1) The book value per share of common stock is the amount per share of common stock
that would be received if all of a firm’s assets were sold for their accounting value and
the proceeds remaining were divided among common stockholders.
2) The sale of a unit of a firm to existing management is often achieved through a
leveraged buyout.
3) The annual percentage yield (APY) is the effective rate of interest that must be
disclosed to customers by banks on their savings products as a result of “truth in
savings laws.”
4) The correlation coefficient is an index of the degree of movement of an asset’s return
in response to a change in the risk-free asset return.
5) Operating leverage is concerned with the relationship between a firm’s sales revenue
and its financial expenses.
6) For a risk-averse manager, the required return increases for an increase in risk.
7) Poor capital structure decisions can result in a high cost of capital, thereby making
some unacceptable investments acceptable.
8) Renewal options normally require the lessor to maintain the assets and to make
insurance and tax payments.
9) A multi-national corporation (MNC) can give some protection to international cash
flows by reducing its liabilities if the currency is appreciating, or by reducing its
financial assets if the currency is depreciating.
10) A firm which uses the aggressive financing strategy plans to purchase raw materials
in large quantities to take price discounts. The firm will finance the purchase with a
long-term loan. The most likely consequence of this action is ________.
A) a decrease in the current ratio
B) an increase in net working capital
C) an increase in risk of insolvency
D) a decrease in net working capital
11) A single-payment note generally has a maturity of ________.
A) 30 days to 9 months or more
B) 10 to 12 months or more
C) 12 to 24 months or more
D) 10 to 24 months or more
12) The value of a firm at optimum capital structure is computed as ________.
A) earnings before interest and taxes times one less tax rate divided by one plus
weighted average cost of capital
B) earnings before interest and taxes times one less tax rate divided by weighted
average cost of capital
C) operating cash flow divided by weighted average cost of capital
D) operating cash flow divided by one plus weighted average cost of capital
13) Which of the following type of firms are most likely to payout cash dividends?
A) rapidly growing firms
B) firms encouraging innovation
C) large mature firms
D) firms expanding their operations
14) You have been offered a project paying $300 at the beginning of each year for the
next 20 years. What is the maximum amount of money you would invest in this project
if you expect 9 percent rate of return to your investment?
A) $ 2,738
B) $ 2,985
C) $15,347
D) $ 6,000
15) A ________ is responsible for evaluating and recommending proposed long-term
investments.
A) financial analyst
B) credit manager
C) pension fund manager
D) capital expenditures manager
16) Calculate the value of a $1,000 bond which has 10 years until maturity and pays
quarterly interest at an annual coupon rate of 12 percent. The required return on
similar-risk bonds is 20 percent.
A) $656.82
B) $835.45
C) $845.66
D) $2,201.08
17) Which of the following is a limitation of ratio analysis?
A) Financial ratios cannot reveal certain specific aspects of a firm’s financial position
B) Ratios that reveal large deviations from the norm merely indicate the possibility of a
problem
C) It is difficult to access audited financial statements for ratio analysis
D) Ratio analysis assumes that inflation has no effect on a firm’s business
18) Which of the following is a means of selling bonds or stocks to the public?
A) private placement
B) public offering
C) organized selling
D) direct placement
19) When a firm decreases or cancels a cash discount, sales are expected to ________,
the investment in accounts receivable is expected to ________, the bad debt expense is
expected to ________, and the profit per unit is expected to ________.
A) decrease; increase; increase; increase
B) decrease; decrease; increase; increase
C) increase; increase; decrease; decrease
D) increase; decrease; decrease; decrease
20) If an investor buys a 100-share call option for $325 with an exercise price of $15
and the underlying price per share of the stock at expiration is $13, what is the amount
of profit or loss, ignoring brokerage fees?
A) There would be a profit of $525
B) There would be a loss of $125
C) There would be a loss of $325
D) There would be a loss of $525
21) Calculate the present value of $800 received at the beginning of year 1, $400
received at the beginning of year 2, and $700 received at the beginning of year 3,
assuming an opportunity cost of 9 percent.
22) Maggie’s Gold Coins, Inc. is considering shortening its credit period from 30 days
to 20 days and believes, as a result of this change, its average collection period will
decrease from 36 days to 30 days. Bad debt expenses are also expected to decrease
from 1.2 percent to 0.8 percent of sales. The firm is currently selling 300,000 units but
believes as a result of the change, sales will decline to 275,000 units. On 300,000 units,
sales revenue is $4,200,000, variable costs total $3,300,000, and fixed costs are
$300,000. The firm has a required return on similar-risk investments of 15 percent.
Evaluate this proposed change and make a recommendation to the firm.
23) Herbert has opened a retirement fund account which pays 7 percent interest and
requires $5,000 annual deposits. Herbert will retire in 15 years and expects 10 years of
retirement life. What is the maximum annual retirement benefit Herbert can get during
his retirement years?
24) Ten years ago, Tom purchased a painting for $300. The painting is now worth
$1,020. Tom could have deposited $300 in a savings account paying 12 percent interest
compounded annually. Which of these two options would have provided Tom with a
higher return?
25) Jeanne has just graduated from high school and has received an award for $5,000.
She would like to deposit the money in an interest earning account until she graduates
from college (i.e., four years from now). In her search for the highest interest earning
account, she has narrowed the list down to the following two accounts: 1) bank A pays
9 percent interest compounded annually, and 2) bank B pays 8 percent interest
compounded semiannually. Which is the better offer, and how much will Jeanne have
upon graduation from college?