1) The profitability index measures the present value of benefits received for each
dollar invested.
2) A debt holder may force the firm to abide by the terms of the debt contract even if the
result is reorganization or dissolution of the firm.
3) The velocity of money is expressed as the average number of times each dollar is
spend on purchases of goods and services, and it is calculated as real GDP divided by
M1.
4) A high price-to-book value ratio would tend to indicate that investors are more
optimistic about the market value of firms asset, and its managers abilities.
5) The higher the discount rate or yield to maturity, the lower the price of a bond.
6) Nations that continually operate with an international trade surplus will become
economically stronger.
7) A net present value profile is a useful tool for evaluating the sensitivity of a projects
NPV to changes in required return.
8) The price-to-book ratio measures the markets value of the firm relative to balance
sheet equity.
9) Common-size financial statements express balance sheet and income statement
numbers as a percent of sales.
10) Sunk costs are relevant in capital budgeting analysis and should be considered in
calculating a projects initial investment.
11) Firms who wish to obtain short-term secured loans generally have two major
current assets available as collateral in the form of:
a.cash and marketable securities
b.receivables and inventory
c.receivables and factoring
d.inventory and floor planning
12) If a firm has current earnings per share of $2 and a degree of combined leverage of
4, a 10% increase in sales would result in earnings per share of:
a.$2.80
b.$8
c.$2.20
d.cannot tell from this information
13) Spontaneous financing refers to:
a.financing provided by accounts payable and accrued liabilities
b.line of credit agreements
c.revolving credit agreements
d.none of the above
14) If a firm has net sales of $400,000, annual cost of goods sold of $315,000, an
inventory turnover of 4.5 times a year, and an accounts receivable turnover of five times
a year, the combined investment in inventories and accounts receivable would be:
a.$64,500
b.$92,000
c.$122,500
d.$150,000
15) An increase in the supply for loanable funds, holding demand constant, will cause
interest rates to:
a.increase
b.decrease
c. stay the same
d.not enough information to tell
16) Which of the following is a characteristic of commercial paper dealers?
a.provide greater convenience for their clients than bank borrowing but at rates
somewhat higher than bank rates
b.set rates at the beginning of the month
c.recall notes that have been placed with investors if rates change dramatically
d.none of the above is a characteristic of commercial paper dealers
17) All of the following statements are correct except:
a.Venture capitalists usually are members of partnerships that consist of a few general
partners
b.The typical venture capital partnership manages between $50 million and $100
million in assets
c.It is common to organize a venture capital fund as publicly listed corporations
d.At the end of a funds life, cash and securities are distributed to the investors
e.All of the above statements are correct
18) Any positive economic profit or positive net present value must arise from
a.a perfectly competitive market situation
b.cost-producing projects that allow the firm to increase costs above the current level
such as economies of scale and access to distribution channels
c.government contracts or preferences
d.two of the above are correct
e.none of the above statements are correct
19) Total reserves in the banking system consist of:
a.vault cash held at commercial banks and other depository institutions
b.reserve deposits held at Federal Reserve banks
c.currency in circulation
d.both a and b
20) Which of the following statements is most correct?
a.While the dollar amount of imports decreased dramatically in 2006 compared to 2003,
they actually increased in 2009 relative to the 2006 level; this development reflects the
impact of the 2007-09 financial crisis and the weakening of the U.S. dollar relative to
other major currencies as the decade of the 2000s came to a close
b.While the dollar amount of imports increased dramatically in 2006 over 2003, they
actually fell in 2009 relative to the 2006 level; this development reflects the impact of
the 2007-09 financial crisis and the weakening of the U.S. dollar relative to other major
currencies as the decade of the 2000s came to a close
c.While the dollar amount of imports increased dramatically in 2006 over 2003, they
actually fell in 2009 relative to the 2006 level; this development reflects the impact of
the 2007-09 financial crisis and the strengthening of the U.S. dollar relative to other
major currencies as the decade of the 2000s came to a close
d.While the dollar amount of imports decreased dramatically in 2006 compared to
2003, they actually fell in 2009 relative to the 2006 level; this development reflects the
impact of the 2007-09 financial crisis and the strengthening of the U.S. dollar relative to
other major currencies as the decade of the 2000s came to a close
e.none of the above
21) During the 2007 – 2009 financial crisis, ___________ and __________, who were
major participants in the secondary mortgage markets, were on the verge of financial
insolvency and possible collapse in mid-2008.
a.Freddie Mae and Fannie Mac
b.the Federal Treasury and the Federal Reserve
c.Morgan Stanley and Smith Barney
d.Washington Mutual and Lehman Brothers
e.none of the above
22) Which of the following represents the least important instrument used to raise funds
in the credit markets during recent years?
