1) Capital budgeting is the process of identifying, evaluating, and implementing a firms
investment opportunities.
2) Standard deviation is stated in the same units of measurement as those of the data
from which they were generated.
3) Internally generated funds for financing new asset investments come from common
stock issues.
4) A syndicate is a group of several investment banking firms that participate in
underwriting and distributing a security issue.
5) A firms cost of capital is discount rate used in the evaluation of capital budgeting
projects using NPV and IRR.
6) The return provided by $100 deposited for 10 years that results in a future value of
$614.46 is -11.45%.
7) A higher coefficient of variation indicates more risk per unit of return.
8) In estimating the cost of equity, the rate of return on U.S. Treasury bills is often used
as a proxy for the risk free rate of return.
9) When accounts receivable are factored: the borrower sells the receivable; accounts
receivable balances are removed from the balance sheet; the customer payment is made
to the factor; and interest is charged on the funds advanced.
10) Crowding out caused by deficit financing can result in tighter credit conditions and
higher interest rates.
11) Bank loans on which interest is paid up front in advance are called:
a.discount loans
b.build-up loans
c.advance interest loans
d.revolving credit agreements
e.none of the above
12) The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12
percent compounded quarterly is
a.$17,549
b.$75,401
c.$93,049
d.$11,200
13) Cash flows from financing activities might include:
a.increase in notes payable
b.increase in accounts payable
c.depreciation
d.all the above
e.none of the above
14) Savings are the accumulation of cash and other financial assets and are generally
classified into which of the following two categories?
a.voluntary and contractual savings
b.primary and secondary savings
c.personal and governmental savings
d.voluntary and corporate savings
15) Federal obligations usually issued for maturities in excess of five years are called:
a.Treasury bonds
b.Treasury notes
c.Treasury bills
d.Agency issues
e. none of the above
16) Corporate stockholders:
a.cannot have limited liability
b.cannot easily transfer ownership
c.cannot be subject to taxes on dividends
d.can limit their liability to the amount of their investment
17) Holding all other factors constant, if a firm increases its current liabilities relative to
total assets,
a.it increases return and reduces risk
b.it has no effect on return and increases risk
c.it reduces return and reduces risk
d.it reduces return and increases risk
e. none of above are correct
18) All of the following statements are correct except:
a.A firms business risk is measured by its variability in EPS over time and is affected by
several factors, including the business cycle, competitive pressures, and the firms
operating leverage or its level of fixed operating costs
b.The degree of financial leverage measures the sensitivity of earnings per share to
changes in interest expense
c.The degree of combined leverage is the percentage change in gross profit that results
from a 1 percent change in sales volume
d.The degree of combined leverage is simply the product of its degree of operating
leverage and its retention rate
e.None of the above statements are correct
19) If a bond with a par value of $500 and a call premium of 6% is called in before its
maturity date, the firm would have to remit the following to the bondholders:
a.$500
b.$530
c.$0
d.none of the above
20) A __________________ is a claim against a customers inventory when the
individual items are indistinguishable.
a.floor plan receipt
b.trust receipt
c.warehouse receipt
d.blanket inventory lien
21) Which of the following statements is correct?
a.Capital budgeting analysis is not a framework for evaluating all business decisions; it
is only a tool for the financial types
b.Proper analysis will identify irrelevant cash flows and an appropriate discount rate to
reflect the risk of the strategy and will compare the benefits and costs of the project
without considering the time value of money
c.Whether the investment is one in a business strategy, building a new warehouse,
seeking fuel efficient methods of doing business, upgrading information technology
systems, or investing in human resources, we should not try to quantify the benefits and
cost of these choices in order to evaluate them properly
d.To achieve success over time, a firms managers must identify and invest in projects
that provide higher than average profits to maximize shareholder wealth
e.none of the above statements are correct
22) The operating break-even sales level is sensitive to all of the following variables
except:
a.fixed operating costs
b.sales price per unit
c.variable operating cost per unit
d.sales commissions expense
e.it is sensitive to all of the above variables
23) Investing in ____________ is a way for small investors to enjoy the benefits of
professional management and diversification.
a.stocks
b.bonds
c.mutual funds
d. none of the above
24) What is the IRR for the following project if its initial after-tax cost is $5,000,000
and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1,
$2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?
a.5.83%
b.9.67%
c.11.44%
d.none of the above
25) The 2002 Sarbanes-Oxley Act was designed to:
a.limit the compensation that could be paid to CEOs.
