1. Which of the following statements best represents what finance is about?
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing risk
2. Consider the timing of the profits of the following certain investment projects:
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
a. Project S is preferred to Project L.
b. Project L is preferred to Project S.
c. Projects S and L are equally desirable.
d. A goal of profit maximization would favor Project S only.
3. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
a. Unlimited liability of shareholders
b. Access to the capital markets
c. Limited life
d. Elimination of double taxation on corporate income
e. All of the above
4. How could you compensate an investor for taking on a significant amount of risk?
a. Increase the expected rate of return.
b. Raise more debt capital.
c. Offer stock at a higher price.
d. Increase sales.
5. If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?
a. $1,000 in five years because they are not good at saving money.
b. $1,000 today because it will be worth more than $1,000 received in five years.
c. $1,000 in five years because it will be worth more than $1,000 received today.
d. Investors would be indifferent to when they would receive the $1,000.
e. None of the above.
6. Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm’s strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
d. Some of a firm’s weaknesses can be identified through the usage of ratios.
7. The question “Did the common stockholders receive an adequate return on their investment?” is answered through the use of:
a. liquidity ratios.
b. profitability ratios.
c. coverage ratios.
d. leverage ratios.
8. Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio.
9. The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of:
b. work in process inventory.
c. marketable securities.
10. Which of the following is not a limitation related to the usage of ratios when reviewing a firm’s performance?
a. Many firms experience seasonality in their operations.
b. Ratios cannot be used to compare firms that are in the same industry if one firm’s sales are higher than another firm’s.
c. Some firms operate in a variety of business lines, which makes it difficult to make comparisons.
d. Accounting practices differ widely among firms.
11. The _______ is the federal agency primarily responsible for regulating the securities industry.
12. __________ is a financial specialist who underwrites and distributes new securities of public corporations.
a. The Federal Reserve Board
b. A commercial banker
c. The SEC
d. An investment banker
13. What is the role of the SEC as it relates to the issuance of new securities by U.S. corporations?
a. To guaranty the sale of securities to the public
b. To ensure accurate and complete disclosure of information about the issuing firm to the public
c. To reduce the cost of issuing securities to the public
d. To provide investment advice to the purchasing public
14. All of the following are found in the cash budget except:
a. a net change in cash for the period.
c. cash disbursements.
d. new financing needed.
15. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
d. None of the above
16. Which of the following are considered to be spontaneous sources of financing (i.e., they arise naturally during the course of doing business)?
a. Notes payable and common stock
b. Accounts receivable and bonds
c. Fixed assets and inventory
d. Accounts payable and accrued expenses
17. The first step involved in predicting financing needs is:
a. projecting the firm’s sales revenues and expenses over the planning period.
b. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
c. determining the firm’s financing needs throughout the planning period.
d. none of the above.
18. 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
19. A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, how much can your friend spend in four years on the purchase? Round off to the nearest $1.
20. You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
21. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 12% of the unpaid balance. What is the amount of the monthly payments?
22. Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina’s plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1.
23. The break-even model enables the manager of the firm to:
a. calculate the minimum price of common stock for certain situations.
b. set appropriate equilibrium thresholds.
c. determine the quantity of output that must be sold to cover all operating costs.
d. determine the optimal amount of debt financing to use.
24. Financial leverage means financing some of a firm’s assets with:
a. commercial paper.
b. preferred stock.
c. corporate bonds.
d. all of the above.
25. In general, as the level of sales rises above the break-even point, the degree of operating leverage:
c. remains constant.
d. none of the above.
26. Due to a technical breakthrough, the fixed costs for a firm drop by 25%. Prior to this breakthrough, fixed costs were $100,000 and unit contribution margin was and remains at $5.00. The new amount of break-even units will be:
27. The firm should accept independent projects if:
a. the payback is less than the IRR.
b. the profitability index is greater than 1.0.
c. the IRR is positive.
d. the NPV is greater than the discounted payback.
28. The NPV method:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.
29. ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.)
30. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,520.
Year Net Cash Flow
3 $ 500
31. An increase in ___________ would increase net working capital.
a. plant and equipment
b. accounts payable
c. accounts receivable
d. both b and c
32. Which of the following is most likely to be a temporary source of financing?
a. Commercial paper
b. Preferred stock
c. Long-term debt
d. All of the above
33. In order to maximize firm value, management should invest in new assets when the internal rate of return is:
a. greater or equal to the firm’s marginal cost of capital.
b. greater than the cost of debt financing.
c. less than or equal to the accounting rate of return.
d. less than or equal to the firm’s marginal cost of capital.
34. 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.
35. The management of inventory is important because:
a. carrying too much inventory can result in a loss of efficiency and profitability.
b. carrying excessive inventory can result in a loss of sales.
c. carrying too little inventory can decrease the average collection period.
d. carrying too little inventory will adversely affect the firm’s CAPM.
36. An operating lease usually:
a. is for a shorter length of time than a financial lease.
b. is for high-tech equipment that might become obsolete rapidly.
c. has the income tax advantage that the entire lease payment is a deductible expense.
d. both a and c.
e. all the above.
37. If a lease is extended for a length of time that is equal to the entire useful life of the equipment, the lease:
a. is referred to as an operating lease.
b. carries no income tax deduction.
c. is a financial lease.
d. will be terminated by the IRS.
38. Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.
39. An increase in the ____________ is likely to encourage a corporation to increase its debt ratio.
a. corporate tax rate
b. personal tax rate
c. company’s degree of operating leverage
d. expected cost of bankruptcy
40. A merger that is driven by the potentially large reduction in the staffing of overlapping functions and the integration of the two companies’ strong similar product lines is referred to as a:
a. conglomerate merger.
b. vertical merger.
c. horizontal merger.
d. diversification merger.