CHAPTER 1

1) What is the goal of financial management for a sole proprietorship?

A. Maximize net income given the current resources of the firm

B. Decrease long-term debt to reduce the risk to the owner
C. Minimize the tax impact on the proprietor
D. Maximize the market value of the equity
E. Minimize the reliance on fixed costs

2) A corporation:

A. is ultimately controlled by its board of directors.

B. is a legal entity separate from its owners.
C. is prohibited from entering into contractual agreements.
D. has its identity defined by its bylaws.
E. has its existence regulated by the rules set forth in its charter.
3) Which one of the following correctly defines a common chain of command within a corporation?

A. The controller reports directly to the corporate treasurer.

B. The treasurer reports directly to the board of directors.
C. The chief financial officer reports directly to the board of directors.
D. The credit manager reports directly to the controller.
E. The controller reports directly to the chief financial officer.
4) The potential conflict of interest between a firm's owners and its managers is referred to as which type
of conflict?

A. Organizational
B. Structural
C. Formation
D. Agency
E. Territorial

5) Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the
NYSE. Valerie's purchase occurred in which market?

A. Dealer market
B. Over-the-counter market
C. Secondary market
D. Primary market
E. Tertiary market

CHAPTER 2
1) Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C. operating cash flow minus the change in net working capital minus net capital spending.
D. operating cash flow plus net capital spending plus the change in net working capital.
E. cash flow to shareholders minus net capital spending plus the change in net working capital.

2) Which one of the following statements concerning market and book values is correct?
A. The market value of accounts receivable is generally higher than the book value of those receivables.
B. The market value tends to provide a better guide to the actual worth of an asset than does the book
value.
C. The market value of fixed assets will always exceed the book value of those assets.
D. Book values represent the amount of cash that will be received if an asset is sold.
E. The current book value of equipment purchased last year is equal to the initial cost of the equipment.

3) Which two of the following determine when revenue is recorded on the financial statements based on
the recognition principle?
I. Payment is collected for the sale of a good or service.
II. The earnings process is virtually complete.
III. The value of a sale can be reliably determined.
IV. The product is physically delivered to the buyer.
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. I and III only

4) The concept of marginal taxation is best exemplified by which one of the following?
A. Kirby's paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B. Johnson's Retreat paid only $45,000 on total revenue of $570,000 last year.
C. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in
taxes.
D. Burlington Centre paid no taxes last year due to carryforward losses.
E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

5) Use the following tax table to answer this question:

The Holiday Inn earned $177,284 in taxable income for the year. How much tax does the company owe
on this income?
A. $46,311.02
B. $48,490.76
C. $52,390.76
D. $59,998.81
E. $65,240.76

CHAPTER 3
1) The cash coverage ratio is used to evaluate the:
A.
B.
C.
D.
E.

liquidity of a firm.
speed at which a firm generates cash.
length of time that a firm can pay its bills if no additional cash becomes available.
ability of a firm to pay the interest on its debt.
relationship between the firm's cash balance and its current liabilities.

2)A firm has total assets of $523,100, current assets of $186,500, current liabilities of $141,000, and total
debt of $215,000. What is the debt-equity ratio?
A. 0.48
B. 0.70
C. 1.10
D. 1.43
E. 2.13
3) A firm has an equity multiplier of 1.5. This means that the firm has a:
A. debt-equity ratio of 0.67.
B. debt-equity ratio of 0.33.
C. total debt ratio of 0.50.
D. total debt ratio of 0.67.
E. total debt ratio of 0.33.

4) Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of
sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35
percent?
A. 12.46 percent
B. 12.95 percent
C. 13.33 percent
D. 15.29 percent
E. 16.11 percent

5) Last year, Teresa's Fashions earned net income of $68,400 and had 12,000 shares of stock
outstanding. The dividends per share were $1.20. What is the dividend payout ratio?
A. 21.05 percent
B. 24.07 percent
C. 38.60 percent
D. 40.21 percent
E. 44.14 percent

CHAPTER 4
1) You have just made your first $5,000 contribution to your individual retirement account. Assuming you
earn a 5 percent rate of return and make no additional contributions, what will your account be worth
when you retire in 35 years? What if you wait for 5 years before contributing?
A. $26,335.37; $23,011.60
B. $27,311.20; $29,803.04
C. $27,311.20; $22,614.08
D. $27,580.08; 21,609.71
E. $31,241.90; $32,614.08

2) Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much
additional income could he earn if he had invested this amount at 7 percent, compounded annually?
A. $1,043.11
B. $1,256.30
C. $1,401.16
D. $1,442.79
E. $1,484.08

3) Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3 percent interest,
compounded annually, on this account. How much interest on interest will he earn over the next 15
years?
A. $238.16
B. $244.20
C. $360.70
D. $606.15
E. $623.70

4) Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her
money?
A. 6 percent interest for 3 years
B. 12 percent interest for 5 years
C. 7 percent interest for 9 years
D. 8 percent interest for 9 years
E. 6 percent interest for 10 years

5) Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account.
The first account was with City Bank at 3 percent, compounded annually. The second account was with
Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true
concerning these accounts?

A. The City Bank account is currently worth $1,201.54.

B. The City Bank account has earned $211.19 more in interest than the Country Bank account.
C. The Country Bank account is currently worth $1,526.08.
D. The Country Bank account has paid $367.48 more in interest than the City Bank account.
E. The Country Bank account has paid $397.30 more in interest than the City Bank account.

CHAPTER 5

1) Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to
get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off
this balance if he makes monthly payments of $50 rather than $60?

A. 28.24 months
B. 31.33 months
C. 36.74 months
D. 39.20 months
E. 41.79 months

2) At the end of this month, Les will start saving $150 a month for retirement through his company's
retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is
employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings,
how much will Les have in his retirement account 30 years from now?

A. $389,406.19
B. $401,005.25
C. $540,311.67
D. $566,190.22
E. $603,289.01

3) Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest.
How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the
nearest whole dollar.

A. $1,338
B. $1,414
C. $1,459
D. $1,506
E. $1,534

4) Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of
$2,500 payments that begin at year t = 25?

A. $16,412.02
B. $17,208.00
C. $34,335.96
D. $36,235.06
E. $36,711.41

5) Which one of the following statements is correct?

A. The APR is equal to the EAR for a loan that charges interest monthly.
B. The EAR is always greater than the APR.
C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1.
D. The APR is the best measure of the actual rate you are paying on a loan.
E. The EAR, rather than the APR, should be used to compare both investment and loan options.

CHAPTER 11

1) You are assigned the task of computing the expected return on a portfolio containing several individual
stocks. Which one of the following statements is correct concerning this task?

A. The expected rate of return on the portfolio must be positive.

B. The arithmetic average of the betas for each security held in the portfolio must equal 1.0.
C. The portfolio beta must be 1.0.
D. The summation of the return deviation from the portfolio expected return for each economic state must
equal zero.
E. The standard deviation of the portfolio must equal 1.0.

2) The expected return on a security depends on which of the following?

I. Risk-free rate of return
II. Amount of the security's unique risk
III Market rate of return
IV. Standard deviation of returns
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV

3) You would like to invest $19,000 and have a portfolio expected return of 12.3 percent. You are
considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an
expected return of 10.3 percent. How much should you invest in Stock A if you invest the balance in
Stock B?

A. $6,807
B. $7,170
C. $7,411
D. $7,937
E. $8,626

4) A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A
risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the
risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on
your portfolio?
A. 8.50 percent
B. 9.16 percent
C. 9.33 percent
D. 9.41 percent
E. 9.56 percent

5) Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68
and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the
expected return of your portfolio?
A. 10.67 percent
B. 11.18 percent
C. 11.62 percent
D. 12.04 percent
E. 13.13 percent