1

A secondary market transaction can occur in either a dealer market or an auction

market.
A)
True
B)
False
2
Control of a firm ultimately rests with the stockholders.
A)
True
B)
False
3
It is generally easier to form a sole proprietorship than it is to form a corporation.
A)
True
B)
False
4
One advantage of the corporate form of organization is that you can buy shares in a
corporation such as Wal-Mart without worrying about being held personally liable for
the corporation's liabilities.
A)
True
B)
False
5
A financial manager must be concerned with three basic areas: Capital budgeting,
capital structure, and working capital.
A)
True
B)
False
6
Which of the following responses best completes the following: The duties of a
working capital manager include
A)
Deciding how to raise the money required to fund a project
B)
Choosing how much inventory a firm should invest in
C)
Deciding the amount of dividends a firm should pay out
D)
Deciding which projects a firm should undertake
E)
Deciding what fixed assets to purchase
7
In a ____________, none of the owners are offered the protection of limited liability.
A)
sole proprietorship
B)
limited liability company
C)
corporation
D)
limited partnership
E)
S corporation

8
Which of the following is the BEST description of the goal of the financial manager in
a corporation where shares are publicly traded?
A)
Maximize sales
B)
Maximize profits
C)
Avoid financial distress
D)
Maintain steady earnings growth
E)
Maximize the current value per share of the existing stock
9
Which of the following is an answer to "What are the duties of a financial manager?"
I. Deciding how much interest to pay the holders of the corporation's bonds
II. Deciding the mix of long-term debt and equity
III. Deciding which projects a firm should undertake
IV. Deciding how much short-term debt to use
A)
I and II only
B)
I, II, and III only
C)
II and III only
D)
II, III, and IV only
E)
I, II, III, and IV
Chapter 2
1
If a firm has operating cash flow of $12,000, has a change in net working capital of
$8,000, has net capital spending of $12,000, and has cash flow to creditors of
$5,000, then cash flow to stockholders must be -$13,000.
A)
True
B)
False
2
If a firm has cash flow from assets of $12,000, dividends paid of $4,000 and net new
equity sales of $4,000, then cash flow to creditors must be $4,000.
A)
True
B)
False
3
Which of the following assets would most likely be considered the least liquid?
A)
A share of common stock in IBM
B)
A bond issued by Microsoft
C)
A share of preferred stock in K-Mart Corp.
D)
A Custer, South Dakota municipal bond
E)
A U.S. Treasury bill

You are to determine the level of net capital spending made by a firm during 1996.
If you have the balance sheet and income statements for the years 1995 and 1996
how would you go about your task?
A)
Ending net fixed assets - beginning net fixed assets +
depreciation for 1996
B)
Beginning net fixed assets + ending net fixed assets - depreciation for
1995
C)
Ending net fixed assets - beginning net fixed assets - depreciation +
taxes for 1996
D)
Ending net fixed assets - beginning net fixed assets + depreciation taxes for 1996
E)
Beginning net fixed assets - ending net fixed assets + depreciation for
1996
5
Consider the following statement: A firm that earns negative net income will quickly
find itself in financial distress.
I. This statement is false because it is possible for a firm to have negative profits but
still have positive cash flows
II. This statement is false because accounting profits do not generally equal cash
flow and it is a lack of cash, not profits, that causes financial distress
III. This statement is true because negative profits mean negative cash flows
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
I and III only
6
As an investor how would you determine the total market value of a publicly traded
corporation such as General Motors?
I. The values of debt and equity as they appear on the most recent financial
statements
II. The value of debt as it appears on the most recent financial statements plus the
current market value of GM's common stock
III. The current market value of GM's stock plus the market value of GM's debt
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
II and III only

7
Balance sheet assets
I. always have a value equal to total liabilities minus shareholders' equity
II. are listed in order of increasing liquidity
III. represent items acquired with the use of liabilities and equity
A)
I only
B)
II and III only
C)
III only
D)
I and II only
E)
I, II, and III

