1) It is important to evaluate a corporate manager’s financial decision by measuring the
effect the decision should have on the corporation’s stock price if everything else were
held constant.
2) Giving the company’s CEO stock options as part of his or her compensation package
is an example of an agency cost.
3) Interest rate parity theory states that the forward premium or discount should be
equal and opposite in sign to the difference in the national interest rates for securities of
the same maturity.
4) Underemployment is a term used to describe hiring employees who work for a
designated foreman or team leader. In this sense they are employed under a specific
individual.
5) There is no legal distinction made between the assets of the business and the personal
assets of any of the owners in the limited partnership.
6) Generally accepted accounting principles (GAAP) require finance statements
prepared on a cash basis because these statements are most useful for investors and
managers.
7) If a firm’s production process requires high operating leverage (use of fixed costs),
then the firm should finance its assets with debt, so that the cost of capital will be
reduced and financing costs will remain fixed.
8) In general, interest on bonds, like dividends on preferred stock, may be deferred until
a later date at the discretion of management, making debt financing more appealing to
corporate managers.
9) Exchange rate risk is the risk that exchange rates will be lower in the future than they
are today.
10) Discretionary financing needed is equal to the predicted change in total assets
minus the change in retained earnings.
11) Which of the following is an advantage of using private placements for debt?
A) reduced costs from the elimination of the registration statement for the SEC,
investment-banking underwriting fees and distribution costs
B) lower interest costs
C) fewer and less burdensome restrictive covenants
D) the possibility of future SEC registration
12) Which of the following statements is MOST correct concerning diversification and
risk?
A) Risk-averse investors often choose companies from different industries for their
portfolios because the correlation of returns is less than if all the companies came from
the same industry
B) Risk-averse investors often select portfolios that include only companies from the
same industry group because the familiarity reduces the risk
C) Only wealthy investors can diversify their portfolios because a portfolio must
contain at least 50 stocks to gain the benefits of diversification
D) Proper diversification generally results in the elimination of risk
13) Fortunately, Europe was largely shielded from the economic recession that afflicted
the world economy in 2007 . The European economies contracted less and have
recovered much more rapidly than their counterparts in the United States and China.
14) Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company’s
dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required
rate of return on this stock is 15.5%, compute the current value per share of Bensen Co.
stock.
A) $81.38
B) $76.43
C) $56.23
D) $43.90
15) If a shareholder cannot attend the corporation’s annual meeting, the shares may still
be voted using
A) the preemptive right
B) a proxy
C) majority voting rules
D) the cumulative voting right
16) Current assets would usually NOT include
A) plant and equipment
B) marketable securities
C) accounts receivable
D) inventories
17) Andre’s wonderful parents established a college savings plan for him when he was
born. They deposited $50 into the account on the last day of each month. The account
has earned 10.9% compounded monthly, tax-free. How much can they withdraw on his
18th birthday to spend on his education?
A) $27,560
B) $30,028
C) $33,307
D) $43,730
18) The financial manager is concerned with
A) striking a balance between holding too much and too little cash
B) maintaining high levels of profitability
C) minimizing the chance of insolvency
D) all of the above
19) Which of the following statements is MOST correct?
A) If a project’s internal rate of return (IRR) exceeds the required return, then the
project’s net present value (NPV) must be negative
B) If Project A has a higher IRR than Project B, then Project A must also have a higher
NPV
C) The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of
return equal to the IRR
D) A project with a NPV = 0 is not acceptable
20) Mountain Snow Sports, Inc. is trying to determine the optimal order quantity for
snow boards for the next twelve months. Annual sales are expected to be 1,000,000
units at a retail price of $400 each. The cost of carrying snow boards is $80 per year.
Studies show that it costs Mountain Snow $250 to prepare and receive an order. What is
the EOQ?
A) 2,750
B) 2,500
C) 2,000
D) 1,850
21) Farrah owns 5,000 shares of stock in DAS, Inc. with a market value of
$15,000.DAS declares a 20% stock dividend. After the dividend is paid, Farrah owns
A) 6,000 shares with a market value of $18,000.
B) 6,000 shares with a market value of $15,000.
C) 5,100 shares with a market value of $15,300.
D) 5,000 shares with a market value of $18,000.
22) Which of the following would be an example of the “transactions motive” for a firm
holding cash balances?
A) investing “excess cash balances”
B) anticipating a downturn in the economy
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials
23) When terminating a project for capital budgeting purposes, the working capital
outlay required at the initiation of the project will
A) not affect the cash flow
B) decrease the cash flow because it is a historical cost
C) increase the cash flow because it is recaptured
D) decrease the cash flow because it is an outlay
24) Which of the following has the most significant influence on return on equity?
A) common dividends
B) principal payments
C) accruals
D) operating income
25) Dividend changes may be used by management as a credible communication tool to
signal investors about future earnings under which of the following dividend policy
theories?
A) the clientele effect
B) the residual dividend theory
C) the information effect
D) the expectations theory
26) GHJ Inc. is investing in a major capital budgeting project that will require the
expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4
million of preferred stock, and $10 million of new common stock. The company
estimates is after-tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost
of retained earnings to be 14%, and the cost of new common stock to be 17%. What is
the weighted average cost of capital for this project?
