I have some questions to be answered. It will take some time but will tip on top of the price offered.
1) When making financial decisions related to assets, you should:
A. always consider market values. B. place primary emphasis on historical costs. C. place more emphasis on
book values than on market values. D. only consider market values if they are less than book values. E. rely
primarily on the value of assets as shown on the balance sheet.
2) Free cash flow is: A. cash given to the firm without cost. B. net income plus taxes. C. an increase in net
working capital. D. cash that the firm is free to distribute to creditors and stockholders. E. None of the above.
3) Your firm has total sales of $1,700. Operating Costs are $745, excluding depreciation and taxes, and
operating related depreciation is $155. The tax rate is 20%. What is the operating cash flow? A. $460 B. $600 C.
$640 D. $800 E. $955
4) Alaska Autos has beginning net fixed assets of $480 and ending net fixed assets of $450. Assets valued at
$120 were sold during the year. Depreciation to-date on the unsold assets was $40. What is the amount spent
on new assets? A. $10 B. $30 C. $50 D. $90 E. $130
5) At the beginning of the year, a firm has current assets of $900 and current liabilities of $500. At the end of the
year, the current assets are $950 and the current liabilities are $600. What is the change in net working capital?
A. -$100 B. -$50 C. $0 D. $50 E. $100
6) Projected future financial statements are called: A. plug statements. B. pro forma statements. C. reconciled
statements. D. aggregated statements. E. none of the above.
7) Financial ratios can be compared to all of the following, except: A. Values before, then after an event
B. Previous time periods of the firm C. Actual accounting values D. Industry averages E. Other ratios.
8) Ratios that measure how efficiently a firm uses its assets to generate sales are known
as __________________ ratios. A. asset management B. long-term solvency C. short-term solvency D. market
9) The Jenkins Family Fun Center, in anticipation of buying a new van at the end of four years, deposited $2,500
in an investment account today. In one year, it is adding another $5,000 to this account. It plans on making a final
deposit of $7,500 to the account in two years. Assuming it earns a 8% rate of return, how much will be available
when it is ready to buy the equipment? A. $12,500 B. $13,316 C. $13,500 D. $14,381 E. $15,532
10) The mixture of debt and equity used by a firm to finance its operations is called:
A. working capital management. B. financial depreciation. C. capital budgeting. D. capital structure.
E. cost analysis.
11) The primary goal of financial managers should be to: A. maximize current dividends per share of the existing
stock. B. maximize the current value per share of the existing stock. C. minimize operational costs and maximize
firm efficiency. D. maintain steady growth in both sales and net earnings.
E. avoid financial distress.
12) Agency costs refer to: A. corporate income subject to double taxation. B. the costs that result from default
and bankruptcy of a firm. C. the total interest paid to creditors over the lifetime of the firm.
D. the total dividends paid to stockholders over the lifetime of a firm. E. the costs of any conflicts of interest
between stockholders and management.
13) A stakeholder is: A. any person or entity that owns shares of stock of a corporation. B. any person or entity
that has voting rights based on stock ownership of a corporation. C. a person who initially started a firm and
currently has management control over the cash flows of the firm due to his/her current ownership of company
stock. D. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows
of the firm. E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash
flows of the firm.
14) A firm?s ratio can be compared to:
A. Competitor firms
B. Industry averages
C. Their own past ratios
D. All of the above
15) Which one of the following is a capital budgeting decision? A. determining how much debt should be
borrowed from a particular lender B. deciding whether or not to open a new store C. deciding when to repay a
long-term debt D. determining how much inventory to keep on hand E. determining how much money should be
kept in the checking account
16) Which of the following is not an advantage of the corporate form of business ownership? A. limited liability for
firm debt B. specialization of roles C. ability to raise capital D. lower agency costs E. unlimited firm life
17) Which form of business structure faces the fewest agency problems? A. sole proprietorship B. general
partnership C. limited partnership D. corporation E. limited liability company
18) Managers are encouraged to act in shareholders' interests by: A. shareholder election of a board of directors
who select management. B. compensation contracts that tie compensation to corporate success. C. the threat of
a takeover by another firm. D. Both A and B. E. All of the above.
19) When examining ratios to determine if a new plan was a success, we would benefit most by: A. time trend
analysis. B. comparing to industry averages. C. comparing to our closest competitor. D. comparing the ratios to
zero. E. it is impossible to determine success from ratios.
20) You want to donate $200,000 to a school to set up a scholarship that will pay $5,000 a year forever. What
rate of return will be needed on this donation to provide the scholarship? A. 2.5% B. 5.0% C. 10% D. 25% E.
21) All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. A. a premium;
higher than B. a premium; equal to C. at par; higher than D. at par; less than E. a discount; higher than
22) Wheels & Deals, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.
