1) The estimated value of reducing float by 1-day is one day’s interest on the freed up
sales.
2) Net working capital is equal to gross working capital minus depreciation.
3) The less risky the bond (or the higher the bond rating) the lower will be the yield to
maturity on the bond.
4) Profits represent money that can be spent, and as such, form the basis for
determining the value of financial decisions.
5) According to the clientele effect, dividend policy matters even if capital markets are
perfect because investors self-select into dividend preference groups.
6) Public perception and reputation do not affect stock prices, which are strictly a
function of dividends and required returns.
7) A timeline identifies the timing and amount of a stream of cash flows, along with the
interest rate it earns.
8) The change in the value of a corporation’s common stock as the result of growth is
the same regardless of whether the growth is the result of internal growth or the
infusion of new capital.
9) Because they occur in private, stricter regulations are placed on the private
placement of securities.
10) A project’s contribution-to-firm risk does allow for diversification within the firm.
11) Conceptually, stock dividends and stock splits may be expected to increase the
shareholder’s value.
12) If two companies have the same net income and the same level of risk, they must
also have the same stock price or the market is not in equilibrium.
13) If the tax rate on dividends and the tax rate on capital gains are the same, then
investors are indifferent to dividend policy.
14) Budgets should not be used for performance evaluation because there is too much
uncertainty involved and this makes it unfair to the person being evaluated.
15) A budget is a forecast of future events.
16) For a firm to have its securities listed on an exchange, it must meet certain
requirements. These usually include measures of profitability, size, market value, and
public ownership.
17) A grocery store decides to offer beer for sale and this decision results in more potato
chip sales. This is an example of a synergistic effect.
18) Which of the following might occur when a firm increases its collection efforts:
A) an increase in inventory costs
B) an increase in bad debts
C) an increase in sales
D) a decline in accounts payable
19) Market efficiency implies which of the following?
A) book value = intrinsic value
B) market value = intrinsic value
C) book value = market value
D) liquidation value = book value
20) Which of the following is/are true?
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks
B) Two points on the Characteristic Line are the T-bill and the market portfolio
C) The greater the total risk of an asset, the greater the expected return
D) All securities have a beta between 0 and 1
21) 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
22) The Colorado Jet Boat Company had a cash balance of $3 million at the beginning
of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore
A) the cash balance at the end of 2010 is $4 million
B) the cash balance at the end of 2010 must be greater than $3 million
C) the cash balance at the end of 2010 must be less than $11 million
D) the cash balance at the end of 2010 cannot be determined from the information given
23) Which of the following ratios would be the poorest indicator of how rapidly the
firm’s credit accounts are being collected?
A) times interest earned
B) average collection period
C) accounts receivable turnover ratio
D) cash conversion cycle
24) Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1
million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling
the shares to investors. This is an example of a
A) privileged subscription
B) standby agreement
C) negotiated purchase
D) commission or best-efforts agreement
25) Which of the following investments is clearly preferred to the others for an investor
who is not holding a well-diversified portfolio?
Investment
A18%20%
B20%20%
C20%22%
A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined without information regarding the risk-free rate of return
26) Speculative, or non-investment-grade, bonds have an S&P bond rating of
A) C or less
B) CCC or less
C) BB or less
D) BBB or less
27) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A
costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.
Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in
year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate
of return for these projects is 10%.The modified internal rate of return for Project A is
A) 19.19%
B) 24.18%
C) 26.89%
D) 29.63%
28) Which of the following are characteristics of a limited partnership?
A) Limited partners may not participate in the management of the limited partnership
B) There must be one or more general partners
C) General partners have unlimited liability
D) all of the above
29) Table 4-5
Yen Inc.
Balance Sheet
Yen Inc.
Income Statement
For the year ended December 31, 2010
Based on the information contained in Tables 4-5, what was Yen’s quick ratio at the end
of 2010?
A) 2.10
B) 1.43
C) 2.93
D) 1.79
30) What was the average annual rate of return on long-term corporate bonds during the
period 1926 to 2011?
A) 8.3%
B) 6.5%
C) 6.2%
D) 7.00%
31) Permanent sources of financing include all but
A) corporate bonds
B) common stock
C) preferred stock
D) commercial paper
32) A financial analyst tells you that investing in stocks will allow you to double your
money in 7 years. What annual rate of return is the analyst assuming you can earn?
A) 8.76%
B) 9.87%
C) 10.01%
D) 10.41%
33) Operating return on assets (OROA) is equal to operating profit margin times total
asset turnover.
34) The common stock for El Viss Company currently sells for $20 per share. The firm
just paid a dividend of $1.50, and the dividend three years ago was $1.30. Dividends
per share are anticipated to grow at the same rate in the future as they have over the past
three years. Flotation costs for new shares will be 6% of the selling price. Calculate the
following:
a.the cost of retained earnings
b.the cost of external equity capital
35) What is the yield to maturity of a corporate bond with 13 years to maturity, a
coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250?
Assume semiannual coupon payments.
A) 4.2%
B) 4.7%
C) 6.0%
D) 5.3%
36) Today is your 20th birthday and your bank account balance is $25,000. Your
account is earning 6.5% interest compounded semiannually. How much will be in the
account on your 50th birthday?
A) $159,795
B) $162,183
C) $163,823
D) $170,351
37) Centralized control over disbursements is assisted by which of the following cash
management techniques?