A) 12.20%
B) 13.12%
C) 13.75%
D) 14.23%
27) Corporation B reported earnings per share of $10. Corporation B has 100,000
shares of common stock outstanding and reported an increase in owners equity of
$400,000 for the period. Corporation B paid $50,000 in interest expense during the
period. Corporation B paid dividends per share of
A) $6.00
B) $5.50
C) $6.50
D) $14.003
28) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky
investment. One year later, Bill’s investment is worth $1,030. Which of the following
statements is MOST correct?
A) If John’s investment is worth less than $1,030, then John was irrational to invest in
the risky project
B) John’s investment must be worth more than $1,030 because of the risk-return
tradeoff, given that John’s investment was more risky
C) If John’s investment is worth more than $1,030, then Bill was irrational to invest in
the less risky investment
D) The worth of John’s investment cannot be determined with the information given.
29) Assume you are to receive a 10-year annuity with annual payments of $1000. The
first payment will be received at the end of Year 1, and the last payment will be
received at the end of Year 10 . You will invest each payment in an account that pays 9
percent compounded annually. Although the annuity payments stop at the end of year
10, you will not withdraw any money from the account until 25 years from today, and
the account will continue to earn 9% for the entire 25-year period. What will be the
value in your account at the end of Year 25 (rounded to the nearest dollar)?
A) $48,359
B) $35,967
C) $48,000
D) $55,340
30) The minimum rate of return necessary to attract an investor to purchase or hold a
security is referred to as the
A) stock’s beta
B) investor’s risk premium
C) investor’s required rate of return
D) risk-free rate
31) An analyst is evaluating two companies, A and B. Company A has a debt ratio of
50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned
about Company B’s debt level, but not about Company A’s debt level. Which of the
following would best explain this position?
A) Company B has much higher operating income than Company A
B) Company A has a lower times interest earned ratio and thus the analyst is not
worried about the amount of debt
C) Company B has a higher operating return on assets than Company A, but Company
A has a higher return on equity than Company B
D) Company B has more total assets than Company A
32) The financial manager most directly responsible for producing the company’s
financial statements and directing its cost accounting functions is the
A) chief financial officer
B) controller
C) treasurer
D) vice president – financer
33) Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further
assume that you were offered a choice to receive the $20 million today, or receive it in
equal installments of $1 million per year for 20 years. According to one of the
principles of finance, which would you take?
A) the $20 million in equal installments of $1 million per year for 20 years because you
would be afraid of spending it all right away
B) the $20 million today because it would be worth more than if you would receive it in
equal installments of $1 million per year for 20 years
C) You would be indifferent as to when you would receive the $20 million since the
total number of dollars received is the same either way
D) the $20 million in equal installments of $1 million per year for 20 years because it
would be worth more than if you would receive it today
34) The Road Ready Riding, Inc. will use an estimated 24,000 wheel assemblies in its
manufacturing process next year. The carrying cost of the wheel assembly inventory is
$1.80 per wheel and the ordering cost per order is $50. What is Road Ready’s economic
ordering quantity of wheel assemblies?
A) 785
B) 997
C) 1,098
D) 1,155
35) You are considering a sales job that pays you on a commission basis or a salaried
position that pays you $50,000 per year. Historical data suggests the following
probability distribution for your commission income. Which job has the higher
expected income?
Probability of
CommissionOccurrence
$15,000.15
$35,000.20
$48,000.35
$67,000.22
$80,000.18
A) The salary of $50,000 is greater than the expected commission of $49,630
B) The salary of $50,000 is greater than the expected commission of $48,400
C) The salary of $50,000 is less than the expected commission of $50,050
D) The salary of $50,000 is less than the expected commission of $52,720
36) When evaluating an investment project, which of the following best describes the
financial information needed by the decision maker?
A) after-tax accounting profits
B) after-tax incremental cash flows to the company as a whole
C) incremental cash flows before taxes so the decision will not be biased by a tax code
that may change in the future
D) pre-tax accounting profits adjusted for any accounting method changes
37) If you were to use the standard deviation as a measure of investment risk, which of
the following has historically been the highest risk investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term government bonds
38) Which of the following should NOT be considered when calculating a firm’s
WACC?
A) after-tax YTM on a firm’s bonds
B) after-tax cost of accounts payable
C) cost of newly issued preferred stock
D) cost of newly issued common stock
39) The acid-test ratio of a firm would be unaffected by which of the following?
A) Several short-term loans are consolidated and paid off using long-term debt
B) Equipment is purchased, financed by a long-term debt issue
C) Additional inventory is purchased for cash
D) Large accounts receivable balances are collected
40) Coyote Inc. operates three divisions. One division involves significant research and
development, and thus has a high-risk cost of capital of 15%. The second division
operates in business segments related to Coyote’s core business, and this division has a
cost of capital of 10% based upon its risk. Coyote’s core business is the least risky
segment, with a cost of capital of 8%. The firm’s overall weighted average cost of
capital of 11% has been used to evaluate capital budgeting projects for all three
divisions. This approach will
A) favor projects in the core business division because that division is the least risky
B) favor projects in the related businesses division because the cost of capital for this
division is the closest to the firm’s weighted average cost of capital
C) favor projects in the research and development division because the higher risk
projects look more favorable if a lower cost of capital is used to evaluate them
D) not favor any division over the other because they all use the same company-wide
weighted average cost of capital
41) Which of the following accounts belong in the liability section of a balance sheet?
A) interest expense
B) accumulated depreciation
C) accounts payable
D) preferred stock