Question 1

__________ activities allow corporations to raise capital by selling stock to investors.

Select one:

a. Bond market

b. Secondary market

c. Primary market

d. Money market

e. Commercial paper market

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The correct answer is: Primary market The Primary Market is where a firm goes to raise external funds
by selling securities to investors.

Question 2

Which of the following statements is false?

Select one:

a. The objective of profit maximization typically translates into maximizing earnings per share.

b. Profit maximization adequately deals with timing and risk.

c. Profit maximization is not the proper goal for managers.

d. Financial managers should not necessarily select projects with the highest expected monetary return.

e. None of the above.

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The correct answer is: Profit maximization adequately deals with timing and risk. Cash flows deal with
timing and risk, profits do not. The proper goal of a firm is shareholder value maximization.

Question 3

The market for debt instruments maturing in one year or less is the:

Select one:

a. Secondary market

b. Money market
c. Capital market

d. Primary market

e. Stock market

Feedback

The correct answer is: Money market: The money market is where firms go to raise short-term funds
such as commercial paper.

Question 4

In the United States, the ultimate goal of a corporate firm is to:

Select one:

a. Increase market share

b. Maximize profit

c. Improve employees welfare

d. Maximize shareholders value

e. Merge with another company

Feedback

The correct answer is: Maximize shareholders value. The goal of corporate firms is to maximize
shareholders value. Increasing market share, maximizing profit, and improving the welfare of
employees are ways to achieve the goal, not the goal itself. Merging with another company is rarely a
goal of a corporate firm.

Question 5

In corporate finance, managers should be primarily concerned with cash flows as opposed to profits.
Cash flows are measured because:

Select one:

a. They recognize more revenue than profits.

b. Risks of the cash flows and the timing in which they occur are considered.

c. Profits are usually overstated.

d. They are less variable than accounting profit.

e. All of the above

Feedback

The correct answer is: Risks of the cash flows and the timing in which they occur are considered.

Week 2

Question 1

In May, Home and You, Inc. increased its inventory of plywood and lumber, expecting sales to spike with
warmer weather. This decision resulted in __________ for the firm.

Select one:

a. A decrease in depreciation expense

b. An increase in depreciation expense

c. An inflow of cash

d. An outflow of cash

e. An increase in earnings

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The correct answer is: An outflow of cash. The increase in inventory is a use of cash and hence results in
an outflow of cash.

Question 2

A company's balance sheet shows the value of assets, liabilities, and stockholders' equity:

Select one:

a. At the end of the month

b. For any given period of time

c. At a specific point in time

d. Over an annual period

e. At the end of the calendar year

Feedback

The correct answer is: At a specific point in time. The balance sheet is a depiction of assets, liabilities,
and stockholders equity as of a specific point of time. It is not a flow over a period of time, and it does
not have to be at the end of a calendar year.
Question 3

Non-cash charges, such as __________, are expenses that appear on the income statement but do not
involve an actual outlay of cash.

Select one:

a. Investment flows, operating flows, financing flows

b. NOPAT

c. Free cash flows

d. Depreciation, amortization, and depletion allowance

e. All of the above

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The correct answer is: Depreciation, amortization, and depletion allowance. Depreciation, amortization,
and depletion allowance are non-cash expenses.

Question 4

In the Statement of Cash Flows, the cash flows resulting from debt and equity financing transactions can
be found in _________________.

Select one:

a. Cash flow from operations

b. Cash flow from investing

c. Cash flow from financing

d. Opening Cash Balance

e. None of the above

Feedback

The correct answer is: Cash flow from financing. Debt and equity transactions are financing activities,
hence they are found in cash flow from financing.

Question 5

An income statement shows how much a company has in:

Select one:

a. Earnings before interest and taxes

b. Sales

c. Net profit

d. All of the above

e. None of the above

Feedback

The correct answer is: All of the above. An Income statement shows sales, expenses, and profits of a
firm. So the answer is all of the above.

Week 3

A firm's operating cycle is the:

Select one:

a. Number of days a firm's plant operates during a year

b. Length of time necessary for a firm to operate equipment to produce a product

c. Time interval between the firm's receipt of raw materials inventory to begin production to its
collection of cash from the sale of the finished product d. Months over which a firm prepares its annual
report of operations, which may not necessarily be January to December

e. Amount of time that suppliers are willing to extend credit for operations

Feedback

The correct answer is: Time interval between the firm's receipt of raw materials inventory to begin
production to its collection of cash from the sale of the finished product. The Operating Cycle is the time
interval between when the firm receives inventory to when the firm collects cash from its customers.