8
Which of the following represents a use of the matching principle in accounting?
I. The cost purchasing a good on account is recorded when the account payable is
paid
II. Revenues from a sale on account are recorded when the payment on the account
receivable is received
III. The costs of producing inventory are recognized along with the revenues from
the sale when the sale is made
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
I and III only
9
Which of the following is considered a noncash expense on the income statement?
A)
Income taxes
B)
Depreciation
C)
Interest expense
D)
Wages and salaries
E)
Cost of goods sold
10
Which of the following is/are true about the balance sheet and income statement?
I. The income statement reflects a summary of activity that occurs over some
period of time while the balance sheet is a snapshot taken at a single point in time
II. Both represent a summary of activity that occurs over some period of time
III. The two, combined, give a reasonable estimate of the firm's cash flows and
market values
A)
I only

B)
II only
C)
III only
D)
I and III only
E)
I, II, and III
Chapter 3
1
Which of the following is generally considered one of the major categories on a
typical statement of cash flows?
A)
Subsidiary activities
B)
Notes payable activities
C)
Operating activities
D)
Income statement activities
E)
Division activities
2
Comparison of the financial statements of two firms in the same general industry
may be difficult if
I. the size of the two firms' operations are different
II. the firms have identical product lines and operations
III. the firms' financial statements are prepared using different fiscal year-ends
A)
I only
B)
III only
C)
I and II only
D)
I and III only
E)
I, II and III
3
In a common size statement, the balance sheet is expressed as a percentage of
____________ while the income statement is expressed as a percentage of
____________.
A)
liabilities plus equity; net income
B)
assets; net income
C)
sales; liabilities plus equity
D)
liabilities plus equity; sales
E)
liabilities; sales
4
You are comparing two companies by looking at financial ratios they publish in their
annual reports. You know that
I. you must be careful because not all financial statement ratios are computed the
same way
II. the financial ratios of a large firm and a medium size firm cannot be compared
III. these financial ratios will capture the relevant differences between the two firms,
leaving you with no need to look at the rest of the reports
A)
I only
B)
II only
C)
III only

D)
E)

I and II only
I and III only

5
The interval measure is an example of a ____________ ratio.
A)
short-term solvency
B)
financial leverage
C)
asset management
D)
profitability
E)
market value
6
Which of the following statements about the current ratio is accurate?
A)
Use of book values in calculation of this ratio is unacceptable because
the market values of these assets and liabilities tend to deviate from book values
B)
This ratio is computed by dividing current liabilities by current assets
C)
It will always be greater than the quick ratio in companies that
carry inventory
D)
This ratio is intended to indicate the long run liquidity position of the
firm
E)
The higher the current ratio the higher the level of cash in a firm
7
____________ is considered to be a liquidity ratio.
A)
The return on assets
B)
The fixed asset turnover
C)
The cash ratio
D)
The times interest earned ratio
E)
The profit margin
8
____________ are designed to determine a firm's long-run ability to meet its
obligations.
A)
Liquidity ratios
B)
Asset-utilization ratios
C)
Profitability ratios
D)
Financial leverage ratios
E)
Market value ratios
9
Which of the following is NOT incorporated into calculation of the Du Pont identity?
A)
Return on assets
B)
Equity multiplier
C)
Total asset turnover
D)
Profit margin
E)
Receivables turnover

10. What does the fixed asset turnover ratio measure?

A)
How well total assets are utilized during a year
B)
The length of time it takes a firm to completely replace its fixed assets
C)
The amount of EBIT a firm generates per dollar of fixed assets
D)
The percent of total assets that are invested in fixed assets
E)
The amount of sales each dollar of fixed assets generates
Chapter 4
1
Aggregation refers to the process by which a firm first projects its aggregate
investment requirement, then it breaks that total up and allocates it to the
investment proposals of the firm's smaller units.
A)
True
B)
False
2
With good financial planning, managers can be less vigilant in their day to day
management of the firm.
A)
True
B)
False
3
All else equal, a firm that utilizes assets inefficiently will have a higher sustainable
growth rate than a firm that does not.
A)
True
B)
False
4
One would expect the capital intensity ratio of an auto manufacturing firm to be
lower than that of a software development firm.
A)
True
B)
False
5
In most industries, planning beyond the period of one year is not very useful.
A)
True
B)
False
6
Financial planning is important because the only way for a firm to prosper is for it to
grow.
A)
True
B)
False
7
One of the first things needed when constructing a financial plan is a sales forecast.
A)
True
B)
False
8