A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) both B and C
38) Kelly Corporation is considering an investment proposal that requires an initial
investment of $150,000 in equipment. Fully depreciated existing equipment may be
disposed of for $40,000 pre-tax. The proposed project will have a five-year life, and is
expected to produce additional revenue of $65,000 per year. Expenses other than
depreciation will be $15,000 per year. The new equipment will be depreciated to zero
over the five-year useful life, but it is expected to actually be sold for $20,000. Kelly
has a 35% tax rate.
a.What is the net initial outlay for the proposed project?
b.What is the operating cash flow for years 1-4?
c.What is the total cash flow at the end of year five (operating cash flow for year 5 plus
terminal cash flow)?
39) Table 3-1
Jones Company
Financial Information
Based on the information in Table 3-1, calculate the amount of dividends paid by Jones
Company in 2010 (no assets were disposed of during the year, and there was no change
in interest payable or taxes payable).
A) $2,000
B) $2,500
C) $3,500
D) $4,000
40) William Corp. Bonds have a current yield of 7% and mature in 10 years. Smith
Corp. Bonds have a current yield of 5% and mature in 10 years. Given this information,
which of the following statements is MOST correct?
A) William Corp. Bonds will have a higher yield to maturity than Smith Corp. Bonds
B) Smith Corp. Bonds will sell for a lower price than William Corp. Bonds
C) Smith Corp. Bonds are riskier than William Corp. Bonds
D) If both bonds have the same yield to maturity, then the price of Smith Corp. Bonds
must be less than the price of William Corp. Bonds
41) With regard to the hedging principle, which of the following assets should be
financed with current liabilities?
A) minimum level of cash required for year round operations
B) expansion of accounts receivable to meet seasonal demand
C) machinery
D) buildings
42) Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of
$500,000; and long-term assets of $800,000. How much is the firm’s Total Liabilities &
Equity?
A) $2,500,000
B) $1,300,000
C) $2,000,000
D) $1,800,000
43) Compare the risk of a 90-day unsecured promissory note issued by Southwest
Airlines to a 20-year U.S. Government Treasury Bond.
A) The Treasury Bond has a lower financial risk, but a higher interest rate risk
B) The Treasury Bond has a lower financial risk and a lower interest rate risk
C) The Treasury Bond has a lower interest rate risk, but higher financial risk
D) The Treasury Bond has a higher interest rate risk, and a higher financial risk
44) You are going to invest all of your funds in one of three projects with the following
distribution of possible returns:
PROJECT 1PROJECT 2
StandardStandard
ProbabilityReturnDeviationBetaProbabilityReturnDeviationBeta
50% Chance22%12%1.130% Chance36%19.5%1.0
50% Chance-4%40% Chance10.5%
30% Chance-20%
PROJECT 3
Standard
ProbabilityReturnDeviationBeta
10% Chance28%12%1.2
70% Chance18%
20% Chance-8%
If you are a risk averse investor, which one should you choose?
A) Project 1
B) Project 2
C) Project 3
D) either Project 1 or Project 2 because they have the same expected return
45) Which of the following forms of business organization has the greatest ability to
attract new capital?
A) sole proprietorship
B) corporation
C) general partnership
D) limited partnership
46) 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
47) You are considering the three securities listed below.
a. Calculate the expected return for each security.
b. Calculate the standard deviation of returns for each security.
c. Compare Stock A with Stocks B and C. Is Stock A preferred over the others?
48) If the exchange rate quotes in two different countries were out of line with each
other, an enterprising trader could make a profit by buying in the market where the
currency was cheaper and simultaneously selling it in the market where the currency
was more expensive. Such a person would be known as a
A) spot trader
B) arbitrageur
C) cross trader
D) capitalist
49) Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order
bicycles this year. Variable costs are 40 percent of sales while fixed costs total
$600,000. At what price must each bicycle be sold for Wheely to earn EBIT of
$450,000?
50) You borrow $30,000 and agree to pay it off with one lump sum payment of $40,000
in 6 years. What annual rate of interest will you be charged?
51) D&B Contracting plans to purchase a new backhoe. The one under consideration
costs $233,000, and has a useful life of 8 years. After-tax cash flows are expected to be
$31,384 in each of the 8 years and nothing thereafter. Calculate the internal rate of
return for the grader.
52) If provided the nominal rate of interest (r) of 7.4% and the anticipated rate of
inflation (i) of 4.5%, what is the real rate of interest (R)?
53) Complete the following balance sheet using the information given. Round account
balances to the nearest dollar.
54) You have a choice between investing in a corporate bond or a municipal bond. The
corporate bond has an annual yield of 10 percent, while the municipal bond has an
annual yield of 7 percent. At what tax rate would you be indifferent between buying the
corporate bond or the municipal bond?
55) You borrow $25,000 to buy a car, and agree to make 48 monthly payments of
$607.39 to repay the loan. What annual rate of interest, which is being compounded
monthly, are you being charged?
56) Given the anticipated rate of inflation (i) of 1.7% and the real rate of interest (R) of
1.4%, find the nominal rate of interest (r).
57) Short-term United States Treasury Bills are widely used as proxies for risk-free
assets, yet the returns on these T-bills are consistently greater than zero. Is this
consistent with the concept of a risk-return tradeoff?
58) Brett’s, Inc. has received a proposal from its bank to establish a lock-box system to
accelerate the receipt of $600 million annually on 900,000 checks. By its own analysis
Brett’s, Inc.believes such a system would decrease total float by 3.5 days. If Brett’s, Inc.
can earn 7 percent before taxes on the released funds, what is the maximum that Brett’s,
Inc. should be willing to pay the bank per check for the service? Use a 365-day year.