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1) The net present value of an investment is the present value of a projects future cash
inflows minus its initial cost.
2) The maturity risk premium is the added return expected by lenders because of the
expectation of inflation.
3) Using aggressive approach for financing a firms assets, long term financing would be
used only to finance fixed assets, while short term financing would be used to finance
current assets including seasonal fluctuations.
4) The interest rate is the basic price that equates the demand for supply of loanable
funds in the financial markets.
5) In general, most businesses should take advantage of a cash discount of 2/10 net 30
because the cost of not doing so is more expensive than the cost of borrowing.
6) The internal rate of return is the return that caused the net present value to be zero.
7) A contract for the purchase or sale of a currency where delivery will take place at a
future date is called a forward exchange rate.
8) The price/earnings ratio shows how much investors are willing to pay for each dollar
of the firms current earnings per share.
9) Simple interest is interest earned on the investments principal and interest.
10) If Stock A has a higher standard deviation than Stock B, it will also have a greater
coefficient of variation.
11) There is no opportunity cost associated with retained earnings.
12) The weighted average cost of capital represents the maximum required rate of
return on a capital-budgeting project and is found by multiplying the cost of each
capital structure component by its appropriate weight and summing the terms.
13) If a Canadian Savings bond can be purchased for $29.50 and has a maturity value at
the end of 25 years of $100, what is the annual rate of return on the bond?
a.5%
b.6%
c.7%
d.8%
14) All of the following statements are correct except:
a.The NPV and IRR methods will only sometimes agree on whether a project enhances
or harms shareholder wealth
b.If a project has a positive NPV, its IRR will always be less than the cost of capital
c.If a project has a negative NPV, its IRR will always be greater than the cost of capital
d.There is always a conflict between NPV and IRR in the case of mutually exclusive
projects
e.none of the above are correct
15) The percentage of deposits that must be held as reserves is called
a.excess reserves
b.required reserves
c.required reserve ratio
d.none of the above
16) You deposit $1,000 in a long-term certificate of deposit with a fixed interest rate of
9%. How many years will it take for you to triple your deposit? Pick the closest
answer.
a.11 years
b.12 years
c.13 years
d.14 years
17) The basic sources of loanable funds are:
a.short-term funds and currency
b.current savings and the creation of new funds through the expansion of credit by
depository institutions
c.contractual savings and commercial bank credit
d.bank loans and the creation of new funds through the contraction of credit by
depository institutions
18) Federal funds rates usually parallel the:
a.prime rate
b.U. S. Treasury bill rate
c.Dow Jones Industrial Average
d.none of the above
19) The constant dividend growth model assumes:
a.a constant annual dividend
b.a constant dividend growth rate for no more than the first 10 years
c.that the discount rate must be greater than the dividend growth rate
d.two of above are true assumptions
20) ____________________ in business involves making decisions relating to the
efficient use of financial resources in the production and sale of goods and services.
a.Financial management
b.Financial economics
c.Investment management
d.Asset allocation
e.none of the above
21) Which of the following statements is false?
a.the present value of a future sum decreases as either the discount rate or the number of
discounting periods per year increases
b.if the present value of a sum is equal to its future value, the interest rate must be zero
c.if the discount (or interest) rate is positive, the future value of an expected series of
payments will always exceed the present value of the same series
d.each of the above statements is true
22) Which of the following short-term sources of funds is available only to the
financially strongest concerns?
a.trade credit
b.commercial bank loans
c.finance company loans
d.commercial paper
23) The interest rate determined by multiplying the interest rate charged per period by
the number of periods in a year is called the:
a.annual percentage rate
b.compound rate of interest
c.stated rate of interest
d.effective annual rate
24) Assume that a bank receives a primary deposit of $1,000. If the reserve requirement
is 25%, what will be the amount of excess reserves available for lending purposes?
a.zero
b.$250
c.$750
d.$1,000
e.none of the above
25) Bill Clinton plans to fund his individual retirement account (IRA) with the
maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill
can earn 12 percent on his contributions, how much will he have at the end of the
twentieth year?