All else equal, the lower the forecasted growth the larger the level of external
financing needed.
A)
True
B)
False
9
A firm with a positive ROE could have a negative ROA.
A)
True
B)
False

10
All else equal, an increase in a firm's capital intensity ratio will increase its external
financing needed.
A)
True
B)
False
Chapter 5
1
Most investments, whether they involve real assets or financial assets, can be
analyzed using the discounted cash flow approach.
A)
True
B)
False
2
The Rule of 72 tells us how long into the future we must wait before an investment's
value is equal to three times the initial amount.
A)
True
B)
False
3
If you are given a present value, how long the money is to be invested, and the
future value of that investment, you can solve for the interest rate that was earned
on the investment.
A)
True
B)
False
4
Calculating the present value of a future cash flow to determine its value today is
known as the discount rate.
A)
True
B)
False
5
Suppose you are trying to find the present value of two different cash flows using
the same interest rate for each cash flow. One is $1,000 ten years from now, the
other a $800 flow seven years from now. Which of the following is/are true about the
discount factors used to value the cash flows?

A)
The factor for the cash flow ten years away is always less than
or equal to the factor for the cash flow that is received seven years from
now
B)
Both factors are greater than 1
C)
Regardless of the interest rate, the discount factors are such that the
present value of the $1,000 will always be higher than the present value of the
$800
D)
Since the payments are different, no statement can be made regarding
the factors to be used
E)
The astute investor will factor in the time differential and choose the
payment that arrives the soonest

6
You are choosing between investments offered by two different banks. One
promises a return of 10% for three years in simple interest while the other offers a
return of 10% for three years in compound interest. You should
A)
choose the simple interest option because both have the same basic
interest rate
B)
choose the compound interest option because it provides a
higher return than the simple interest option
C)
choose the compound interest option only if the compounding is for
monthly periods
D)
choose the simple interest option only if compounding occurs more
than once a year
E)
choose the compound interest option only if you are investing less than
$5,000
7
Given r and t greater than zero,
I. Present value interest factors are less than 1.0
II. Future value interest factors are less than 1.0
III. Present value interest factors are greater than future value interest factors
IV. Present value interest factors grow as t grows, provided r is held constant
A)
I only
B)
I and III only
C)
I and IV only
D)
II and III only
E)
II and IV only
8
You received a $1 savings account earning 5% on your 1st birthday. How much will
you have in the account on your 40th birthday if you don't withdraw any money
before then?
A)
$5.89

B)
C)
D)
E)

$6.34
$6.70
$7.00
$7.04

9
What is the future value of $25,000 received today if it is invested at 6.5%
compounded annually for six years?
A)
$17,133.35
B)
$27,476.42
C)
$36,478.56
D)
$39,521.75
E)
$41,374.89

10
How much would you have to invest today at 8% compounded annually to have
$25,000 to buy a trailer house in 4 years?
A)
$18,267.26
B)
$18,375.75
C)
$19,147.25
D)
$21,370.10
E)
$22,149.57
Chapter 6
1
The present value of an ordinary annuity and an annuity due will be the same if
they have the same payment per period, the same number of periods, and identical
discount rates.
A)
True
B)
False
2
You can find the future value of a set of cash flows by finding the future value of
each cash flow individually and then summing these future values.
A)
True
B)
False
3
In almost all present and future value computations, it is implicitly assumed that the
cash flows occur at the end of each period.
A)
True
B)
False
4