The bonds mature in 9 years. What is the market price of a $1,000 face value bond? A. $953.28 B. $963.88 C.
$1,108.16 D. $1,401.26 E. $1,401.86
23) A corporate bond with a face value of $1,000 matures in 4 years and has a 8% coupon paid at the end of
each year. The current price of the bond is $932. What is the yield to maturity for this bond? A. 5.05% B. 6.48%
C. 8.58% D. 10.15% E. 11.92%
24) Fruit Phones recently paid a $2.50 annual dividend on its common stock. This dividend increases at an
average rate of 4% per year. The stock is currently selling for $52.00 a share. What is the market rate of return?
A. 2.5% B. 4.0% C. 5.0% D. 6.0% E. 9.0%
25) Goodweek Tire has a 6-year, 8% annual coupon bond with a $1,000 par value. Generic Tire has a 12-year,
8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6% and were
issued one year ago. Which of the following statements are correct if the market yield increases to 7%? A. Both
bonds would increase in value by the same amount. B. Both bonds would decrease in value by the same
amount. C. The Jackson bond will decrease by more than the Earls bond. D. The Earls bond will decrease by
more than the Jackson bond. E. The Jackson bond will increase by more than the Earls bond.
26) All else constant, a coupon bond that is selling at a premium, must have: A. a coupon rate that is equal to the
yield to maturity. B. a market price that is less than par value. C. semi-annual interest payments. D. a yield to
maturity that is less than the coupon rate. E. a coupon rate that is less than the yield to maturity.
27) The zero coupon bonds of Free City have a market price of $394.47, a face value of $1,000, and a yield to
maturity of 6.87%. How many years is it until this bond matures? A. 7 years B. 10 years C. 14 years D. 18 years
E. 21 years
28) Accounting profits and cash flows are: A. generally the same since they reflect current laws and accounting
standards. B. generally not the same because cash inflows occur before revenue recognition. C. generally the
same since accounting profits reflect when the cash flow are received. D. generally not the same since GAAP
allows for revenue recognition separate from the receipt of cash flows, and expenses separate from cash
payments. E. Both c and d.
29) Which of the following will increase sustainable growth? A. Buy back existing stock B. Decrease debt C.
Increase profit margin D. Increase asset requirement ratio E. Increase dividend payout ratio
30) The sustainable growth rate: A. assumes the debt-equity ratio is variable. B. is normally higher than the
internal growth rate. C. assumes there is no external financing of any kind. D. is based on receiving additional
external debt and equity financing. E. assumes that 100% of all income is retained by the firm.
31) You are comparing two annuities which offer equal monthly payments for ten years. Both annuities are
identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays
on the last day of each month. Which one of the following statements is correct concerning these two annuities?
A. Both annuities are of equal value today. B. Annuity B is an annuity due. C. Annuity A has a higher future value
than annuity B. D. Annuity B has a higher present value than annuity A. E. Both annuities have the same future
value in 10 years.
32) Which one of the following statements concerning the annual percentage rate is correct? A. The annual
percentage rate considers interest on interest. B. The rate of interest you actually pay on a loan is called the
annual percentage rate. C. The effective annual rate is lower than the annual percentage rate when an interest
rate is compounded quarterly. D. When firms advertise the annual percentage rate they are violating U.S. truthin-lending laws. E. The annual percentage rate equals the effective annual rate when the rate on an account is
designated as simple interest.
33) Which one of the following statements concerning interest rates is correct? A. The stated rate is the same as
the effective annual rate. B. An effective annual rate is the rate that applies if interest were charged annually. C.
The annual percentage rate increases as the number of compounding periods per year increases. D. Banks
prefer more frequent compounding on their savings accounts. E. For any positive rate of interest, the effective
annual rate will always exceed the annual percentage rate.
34) Regarding $0 NPV projects, a firm could do all of the following except: A. accept all zero NPV projects. B.
reject all zero NPV projects. C. be indifferent about zero NPV projects. D. Change the discount rate to make zero
NPV projects positive or negative. E. sometimes accept even negative NPV projects.
35) Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for
another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this
employee benefit worth to you today? A. $13,144.43 B. $15,920.55 C. $16,430.54 D. $26,000.00 E. $27,300.00
36) You have some property for sale and have received two offers. The first offer is for $189,000 today in cash.
The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the
applicable discount rate is 8.75%, which offer should you accept and why? A. You should accept the $189,000
today because it has the higher net present value. B. You should accept the $189,000 today because it has the
lower future value. C. You should accept the second offer because you will receive $200,000 total. D. You should
accept the second offer because you will receive an extra $11,000. E. You should accept the second offer
because it has a present value of $194,555.42.
