1) Which one of the following is the need to hold cash simply as a financial reserve?
A.Precautionary motive
B.Opportunistic motive
C.Speculative motive
D.Activity motive
E.Transaction motive
2) You plan to buy a new Mercedes four years from now. Today, a comparable car costs
$82,500. You expect the price of the car to increase by an average of 4.8 percent per
year over the next four years. How much will your dream car cost by the time you are
ready to buy it?
A.$98,340.00
B.$98,666.67
C.$99,517.41
D.$99,818.02
E.$100,023.16
3) Heidi owns 400 shares of Boyd Enterprises stock, which is valued at $17 a share.
Boyd Enterprises just declared a 10 percent stock dividend. How many shares will
Heidi own and what will the price per share be after the dividend?
A.360; $15.45
B.360; $18.70
C.440; $15.45
D.440; $17.00
E.440; $18.70
4) Which one of the following is most commonly used in international trades?
A.Sight draft
B.Time draft
C.Commercial paper
D.Banker’s acceptance
E.Open account
5) On which one of the following dates do dividends become a liability of the issuer for
accounting purposes?
A.First day of the fiscal year in which the dividend is expected to be paid
B.Twelve months prior to the expected dividend payment date
C.On the declaration date
D.On the date of record
E.On the date of payment
6) You recently sold an antique car you owned and valued greatly. However, you
needed money and agreed to sell the car at a price of $48,000, to be paid in monthly
payments of $1,200 each for 48 months. What interest rate did you charge for financing
the sale?
A.8.65 percent
B.8.75 percent
C.8.88 percent
D.9.24 percent
E.9.49 percent
7) Which one of the following terms is most commonly used to describe the cash flows
of a new project that are simply an offset of reduced cash flows for a current project?
A.Opportunity cost
B.Sunk cost
C.Erosion
D.Replicated flows
E.Pirated flows
8) The weighted average cost of capital is defined as the weighted average of a firm’s:
A.return on its investments
B.cost of equity and its aftertax cost of debt
C.pretax cost of debt and equity securities
D.bond coupon rates
E.dividend and capital gains yields
9) River Rock, Inc. just paid an annual dividend of $2.80. The company has increased
its dividend by 2.5 percent a year for the past ten years and expects to continue doing
so. What will a share of this stock be worth six years from now if the required return is
16 percent?
A.$23.60
B.$24.65
C.$25.08
D.$25.50
E.$26.90
10) Which one of the following is an expected result of the Check Clearing Act for the
21st Century?
A.Firms will have to wait three days before having access to their deposited funds
B.Zero-balance accounts will be eliminated
C.Lockboxes will be prohibited
D.Collection float, but not disbursement float, will be reduced
E.Both collection and disbursement float will be reduced
11) The recognition principle states that:
A.costs should be recorded on the income statement whenever those costs can be
reliably determined
B.costs should be recorded when paid
C.the costs of producing an item should be recorded when the sale of that item is
recorded as revenue
D.sales should be recorded when the payment for that sale is received
E.sales should be recorded when the earnings process is virtually completed and the
value of the sale can be determined
12) World United stock currently plots on the security market line and has a beta of
1.04. Which one of the following will increase that stock’s rate of return without
affecting the risk level of the stock, all else constant?
A.An increase in the risk-free rate
B.Decrease in the security’s beta
C.Overpricing of the stock in the market place
D.Increase in the market risk-to-reward ratio
E.Decrease in the market rate of return
13) Given the following information, what is the standard deviation of the returns on
this stock?
A.7.38 percent
B.7.55 percent
C.7.80 percent
D.7.91 percent
E.8.06 percent
14) Consider a portfolio comprised of four risky securities. Assume the economy has
three states with varying probabilities of occurrence. Which one of the following will
guarantee that the portfolio variance will equal zero?
A.The portfolio beta must be 1.0
B.The portfolio expected rate of return must be the same for each economic state
C.The portfolio risk premium must equal zero
D.The portfolio expected rate of return must equal the expected market rate of return
E.There must be equal probabilities that the state of the economy will be a boom or a
bust
15) Laurie’s Ice Rink keeps an extra $1,500 in its checking account simply in case an
emergency arises. Which type of motive for holding cash does this represent?
A.Speculative
B.Float requirement
C.Transaction
D.Precautionary
E.Availability
16) Sara is investing $1,000 today. Which one of the following will increase the future
value of that amount?
