FINAL Multiple Choice

Question 1

The goal of financial management is to increase the:
a. future value of the firm’s total equity.
b. book value of equity.
c. dividends paid per share.
d. current market value per share.
e. number of shares outstanding.

Answer 1

current market value per share

Question 2

Corporate shareholders:
a. are proportionately liable for the firm’s debts.
b. are protected from all financial losses.
c. have the ability to change the corporation’s bylaws.
d. receive tax-free distributions since all profits are taxed at the corporate level.
e. have basically no control over the actual corporation.

Answer 2

have basically no control over the actual corporation.

Question 3

One example of a primary market transaction would be the:
a. sale of 100 shares of stock by Maria to her best friend.
b. purchase by Theo of 5,000 shares of stock from his father.
c. sale of 1,000 shares of newly issued stock by Alt Company to Miquel.
d. sale by Terry of 50,000 shares of stock to his brother.
e. sale of 5,000 shares of stock owned by a corporate CEO to his son.

Answer 3

sale of 1,000 shares of newly issued stock by Alt Company to Miquel

Question 4

Net working capital is defined as:
a. The depreciated book value of a firm’s fixed assets.
b. total assets minus total liabilities.
c. the value of a firm’s current assets.
d. current assets minus current liabilities.
e. available cash minus current liabilities.

Answer 4

current assets minus current liabilities

Question 5

Net working capital increases when:
a. fixed assets are purchased for cash.
b. inventory is purchased on credit.
c. inventory is sold at cost.
d. a credit customer pays for his or her purchase.
e. inventory is sold at a profit.

Answer 5

a credit customer pays for his or her purchase

Question 6

Net working capital decreases when:
a. a new 3-year loan is obtained with the proceeds used to purchase inventory.
b. a credit customer pays his or her bill in full.
c. depreciation increases.
d. a long-term debt is used to finance a fixed asset purchase.
e. a dividend is paid to current shareholders.

Answer 6

dividend paid to current shareholders

Question 7

In a general partnership, each partner is personally liable for:
a. b. only the partnership debts that he or she personally created.
his or her proportionate share of all partnership debts regardless of which partner
incurred that debt.
c. d. e. the total debts of the partnership, even if he or she was unaware of those debts.
the debts of the partnership up to the amount he or she invested in the firm.
all personal and partnership debts incurred by any partner, even if he or she was unaware
of those debts.

Answer 7

the total debts of the partnership, even if he or she was unaware of those debts

Question 8

Which one of the following situations is most apt to create an agency conflict?
a. Compensating a manager based on his or her division’s net income
b. Giving all employees a bonus if a certain level of efficiency is maintained
c. Hiring an independent consultant to study the operating efficiency of the firm
d. Basing management bonuses on the length of employment
e. Laying off employees during a slack period

Answer 8

basing management bounses on the lnegth of oemplyment

Question 9

A common-size balance sheet helps financial managers determine:
a. which customers are paying on a timely basis.
b. if costs are increasing faster or slower than sales.
c. if changes are occurring in a firm’s mix of assets.
d. if a firm is generating more or less sales per dollar of assets than in prior years.
e. the rate at which the firm’s dividend payout is changing

Answer 9

if changes are occurring in a firm’s mix of assets

Question 10

All else held constant, the future value of a lump-sum investment will decrease if the:
a. amount of the lump-sum investment increases.
b. time period is increased.
c. interest is left in the investment.
d. interest rate increases.
e. interest is changed to simple interest from compound interest.

Answer 10

interest is changed to simple interest from compound interest

Question 11

Which one of the following will increase the present value of a lump-sum future amount to be
received in 15 years?
a. An increase in the time period
b. An increase in the interest rate
c. A decrease in the future value
d. A decrease in the interest rate
e. Changing to compound interest from simple interest

Answer 11

A decrease in the interest rate

Question 12

The equity multiplier is equal to:
a. one plus the debt-equity ratio.
b. one plus the total asset turnover.
c. total debt divided by total equity.
d. total equity divided by total assets.
e. one divided by the total asset turnover.

Answer 12

one plus the debt-equity ratio

Question 13

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The
effective annual rate on this account:
a. will be less than 12.9 percent.
b. can either be less than or equal to 12.9 percent.
c. is 12.9 percent.
d. can either be greater than or equal to 12.9 percent.
e. will be greater than 12.9 percent.

Answer 13

greater than 12.9%

Question 14

A bond’s annual interest divided by its face value is referred to as the:
a. market rate.
b. call provision.
c. coupon rate.
d. current yield.
e. yield to maturity.