37) Which one of the following statements is correct concerning the payback period? A. An investment should be
rejected if the payback is positive and accepted if it is negative. B. An investment should be accepted if the
payback is positive and rejected if it is negative. C. An investment is acceptable if its calculated payback period is
less than some pre-specified period of time. D. An investment is acceptable if its calculated payback period is
greater than some pre-specified period of time. E. An investment should be accepted any time the payback
period is less than the discounted payback period, given a positive discount rate.
38) The discounted payback rule may cause: A. some positive net present value projects to be rejected. B. the
most liquid projects to be rejected in favor of less liquid projects. C. projects to be incorrectly accepted due to
ignoring the time value of money. D. some projects with negative net present values to be accepted. E. Both A
39) Analysis using the profitability index: A. frequently conflicts with the accept and reject decisions generated by
the application of the net present value rule. B. is useful as a decision tool when investment funds are limited. C.
cannot be used to aid capital rationing. D. utilizes the same basic variables as those used in the average
accounting return. E. produces results which typically are difficult to comprehend or apply.
40) Which one of the following is the best example of two mutually exclusive projects? A. planning to build a
warehouse and a retail outlet side by side B. buying sufficient equipment to manufacture both desks and chairs
simultaneously C. using an empty warehouse for storage or renting it entirely out to another firm D. using the
company sales force to promote sales of both shoes and socks E. buying both inventory and fixed assets using
funds from the same bond issue
41) Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both
projects have 5 year lives.
PROJECT A PROJECT B
Net Present Value $ 15,090 $14,693
Payback period 2.76 Years 2.51 Years
Average Accounting Return 9.3% 9.6%
Required Return 8.3% 8.0%
Required Return 9.0% 9.0%
Matt has been asked for his best recommendation given this information. His recommendation should be to: A.
accept project B because it has the shortest payback period. B. accept both projects as they both have positive
net present values. C. accept project A and reject project B based on their net present values. D. accept project
B and reject project A based on their average accounting returns. E. accept project A and reject project B based
on the required return.
42) The discount rate that makes the net present value of an investment exactly equal to zero is called the: A.
external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer.
43) A situation in which accepting one investment prevents the acceptance of another investment is called the: A.
net present value profile. B. operational ambiguity decision. C. mutually exclusive investment decision. D. issues
of scale problem. E. multiple choices of operations decision.
44) All else constant, the net present value of a typical investment project increases when: A. the discount rate
increases. B. each cash inflow is delayed by one year. C. the initial cost of a project increases. D. the rate of
return decreases. E. all cash inflows occur during the last year of a project's life instead of periodically
throughout the life of the project.
45) No matter how many forms of investment analysis you do: A. only the first three years of a project ever affect
its final outcome.
B. a project will never be accepted unless the payback period is met. C. the internal rate of return will always
produce the most reliable results. D. the initial costs will generally vary considerably from the estimated costs. E.
the actual results from a project may vary significantly from the expected results.
46) If there is a conflict between mutually exclusive projects due to the IRR, one should: A. drop the two projects
immediately. B. spend more money on gathering information. C. depend on the NPV as it will always provide the
most value. D. depend on the AAR because it does not suffer from these same problems. E. None of the above.
47) What is the net present value of a project with the following cash flows and a required return of 12%?
YEAR CASH FLOW
0 – $28,900
3 $ 2,750
A. -$287.22 B. -$177.62 C. $177.62 D. $204.36 E. $287.22
48) You are considering two mutually exclusive projects with the following cash flows. Will your choice between
the two projects differ if the required rate of return is 8% rather than 11% ? If so, what should you do?
YEAR PROJECT A PROJECT B
0 – $240,000 – $198,000
1 $ – 0 – $110,800
2 $ – 0 – $ 82,500
3 $325,000 $ 45,000
yes; Select A at 8% and B at 11%. B. yes; Select B at 8% and A at 11%. C. yes; Select A at 8% and select neither
at 11%. D. no; Regardless of the required rate, project A always has the higher NPV. E. no; Regardless of the
required rate, project B always has the higher NPV.
49) Which of the following is false? A. Incremental costs can be Opportunity costs. B. Opportunity costs can be
Incremental cost. C. Of the three categories of Opportunity costs, only one is usually an Incremental cost. D.
Opportunity costs and Incremental cost may be discounted at different rates.
E. Some Opportunity costs are not Incremental costs.
50) A project has an initial cost of $8,500 and produces cash inflows of $2,600, $4,900,and $1,500 over the next
three years, respectively. What is the discounted payback period if the required rate of return is 7%? A. 2.13
years B. 2.33 years C. 2.67 years D. 2.91 years E. never
51) A cost that has already been paid, or the liability to pay has already been incurred, is a(n): A. salvage value
expense. B. net working capital expense. C. sunk cost. D. opportunity cost. E. erosion cost.