a.U.S. government securities
b.corporate bonds
c.mortgages
d.consumer debt
23) If you invest 40% of your investment in GE with an expected rate of return of 10%
and the remainder in IBM with an expected rate of return of 16%, the expected return
on your portfolio is:
a.12.4%
b.13%
c.13.6%
14.5%
24) Which of the following is not a reason to sell securities in a private placement?
a.to keep current shareholders from suspecting sweetheart deals
b.to forestall a hostile takeover
c.to fulfill a need for an emergency infusion of equity
d.to reduce dividend payouts to shareholders
e.none of the above
25) A (n) ________ in current liabilities ________ 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
26) All of the following statements are correct except:
a.The pecking order hypothesis is a theory that states managers prefer to use new debt
to finance the firm, then retained earnings, and (as a final resort) new equity
b.The market timing hypothesis states that firms try to time the equity market by issuing
stock when their stock prices are high and repurchasing shares when stock values are
low
c.The static tradeoff hypothesis states that firms will balance the advantages of debt (its
lower cost and tax-deductibility of interest) with its disadvantages (greater possibility of
bankruptcy and the value of explicit and implicit bankruptcy costs)
d.Agency costs reduce the optimal level of debt financing for a firm below the level that
would be appropriate if agency costs were zero
e.All of the above statements are correct
27) Bruce Lee wishes to accumulate $1 million by making equal annual end-of-year
deposits over the next 20 years. If Bruce can earn 10 percent on his investments, how
much must he deposit at the end of each year?
a.$14,900
b.$50,000
c.$117,453
d.$17,460
28) Using the constant dividend growth model, which of the following components not
be considered?
a.current stock price
b.dividend growth rate
c.risk-free rate
d.all the above are considered in the constant dividend growth model
29) The Federal Reserve System:
a.permits member banks to accept drafts, but restricts the time period involved
b.actively encourages member banks to assist in financing international transactions
c.discourages its member banks from accepting foreign drafts
d.limits the type of international transactions for which member banks may accept
drafts
30) All of the following statements are correct except:
a.EBIT/EPS analysis allows managers to see how the same capital structures affect the
earnings and risk levels of their firms
b.EBIT/EPS analysis shows the graphical relationship between a firms operating
earnings, or earnings before interest and taxes (EBIT), and earnings per share (EPS)
c.EBIT/EPS analysis suggests that at some EBIT level, a firm will be indifferent
between the two capital structures, inasmuch as they result in the same earnings per
share
d.EBIT/eps analysis shows the ranges of EBIT where a firm may prefer one capital
structure over another so that the firm may decide to increase or decrease its financial
leverage depending on whether its expected EBIT is above or below the indifference
EBIT level
e.All of the above statements are correct
31) ________________ involves the sale or marketing of securities, the analysis of
securities, and the management of risk through portfolio diversification.
a.investments
b.financial institutions
c.finance
d.financial management
32) If a firm chooses to take a cash discount, it should
a.pay as soon as possible
b.pay on the last day of the credit period
c.take the discount no matter when the firm actually pays
d.pay on the last day of the discount period
e.none of the above
33) The cost of capital for retained earnings:
a.cannot be determined
b.may be determined by more than method
c.is greater than the cost of capital for common stock
d.none of the above
34) Which one of the following assets has historically had the highest average annual
return?
a.large company stocks
b.long-term corporate bonds
c.long-term government bonds
d.U.S. Treasury bills
35) Find the net profit margin earnings before interest and taxes is $20,000, net income
is $10,000, sales are $50,000, and total assets are $100,000.
a.40%
b.20%
c.10%
d.none of the above
36) A firm is evaluating a proposal which has an initial investment of $50,000 and has
cash flows of $15,000 per year for five years. If the firms required return or cost of
capital is 15%, should it accept the project using the IRR as a decision criteria?
a.yes
b.no
c.cant tell
d.none of the above
37) If you have an account with a 21.5% annual percentage rate where interest is
compounded quarterly, what is the effective annual rate of interest?
a.23.75%
b.23.3%
c.21.5%
d.none of the above
38) If interest rates increase because of a previously unanticipated inflation rate risk:
a.long-lived debt instruments will decline more than short-lived debt instruments
b.long-lived debt instruments will decline less than short-lived debt instruments
c.neither set of debt instruments will decline
d.all other things being equal, both should decline equally
39) The Export-Import Bank:
a.makes loans and offers guarantees to foreign exporters to the United States
b.may offer emergency credits to assist other countries to maintain their level of imports
from the United States
c.makes loans or offers guarantees when the soundness of the transaction is in doubt
d.makes loans to domestic exporters to encourage foreign trade
40) Which of the following securities have voting rights?
a.convertible bond
b.preferred stock
c.common stock
d.all the above
41) _______________ is the study of how individuals prepare for financial
emergencies, protect against premature death and the loss of property, and accumulate
wealth over time.
a.Personal finance
b.Corporate finance
c.Entrepreneurial finance
d.Investment banking
e.none of the above