Question 2

In order to achieve the goal of shortening the cash cycle for her firm, Cheri should suggest __________
inventory turnover, __________ the collection period on accounts receivable, and __________ the
amount of time taken to pay outstanding accounts.

Select one:

a. Decreasing; decreasing; increasing

b. Decreasing; decreasing; decreasing

c. Decreasing; increasing; decreasing

d. Increasing; decreasing; increasing

e. Increasing; decreasing; decreasing

Feedback

The correct answer is: Increasing; decreasing; increasing

Question 3

Which is not among The 5 Cs of Credit?

Select one:

a. Components Correct

b. Capacity

c. Conditions

d. Character

e. Capital

Feedback

The correct answer is: Components Components is not one of the 5 Cs. The 5th "C" is Collateral.

Question 4

Investment in accounts receivable requires cash outflow, just like an investment in ________.

Select one:

a. Retained earnings

b. Accounts payable

c. Depreciation

d. Inventory

e. All of the above

Feedback

The correct answer is: Inventory. Increases in accounts receivables and inventory are both uses of cash,
hence requiring cash outflow.
Question 5

Which of the following is not a source of short term financing?

Select one:

a. Commercial paper

b. Line of Credit

c. Stretching accounts payable

d. Issuing equity

e. Factoring accounts receivable

Feedback

The correct answer is: Issuing equity. Equity financing is long-term in nature, hence not a source of
short-term financing.

Week 4

Question 1

An unusually large increase in accounts receivable might occur if:

Select one:

a. The firm was holding more inventory

b. The firm had softened its credit requirements

c. Sales had increased significantly

d. A & B

e. B & C

Feedback

The correct answer is: B & C. Holding more inventory does not result in an increase in accounts
receivable. An increase in accounts receivable is likely when the firm softened its credit standards and
increased its sales.

Question 2

When evaluating the financial performance of a firm, analysts typically compare the firm's ratios to:

Select one:

a. Ratios of other firms in the same industry

b. The firm's previous years' ratios

c. Ratios of the firms competitors

d. All of the above

e. None of the above

Feedback

The correct answer is: All of the above. Financial analysis involves comparing a firms ratios over time
and in relation to its industry peers which include its competitors.

Question 3

Which item on the balance sheet is not needed in the calculation of working capital?

Select one:

a. Accounts receivable

b. Inventory

c. Long-term debt

d. Accounts payable

e. Prepaid expenses

Feedback

The correct answer is: Long-term debt. Working capital is calculated from subtracting current liabilities
from current assets. Long term debt is not part of current liabilities nor current assets.

Question 4

Motown Foods, a retail grocery chain, has an inventory turnover ratio of 15. The industry average is 10.
The difference in these ratios shows that Motown Foods:

Select one:

a. Carries larger inventories than the industry average

b. Has lower sales than the average firm in the industry

c. Sells its goods at a slower rate than the industry average

d. Sells its goods more quickly than the industry average

e. Invests more in inventory per dollar of sales than the industry average

Feedback
The correct answer is: Sells its goods more quickly than the industry average. A higher inventory
turnover means inventory stays in the warehouse for a shorter period of time, hence a smaller inventory
and smaller investment in inventory. This implies the firm sells its goods more quickly than an average
firm in the industry.

Question 5

Correct

Analyzing the financial statements of a firm allows a financial manager to:

Select one:

a. Determine the financial health of that firm

b. Determine if the firm is creating value for the shareholders

c. Identify problem areas of the firm

d. Identify areas where the firm excels

e. All of the above Correct

Feedback

The correct answer is: All of the above

Week 5

The higher the interest rate and the longer the period of time:

Select one:

a. The higher the future value and the lower the present value

b. The higher the future value and the higher the present value

c. The lower the future value and the lower the present value

d. The lower the future value and the higher the present value

e. None of the above

Feedback

The correct answer is: The higher the future value and the lower the present value. A higher interest
rate and a longer period of time leads to a higher future value but lower present value.

Question 2
For a given stated annual rate, the effective annual interest rate:

Select one:

a. Can be found by dividing the stated rate by the number of compounding periods

b. Increases as compounding frequency increases

c. Is at a minimum when interest is compounded quarterly

d. Decreases if the number of compounding periods is greater than the number of holding periods

e. Is always lower than the stated annual rate

Feedback

The correct answer is: Increases as compounding frequency increases. A higher compounding frequency
leads to a higher effective annual interest rates as interests are added to the principal to earn more
interest sooner.