a.$19,292
b.$14,938
c.$40,000
d.$144,104
26) Which of the following is not true of Treasury bills?
a.long-lived
b.sold at a discount
c.mature at par
d.all the above are false
27) Assume a firms production process requires an average of 80 days to go from raw
materials to finished products and another 40 days before the finished goods are sold. If
the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what
would the short-term operating cycle be?
a.110 days
b.130 days
c.190 days
d.270 days
28) Federal obligations usually issued for maturities of five up to one year are called:
a.Treasury bonds
b.Treasury notes
c.Treasury bills
d.Agency issues
e. none of the above
29) As interest rates fall, the prices of existing bonds will:
a.rise
b.stay the same
c.fall
d.either a or b, depending on the state of the economy
e. none of the above
30) The future value of $200 received today and deposited at 8 percent for three years is
a.$248
b.$252
c.$158
d.$200
31) If a Microsoft January 20 put option with a strike price of $20 was selling for $5.00
and the market price of the underlying Microsoft stock was $18.00, the price of the put
option would be _______________.
a.in-the-money
b.out-of-the-money
c.fairly priced
d.not enough information to tell
32) An increase in the supply for loanable funds accompanied by a decrease in demand
will cause interest rates to:
a.increase
b.decrease
c. stay the same
d.not enough information to tell
33) Dan Quayle plans to fund his individual retirement account (IRA) with the
maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan
can earn 10 percent on his contributions, how much will he have at the end of the tenth
year?
a.$12,290
b.$20,000
c.$31,874
d.$51,880
34) All of the following statements are correct except:
a.The firms optimum debt/equity mix maximizes the firms cost of capital, which in turn
helps the firm to maximize shareholder wealth
b.A firms mix of debt and equity used to finance its assets defines the firms capital
structure
c.A nonoptimal capital structure with either too much or too little debt leads to higher
financing costs, and the firm will likely reject some capital budgeting projects that
could have increased shareholder wealth with an optimal financing mix
d.A projects NPV represents the increase in shareholders wealth from undertaking a
project; thus, a lower weighted average cost of capital gives higher project net present
values and results in higher levels of shareholder wealth
All of the above statements are correct
35) __________________ is a technique for trading stocks as a group rather than
individually, defined as a minimum of at least 15 different stocks with a maximum
value of $1 million.
a.A short sale
b.A stop-loss order
c.Margin trading
d.Program trading
36) All of the following are true regarding mortgage backed securities except:
a.A mortgage-back security is a debt security created by pooling together a group of
mortgage loans whose periodic payments belong to the holders of the security
b.mortgage-back securities never pass through the interest and principal payments to
the owners of the securities
c.Payments on the underlying mortgages are made to the financial institution that
created the mortgage-backed security, and the institution, in turn, pays or passes
through the payments to the investors or owners of the securities
d.In some mortgage-backed securities, the issuer separates or strips the interest and
principal payment streams into separate securities
e.all of the above statements are true
37) Funding for some government agencies that is not included in the federal budget is
called
a.discretionary federal spending
b.non-discretionary outlays
c.non-negotiable expense items
d.secret program spending
e.none of the above
38) The size of the cash buffer depends upon:
a.the ability to easily acquire financing on short notice
b.the predictability of cash inflows
c.the predictability of cash inflows
d.all the above
39) BP has an operating cycle of 120 days, an average collection period of 40 days, and
an average payment period of 30 days. Based on this information, BPs average age of
inventory is ________ days.
a.80
b.50
c.90
d.70
e.none of the above
40) To equal M1 money supply, the monetary base:
a.is multiplied by the money multiplier
b.is added to by the money multiplier
c.is subtracted from the money multiplier
d.none of the above
41) Which form of business organization has a basic weakness of reaching a capital
limit?
a.proprietorship
b.partnership
c.limited partnership
d.all of the above
