1.

The break-even model expresses the volume of output as a unit quantity. True

2.

According to the DuPont Analysis, an increase in net profit margin will decrease
return on assets. False

3.

A new issue of common stock is considered a primary market transaction in the

money market. False

4.

When forecasting statements, assets always increase proportionately to sales

regardless of capacity. False

If we invest money for 10 years at 8% interest, compounded semi-annually, we are

really investing money for 20 six-month periods, during which we receive 4%
interest
each period. True

6.

The same basic formula is used for computing both the computation of future value and of
present value. True

The goal of the firm should be the maximization of profit. False

8.

Both the IRR rule and the accounting rate of return rule take into consideration the time
value of money. False

9.

The IRR assumes that cash flows are reinvested at the cost of capital. False

10. The largest cash receipts for a firm come from accounts payable. False
11. There are no disadvantages to the Net Present Value method. False
12.

Corporate profits play a part in the choice firms make between using internal versus
external capital. True

13.

Because the 2% discount is so small, terms of credit such as 2/10 net 30 do not have much
affect on accounts receivable management. False

14. The capital budgeting decision-making process involves measuring the

incremental cash flows of an investment proposal and evaluating the attractiveness of these
cash flows relative to the projects cost. True
15. Projects are said to be mutually exclusive when undertaking one prevents doing
the other(s). True
16. The weighted average cost of capital is the minimum required return that must be earned on
additional investment if firm value is to remain unchanged. True
17.

An increase in financial leverage will increase earnings before income and taxes
(EBIT). False

18.

Economies of scale are created when sharing of resources increases a firms productivity.
True

19.

Leading and lagging are financial techniques used to eliminate risk. True

20. Financial ratios comprise the principal tool of financial analysis since they can be
used to answer a variety of questions regarding a firm's financial condition. True

1.

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.

2.

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

3.

Which costs should be included when calculating the degree of operating leverage?
a. Depreciation
b. Administrative expenses
c. Real estate taxes
d. Both b and c
e. All of the above

4.

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 1/2
b. 4 1/2
c. 4 2/3
d. 5

5.

An increase in ___________________ would increase a firms liquidity.

a. notes payable
b. inventories
c. cash
d. both b and c
e. all of the above

6.

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.

7.

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. -$466
c. $27,534
d. $8,891

8.

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.

9.

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

10.

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 firms assets.

11.

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 companys 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%

12.

The Independence Hypothesis states that the use of a greater degree of leverage might
result in greater:
a. earnings.
b. dividends.
c. firm cost of common equity.
d. both a & c.
e. all of the above.

13.

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 firm
d. The relative earnings growth rates of the firms

14.

Elimination of all foreign exchange risk:

a.
b.
c.
d.
e.
15.

should be the objective of a prudent financial manager.

should be analyzed on a cost benefit basis.
is possible through diversification.
both a and c.
all of the above.

Consider cash flows for Projects X and Y such as:

Project X
Project Y
Year 1
$3000
$ 0
Year 2
$ 0
$3000
A rational person would prefer receiving cash flows sooner because:
a. the money can be reinvested.
a.the money is nice to have around.
b. the investor may be tired of a particular investment.
c.the investor is indifferent to either proposal.

16.

Corporations receive money from investors with:

a.initial public offerings.
a.seasoned new issues.
b. primary market transactions.
c.a and b.
d. all of the above.

17. The debt ratio is a measure of a firms:

a. leverage.
b. profitability.
c. liquidity.
d. efficiency.
18.

Capital market instruments include:

a. negotiable certificates of deposit.
b. corporate equities.
c. preferred stock.
d. both b and c.
e. all of the above.

19.

What is the most important ingredient in developing a firms 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

20.

Which of the following best illustrates the hedging principle as it applies to the
management of working capital?

a. Dont 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.