Question 3

The Happy Hang Glide Company is purchasing a building and has obtained a $20 million loan for 30
years. The loan bears an annual interest rate of 8%, compounded monthly. The mortgage payments,
which will be made at the end of each month, include both principal and interest on the declining
balance. How large will Happy Hang Glides monthly payments be?

Select one:

a. $55,555.56

b. $133,333.33

c. $146,752.91

d. $4,444.44

e. $53,333.33

Feedback

The correct answer is: $146,752.91. CorrectUsing a financial calculator, find PMT:

12 P/YR

PV=20,000,000

I%=8

N=360

FV=0
PMT = $146,752.91

Question 4

In 10 years, you plan to retire and buy a house in Panama City, Florida. The house you are looking at
currently costs $325,000 and is expected to increase in value each year at a rate of 5% per year.How
much will the house cost in 10 years?

Select one:

a. $650,000.00

b. $529,390.75

c. $341,250.21

d. $487,500.00

e. None of the above

Feedback

The correct answer is: $529,390.75. We need to find the future value of $325,000 in 10 years at a rate of
5%. P10 = $ 325,000 (1.05)10 = $529,390.75.

Question 5

The present value of a perpetuity:

Select one:

a. Equals the annual, end-of-year payment divided by the discount rate

b. Is calculated using the same equation as the present value of an annuity

c. Is found by dividing the present value of the infinite annuity stream by (1 + r)

d. Cannot be calculated if the cash flows are large

e. None of the above

Feedback

The correct answer is: Equals the annual, end-of-year payment divided by the discount rate. PV = C/r,
where C is the end of year cash flow and r is the discount rate.

Week 6

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
Select one:

a. A premium; higher than

b. A premium; equal to

c. At par; higher than

d. At par; less than

e. A discount; higher than

Feedback

The correct answer is: A discount; higher than. Because the coupon rate of a bond does not change
throughout the duration of a bond, the bond price will adjust up and down to reflect the change in the
market interest rate (yield to maturity). When the yield to maturity is higher than the coupon rate, the
bond will sell at a discount. When the yield to maturity is lower than the coupon rate, the bond will sell
at a premium.

Question 2

(Select all that apply.) The process of valuing an ordinary corporate bond involves __________.

Select one or more:

a. Determining the bond's cash flows

b. Determining an appropriate discount rate

c. Calculating the present value

Feedback

The correct answer is: Determining the bond's cash flows, Determining an appropriate discount rate,
Calculating the present value. The value of a bond is found by discounting all the future cash flows
associated with the bond to present at the yield to maturity.

Question 3

Preferred stock of Heavenly Nice, Inc., pays annual dividends of $5. These dividends are expected to
continue into the indefinite future. What is the fair price of Heavenly Nices preferred stock if the
required return on this stock is 8 percent?

Select one:

a. $0.625

b. $6.25

c. $62.50
d. $40.00

e. None of the above

Feedback

The correct answer is: $62.50. Preferred stock has a constant dividend stream. Therefore its value =
$5/0.08 = $62.50.

Question 4

Zale Hardware Inc. paid an annual dividend of $1.00 yesterday. If future dividends are expected to grow
at a rate of 5 percent, and the required rate of return on this stock is 15 percent, the fair price of this
stock today is:

Select one:

a. $10.00

b. $10.50

c. $6.67

d. $21.00

e. $20.00

Feedback

The correct answer is: $10.50. According to the growth dividend model, the value of the stock = C1 / (r-
g). Value = $5 (1.05) / (0.15 0.05) = $10.50.

Question 5

When the yield curve is upward sloping:

Select one:

a. Short-term interest rate is higher than long-term interest rate

b. Interest rate is expected to go down in the future

c. The economy is currently experiencing hyper-inflation

d. Its an indication that investors do not value liquidity

e. None of the above

Feedback
The correct answer is: None of the above. The yield curve measures the relation between the yield to
maturity and time to maturity of bills and bonds. When a yield curve is upward sloping, it means the
short-term interest rate is lower than the long-term interest rate, and investors expect interest rates to
rise in the future. It also indicates that investors value liquidity.

Week 7

Which of the following does NOT characterize NPV?