In order to compare different investment opportunities (each with the same risk)
with interest rates reported in different manners you should
A)
convert each interest rate to an annual nominal rate
B)
convert each interest rate to a monthly nominal rate
C)
convert each interest rate to an effective annual rate
D)
compare them by using the published annual rates
E)
convert each interest rate to an APR
5
Which of the following is a true statement?
A)
When comparing investments it is best not to rely solely on
quoted rates
B)
Compounding will typically not lead to differences between the quoted
rate and the effective rate
C)
The APR on a loan requiring monthly payments is the interest rate you
actually pay
D)
An APR is the interest rate per period divided by the number of periods
per year
E)
With monthly compounding, the APR will be larger than the effective
annual rate
6
You are examining two perpetuities which are identical in every way, except that
perpetuity A will begin making annual payments of $P to you two years from today
while the first $P payment of perpetuity B will occur one year from today. It must be
true that
A)
the current value of perpetuity A is greater than that of B by $P
B)
the current value of perpetuity B is greater than that of A by $P
C)
the current value of perpetuity B is equal to that of perpetuity A
D)
the current value of perpetuity A exceeds that of B by the PV of $P for
one year
E)
the current value of perpetuity B exceeds that of A by the PV
of $P for one year
7
Which of the following describes the equation for finding the annuity present value
factor?
A)
(1 minus present value factor) times the interest rate
B)
(1 plus present value factor) divided by the interest rate
C)
(1 plus present value factor) times the interest rate
D)
(1 minus present value factor) divided by the interest rate
E)
(present value factor minus 1) divided by the interest rate
8
Which of the following describes the equation for finding the annuity future value
factor?
A)
(future value factor minus 1) times the interest rate

B)
C)
D)
E)

(future value factor plus 1) divided by the interest rate

(future value factor plus 1) times the interest rate
(future value factor minus 1) divided by the interest rate
(1 minus present value factor) divided by the interest rate

9
Which of the following is it NOT possible to compute?
A)
present value of a perpetuity
B)
interest rate on a perpetuity given the present value and payment
C)
present value of an annuity due
D)
future value of an annuity due
E)
future value of a perpetuity
10
You have $500 that you would like to invest. You have 2 choices: Savings Account A
which earns 8% compounded annually or Savings Account B which earns 7.75%
compounded semiannually. Which would you choose and why?
A)
A because it has a higher effective annual rate
B)
A because the future value in one year is lower
C)
B because it has a higher effective annual rate
D)
B because the future value in one year is lower
E)
B because it has the higher quoted rate

Chapter 7
1
Which of the following is correct? A zero coupon bond _________________.
A)
typically pays coupons only during the first five years
B)
sells for a price that is greater than the face value
C)
has no interest payments and is thus non-taxable until maturity
D)
is also known as a deep discount bond
E)
provides no cash flow to the holder at maturity
2
Your neighbor is bragging that the coupon payment on the bonds he bought five
years ago have increased in each of the last three years. You know he must own
A)
a zero coupon bond
B)
a LYON
C)
a convertible bond
D)
a put bond
E)
a floating rate bond
3
You want to own equity in a Russian oil firm, but the firm does not have traded
stock. If it had ___________ outstanding you could purchase them and then trade
them in for shares of stock.
A)
convertible bonds

B)
C)
D)
E)

put bonds
debentures
zero coupon bonds
subordinated debentures

4
A firm intends to take on a significant amount of new debt in order to fund the
purchase of a close competitor. However the firm cannot complete the transaction
unless it first calls one of its outstanding bond issues. It must be true that the called
bonds
A)
are backed by the corporation's fixed assets
B)
have a higher interest rate than the new bonds will
C)
have an inferior tax status than the new bonds will
D)
can be called at a price that is very near par
E)
have covenants which restrict such increase in debt
5
________ is an unsecured obligation of the issuing company.
A)
A indenture
B)
A debenture
C)
A covenant
D)
The deed of trust
E)
Dedicated capital

6
__________ included in the bond indenture to protect bondholders from certain
actions by the company.
A)
Indentures are
B)
Debentures are
C)
Covenants are
D)
Articles of incorporation are
E)
A description of dedicated capital is
7
________________ is an account into which periodic payments are made for the
purpose of retiring a bond issue.
A)
An indenture
B)
A debenture
C)
A covenant
D)
A call option
E)
A sinking fund
8
__________ is the legal document that describes the mortgage on real property that
acts as security on a bond issue.
A)
A specific performance contract
B)
A debenture

C)
D)
E)

A restrictive covenant
A trust deed
An indenture

9
Which of the following risks do debt ratings specifically attempt to assess?
I. Interest rate risk
II. Default risk
III. The risk of a call being made
A)
I only
B)
II only
C)
I and II only
D)
II and III only
E)
I, II, and III
10
Which of the following is NOT a duty of a trust company appointed when bonds are
issued?
A)
Make sure terms of the indenture are obeyed
B)
Manage the sinking fund
C)
Decide when the bonds should be called
D)
Monitor the protective covenants for the bondholders
E)
Represent the bondholders in default