b.eliminate the many disclosure and conflict of interest problems of corporations
c.provide uniform international accounting standards
d.two of the above
e.none of the above
26) The risk cause by variations in interest expense unrelated to sales or operating
income arising from changes in the level of interest rates in the economy is called:
a.interest rate risk
b.business risk
c.tax risk
d. interest rate risk
e. none of the above
27) Changes in the growth rates for money supply and money velocity affect the growth
rate in:
a.real economic activity
b.the rate of inflation
c.the turnover of goods and services
d.both a and b
28) Which of the following statements is false?
a.The process of channeling savings into investment through the use of a financial
institution or intermediary results in the creation of one type of financial asset and one
type of financial liability
b.During the early years of the history of the United States, foreigners purchased
significant volumes of federal government securities
c.The single most important use of funds raised in the credit markets is by the
household sector
d.All of the above statements are false
29) The current ratio concept is particularly useful in:
a.analyzing large firms
b.comparing the financial positions of firms of varying sizes
c.examining firms with large seasonal sales
d.comparing the financial structures of firms of varying sizes
30) One way a firm can reduce the amount of cash it needs in any one month is to
a.slow down the payment of receivables
b.delay the payment of wages
c.speed up the payment of taxes
d.speed up the payment of wages
e.none of the above
31) Which of the following is not a component of the security market line equation?
a.risk-free rate
b.expected return on the market
c.an assets systematic risk
d.an assets unsystematic risk
32) The depreciation method currently used for tax purposes today is called the:
a.accelerated cost recovery system (ACRS)
b.straight line method (SLM)
c.modified accelerated cost recovery system (MACRS)
d.double digit balance (DDB)
e.none of the above
33) A bond that allows the same assets to be used as security in future issues is called a
(n):
a.first mortgage bond
b.equipment trust certificate
c.closed-end mortgage bond
d.open-end mortgage bond
34) ___________________ is the market for large blocks of listed stocks that operates
outside the confines of the organized exchanges.
a.The primary market
b.The secondary market
c.The third market
d.The fourth market
35) Which of the following is not considered to be a basic theory used to explain the
term structure of interest rates?
a.expectations theory
b.loanable funds theory
c.liquidity premium theory
d.market segmentation theory
e.two of the above are not considered to be a basic theory
36) Ningbo Shipping has prepared the coming year’s pro forma balance sheet and has
estimated that external financing required would be -$230,000. The firm should prepare
to
a.repurchase common stock totaling $230,000
b.arrange for a loan of $230,000
c.do nothing; the balance sheet balances
d.sell an additional $230,000 of common stock
e.all of the above
37) If the nominal rate of interest is 10%, the risk-free rate of interest is 3%, the default
premium is 3%, the liquidity premium is 0.5%, and the maturity premium is 1.5%, then
the inflation premium must be ______.
a.2.0%
b.2.5%
c.3.0%
d.none of the above
38) The last dividend on GTE stock was $4, and the expected growth rate is 10%. If
you require a rate of return of 20%, what is the highest price you should be willing to
pay for GTE stock?
a.$40
b.$42.50
c.$44
d.none of the above
39) A (n) ________ in current assets ________ net working capital, thereby ________
the risk of technical insolvency.
a.decrease; increases; increasing
b.decrease; decreases; reducing
c.increase; decreases; increasing
d.increase; increases; reducing
40) All of the following statements are correct except:
a.MIRR solves some of the problems presented by IRR in that MIRR rankings of
mutually exclusive projects with comparably-sized initial investments will agree with
the NPV rankings of those projects
b.MIRR always gives a single answerit will not give us multiple answers as the IRR
approach sometimes does
c.MIRR is most useful in the case of mutually exclusive investments and in cases where
project cash flows change sign more than once
d.MIRR is always less than the regular IRR if the cost of capital is less than the regular
IRR
e.all of the above are correct
41) Basic requirements of an effective financial system include:
a.creating money
b.transferring money
c.accumulating savings
d.all of the above
e.none of the above
42) The Small Business Administration assists in the financing of small businesses in
which of the following ways?
a.making direct loans to businesses
b.participating jointly with banks in extending loans to businesses
c.guaranteeing bank loans to businesses
d.all the above
43) John deposits $2,000 per year at the end of the year for the next 20 years into an
IRA account that pays 6%. How much will John have on deposit at the end of 20 years?
a.$67,520
b.$73,572
c.$81,990
d.$75,686
44) If a firms sales are $2,000,000, its cost of goods sold is $1,500,000, and its fixed
assets are $1,000,000, what is fixed asset turnover?
a.2.0 times
b.1.5 times
c.0.5 times
d.67 times