52) . The cash flow from projects for a company is computed as the: A. net operating cash flow generated by the
project, less any sunk costs and erosion costs. B. sum of the incremental operating cash flow and after-tax
salvage value of the project. C. net income generated by the project, plus the annual depreciation expense. D.
sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the
project. E. sum of the sunk costs, opportunity costs, and erosion costs of the project.
53) You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are
trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the
$500 you spent fixing the transmission is a(n) _____ cost. A. opportunity B. fixed C. incremental D. sunk E.
54) Other things held constant, an increase in which one of the following will increase the operating cash flow? A.
employee salaries B. office rent C. building maintenance D. equipment depreciation E. equipment rental
55) Scenario analysis is different than sensitivity analysis: A. because it is short and simple. B. as no economic
forecasts are changed. C. as several variables are changed together. D. because it is a "by the seat of the pants"
E. because scenario analysis deals with actual data versus sensitivity analysis which deals with a forecast.
56) Investing in stocks can be more like gambling when: A. Both have a short time horizon B. Both involve risk C.
Both involve an initial outflow of cash D. Both have a positive expected return E. Both result in long-term loses.
57) The excess return required from a risky asset over that required from a risk-free asset is called the: A. risk
premium. B. geometric premium. C. excess return. D. average return. E. variance.
58) Which one of the following is a correct statement concerning risk premium? A. The greater the volatility of
returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The
lower the average rate of return, the greater the risk premium. D. The risk premium is not correlated to the
average rate of return. E. The risk premium is not affected by the volatility of returns.
59) Capital market history shows us that the average return relationship from lowest to highest between
securities is: A. inflation, corporate bonds, Treasuries, small company stocks, large company stocks. B. Treasury
bills, inflation, small company stocks, large company stocks. C. Treasury bills, corporate bonds, government
bonds, large common stocks, small company stocks. D. Treasury bills, government bonds, corporate bonds,
large common stocks, small company stocks. E. There is no ordering.
60) The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will
eliminate all of your risk. B. concentrating an investment in three companies all within the same industry will
greatly reduce your overall risk. C. spreading an investment across five diverse companies will not lower your
overall risk at all. D. spreading an investment across many diverse assets will eliminate all of the risk. E.
spreading an investment across many diverse assets will eliminate some of the risk.
61) Which one of the following is an example of a non-diversifiable risk? A. a well respected president of a firm
suddenly resigns B. a well respected chairman of the Federal Reserve unexpectedly resigns C. a key employee
suddenly resigns and accepts employment with a key competitor D. a well managed firm reduces its work force
and automates several jobs E. a poorly managed firm suddenly goes out of business due to lack of sales
62) The expected return on a portfolio: A. can be greater than the expected return on the best performing
security in the portfolio. B. can be less than the expected return on the worst performing security in the portfolio.
C. is independent of the performance of the overall economy. D. is limited by the returns on the individual
securities within the portfolio. E. is an arithmetic average of the returns of the individual securities when the
weights of those securities are unequal.
63) If a stock portfolio is well diversified, then the portfolio variance: A. will equal the variance of the most volatile
stock in the portfolio. B. may be less than the variance of the least risky stock in the portfolio. C. must be equal to
or greater than the variance of the least risky stock in the portfolio. D. will be a weighted average of the variances
of the individual securities in the portfolio. E. will be an arithmetic average of the variance of the individual
securities in the portfolio.
64) Which one of the following is an example of systematic risk? A. the price of lumber declines sharply B. airline
pilots go on strike C. the Federal Reserve increases interest rates D. a hurricane hits a tourist destination E.
people become diet conscious and avoid fast food restaurants
65) A firm?s current stock price reflects investors expectations of: A. The sum of all net income B. The sum of all
future dividends C. The sum of all future cash flows D. The present value of all net income E. The present value
of all future cash flows
66) Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were made to the
building which cost $60,000. The annual taxes on the property are $20,000. The warehouse has a current book
value of $268,000 and a market value of $295,000. The warehouse is totally paid for and solely owned by your
firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in
the initial cash flow of the project for this building? A. $ – 0 – B. $268,000 C. $295,000 D. $395,000 E. $515,000
67) Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a
tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating
cash flow? A. $49,384 B. $52,616 C. $54,980 D. $58,340 E. $114,340
68) A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $100,000 and
be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The
company has a marginal tax rate of 34%. What is the value of the depreciation tax shield? A. $8,500 B. $17,000
C. $22,500 D. $25,000 E. $37,750
69) A project will produce operating cash flows of $45,000 a year for four years. During the life of the project,
inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will
decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The
equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be
salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working
capital will return to its normal level. What is the net present value of this project given a required return of 14%?
A. $3,483.48 B. $16,117.05 C. $27,958.66 D. $32,037.86 E. $49,876.02