A.Shortening the investment time period
B.Paying interest only on the principal amount
C.Paying simple interest rather than compound interest
D.Paying interest only at the end of the investment period rather than throughout the
investment period
E.Increasing the interest rate
17) A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for
certain that the firm:
A.pays cash for its inventory
B.has more than half its current assets invested in inventory
C.has more cash than inventory
D.has more current liabilities than it does current assets
E.has positive net working capital
18) A sole proprietorship:
A.provides limited liability for its owner
B.involves significant legal costs during the formation process
C.has an unlimited life
D.has its profits taxed as personal income
E.can generally raise significant capital from non-owner sources
19) A firm has adopted a policy whereby it will not seek any additional external
financing. Given this, what is the maximum growth rate for the firm if it has net income
of $12,100, total equity of $94,000, total assets of $156,000, and a 40 percent dividend
payout ratio?
A.4.88 percent
B.5.11 percent
C.6.62 percent
D.7.67 percent
E.8.37 percent
20) Aardvark, Inc. pays a constant annual dividend. At the end of trading on
Wednesday, the price of its stock was $28. At the end of trading on the following day,
the stock price was $27. As a result of the decline in the stock’s price, the dividend yield
_____ while the capital gains yield _____.
A.remained constant; remained constant
B.increased; remained constant
C.increased; increased
D.decreased; remained constant
E.decreased; decreased
21) Which of the following statements is true?
A.Rapid growth spurs increases in market share and profits and thus, is always a
blessing
B.Firms that grow rapidly only very rarely encounter financial problems
C.The cash flows generated in a given time period are equal to the profits reported
D.Profits provide assurance that cash flow will be sufficient to maintain solvency
E.Due to required cash investments in current assets, fast-growing and profitable
companies can literally “grow broke”
22) The reinvestment approach to the modified internal rate of return:
A.individually discounts each separate cash flow back to the present
B.reinvests all the cash flows, including the initial cash flow, to the end of the project
C.discounts all negative cash flows to the present and compounds all positive cash
flows to the end of the project
D.discounts all negative cash flows back to the present and combines them with the
initial cost
E.compounds all of the cash flows, except for the initial cash flow, to the end of the
project
23) A 6-year, semiannual coupon bond is selling for $991.38. The bond has a face value
of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?
A.4.50 percent
B.4.60 percent
C.6.00 percent
D.9.00 percent
E.9.19 percent
24) Both Projects A and B are acceptable as independent projects. However, the
selection of either one of these projects eliminates the option of selecting the other
project. Which one of the following terms best describes the relationship between
Project A and Project B?
A.Mutually exclusive
B.Conventional
C.Multiple choice
D.Dual return
E.Crosswise
25) The Solvent Insurance Co. will pay you $2,500 a year for 20 years in exchange for
$30,000 today. What interest rate will you earn on this annuity?
A.5.40 percent
B.5.45 percent
C.5.50 percent
D.5.55 percent
E.5.60 percent
26) Hi Fliers is considering making and selling custom kites in two sizes. The small
kites would be priced at $9 and the large kites would be $24. The variable cost per unit
is $5 and $11, respectively. Jill, the owner, feels that she can sell 2,600 of the small
kites and 1,700 of the large kites each year. The fixed costs would only be $2,100 a year
and the tax rate is 34 percent. What is the annual operating cash flow if the annual
depreciation expense is $900?
A.$20,064
B.$20,370
C.$20,848
D.$21,309
E.$21,414
27) Rossiter’s generally receives 3 checks a month in the amounts of $46,500, $32,000,
and $63,800. On average, it takes 1.5 days for the funds from these checks to be added
to the firm’s available balance at the bank once they have been deposited. What is the
amount of the average daily float?
A.$4,743
B.$7,115
C.$14,209
D.$21,506
E.$47,433
28) You are considering the following two mutually exclusive projects. The crossover
point is _____ and project _____ should be accepted at a 12 percent discount rate.
A.11.07 percent; B
B.11.38 percent; A
C.11.38 percent; B
D.14.02 percent; A
E.14.02 percent; B
29) A corporate bond pays 8.5 percent interest. You are in the 15 percent tax bracket.
What is your after-tax yield on this bond?
A.1.28 percent
B.2.23 percent
C.7.23 percent
D.8.35 percent
E.9.78 percent
30) Global Exporters has total assets of $84,300, net working capital of $22,900,
owner’s equity of $38,600, and long-term debt of $23,900. What is the value of the
current assets?
A.$21,600
B.$24,300
C.$38,900
D.$44,700
E.$46,100
31) The cost of capital for a project depends primarily on which one of the following?
A.Source of funds used for the project
B.Division within the firm that undertakes the project
C.Project’s modified internal rate of return
D.How the project uses its funds
E.Project’s fixed costs