flows.
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 profitability 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 financial
risk of the firm.
b. the risk-free rate of each type of capital plus the business risk of the firm.
c. the risk-free rate of each type of capital plus the financial risk of the firm.
d. the risk-free rate of bonds plus the business risk of the firm.

100) The before-tax cost of debt for a firm which has a 40 percent marginal tax rate
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.

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