Select one:

a. NPV does not explicitly incorporate risk into the analysis

b. NPV incorporates all relevant cash flow information

c. NPV uses all of the project's cash flows

d. NPV discounts all future cash flows

e. Using NPV will lead to decisions that maximize shareholder wealth

Feedback

The correct answer is: NPV does not explicitly incorporate risk into the analysis. NPV does incorporate
risk into the analysis as the discount rate used to discount cash flows is higher when the project risk is
higher.

Question 2

The output of __________ analysis is a single, intuitively appealing number representing the compound
annual return that an investment earns over its life.

Select one:

a. IRR

b. NPV

c. PI

d. Payback method

e. Discounted payback method

Feedback

The correct answer is: IRR Internal rate of return (IRR) is the compound annual rate earned for a project.
The others are not rates.
Question 3

What should you do when calculating the IRR of an investment and you generate multiple IRRs?

Select one:

a. You should rely on the lowest IRR generated

b. You should rely on the highest IRR generated

c. The IRR that is closest to the hurdle rate is the appropriate IRR to use

d. You should not use the IRR rule if it generates multiple IRRs

e. You should simply assume IRR=0

Feedback

The correct answer is: You should not use the IRR rule if it generates multiple IRRs. When cash flows
change signs more than once, you may have multiple IRRs or no IRR. You should not use any of the
numbers generated as they are meaningless. Use NPV when those situations arise.

Question 4

The payback period is inferior to the net present value method because it

Select one:

a. deals with accounting income rather than cash flow

b. fails to consider cash flows beyond the cutoff date

c. assumes that cash flows are uniform over the life of the investment

d. is difficult to compute

e. all of the above

Feedback

The correct answer is: fails to consider cash flows beyond the cutoff date. The payback period uses cash
flows and is easy to calculate. One of the major drawbacks is that it ignores cash flows after the cut-off
date.

Question 5

When a firm is faced with capital rationing and has to rank the projects before making investment
decisions, which investment technique works best?

Select one:
a. Net present value

b. Internal rate of return

c. Payback period

d. Profitability index

e. None of the above

Feedback

The correct answer is: Profitability index. The profitability index is best when there is capital rationing
and NPV is best when a firm has unlimited funds.

Week 8

The cash flows of a project should:

Select one:

a. be computed on a pre-tax basis

b. include all sunk costs and opportunity costs

c. include all incremental costs, including opportunity costs

d. be applied to the year when the related expense or income is recognized by GAAP

e. include all financing costs related to new debt acquired to finance the project

Feedback

The correct answer is: include all incremental costs, including opportunity costs. The cash flows of a
project should be incremental and after-tax, and they should ignore sunk costs and financing costs. The
financing cost is being handled in the cost of capital.

Question 2

Correct

Which of the following are examples of a relevant incremental cash flow in investment analysis?

I.an increase in selling and administrative expenses

II.a decrease in net working capital

III.an increase in taxes

IV.a decrease in the cost of goods sold

Select one:
a. I and III only

b. III and IV only

c. I and IV only

d. I, III, and IV only

e. I, II, III, and IV

Feedback

The correct answer is: I, II, III, and IV. All of these are relevant incremental cash flows in an investment
analysis. Non-relevant cash flows are sunk costs and financing costs.

Question 3

When NPV is positive,

Select one:

a. profitability index is less than 1

b. IRR is less than zero

c. the payback period is short

d. the project never pays back

e. IRR is greater than cost of capital

Feedback

The correct answer is: IRR is greater than cost of capital. When NPV is positive, IRR is greater than the
cost of capital, and the profitability index is greater than 1. There is no relation between NPV and the
payback period.

Question 4

When evaluating an investment, it is best that a financial manager performs a _________ on the
investments cash flows.

Select one:

a. Breakeven analysis

b. Sensitivity analysis

c. Scenario analysis

d. All of the above

e. None of the above

Feedback

The correct answer is: All of the above. Because all future cash flows are estimated, it is best that we
perform breakeven, sensitivity, and scenario analysis to improve the quality of our decision.

Question 5

Sunk costs include any cost that:

Select one:

a. will change if a project is undertaken

b. will be incurred if a project is accepted

c. has previously been incurred and cannot be changed

d. is paid to a third party

e. will occur if a project is accepted and once incurred, cannot be recouped

Feedback

The correct answer is: has previously been incurred and cannot be changed. Sunk costs are irrelevant
cash flows to an investment analysis as it has previously been incurred and cannot be changed.