Answer 14

coupon rate

Question 15

A call provision grants the bond issuer the:
a. right to contact each bondholder to extend the term of his or her bonds.
b. option to exchange the bonds for equity securities.
c. right to automatically extend the bond’s maturity date.
d. right to repurchase the bonds on the open market prior to maturity.
e. option of repurchasing the bonds prior to maturity at a prespecified price.

Answer 15

option of repurchasing the bonds prior to maturity at a prespecified price

Question 16

When a bond’s yield to maturity is less than the bond’s coupon rate, the bond:
a. had to be recently issued.
b. is selling at a premium.
c. has reached its maturity date.
d. is priced at par.
e. is selling at a discount.

Answer 16

selling at a premium

Question 17

The dividend yield on a stock will increase if the:
a. dividend growth rate decreases.
b. stock price decreases.
c. capital gains rate decreases.
d. stock price increases.
e. tax rate on dividends increases.

Answer 17

stock price decreases

Question 18

The constant growth model can be used to value the stock of firms that have which type(s) of
dividends?
Dividends that change by either a constant amount or a constant rate
Dividends that change annually by a constant amount or that are zero
Dividends that change annually by a constant amount
Dividends that are either constant or change annually at a constant rate
Only dividends that increase at a constant rate

Answer 18

Dividends that are either constant or change annually at a constant rate

Question 19

BBB, Inc. pays a constant annual dividend of $3.75 a share and currently sells for $48.50 a share.
What is the rate of return?
a. 7.87%
b. 8.60%
c. 7.73%
d. 8.04%
e. 9.12%

Answer 19

7.73

Question 20

The internal rate of return is the:
a. discount rate that causes a project’s after-tax income to equal zero.
b. discount rate that results in a zero net present value for the project.
c. discount rate that results in a net present value equal to the project’s initial cost.
d. rate of return required by the project’s investors.
e. project’s current market rate of return.

Answer 20

discount rate that results in a zero net present value for the project

Question 21

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

Answer 21

Mutually exclusive

Question 22

Which one of the following statements is correct?
a. The NPV is a measure of profits expressed in today’s dollars.
b. The NPV is positive when the required return exceeds the IRR.
c. If the initial cost of a project is increased, the NPV of that project will also increase.
d. If the IRR equals the required return, the net present value will equal zero.
e. NPV is equal to an investment’s cash inflows discounted to today’s dollars.

Answer 22

If the IRR equals the required return, the net present value will equal zero

Question 23

Myron just financed a used car through his bank. His loan requires equal monthly payments of
$200 for five years. His last on-time payment pays off the loan. What type of loan is it?
a. Amortized
b. Blended discount
c. Interest-only
d. Pure discount
e. Complex

Answer 23

Amortized

Question 24

Ashley Furniture is offering a bedroom suite for $2,700. The credit terms are 60 months at
$73.00 per month. What is the annual interest rate on this offer?
a. 1.75%
b. 19.26%
c. 20.05%
d. 20.97%
e. 21.75%

Answer 24

20.97

Question 25

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as: a. Eroded cash flows b. Deviated projections c. Incremental cash flows d. Directly impacted flows e. Opportunity cash flows

Answer 25

incremental CF

Question 26

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n): a. fixed cost. b. forgotten cost. c. variable cost. d. opportunity cost. e. sunk cost.

Answer 26

sunk cost

Question 27

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? a. Erosion b. Book c. Sunk d. Market e. Opportunity

Answer 27

sunk

Question 28

Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home decor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept? a. Children’s clothing only b. Exclusive gifts only c. Exclusive gifts and decorator items only d. All three options e. None of these options

Answer 28

exclusive gifts only

Question 29

Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis except the cost of the: a. property insurance premium increase. b. exterior landscaping that will be required once the expansion is complete. c. additional sales person that will be required. d. inventory required to fill the additional retail space. e. blueprints that have been drawn of the expansion area.

Answer 29

blueprints that have been drawn of the expansion area

Question 30

Semistrong form market efficiency states that the value of a security is based on: a. all public and private information. b. historical information only. c. all publicly available information. d. all publicly available information plus any data that can be gathered from insider trading. e. random information with no clear distinction as to the source of that information.

Answer 30

all publicly available info

Question 31

Which one of the following combinations will always result in an increased dividend yield? a. Increase in the stock price combined with a lower dividend amount b. Increase in the stock price combined with a higher dividend amount c. Decrease in the stock price combined with a lower dividend amount d. Decrease in the stock price combined with a higher dividend amount e. Increase in the stock price combined with a constant dividend amount

Answer 31

Decrease in the stock price combined with a higher dividend amount

Question 32

Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: a. weak form efficient. b. strong form efficient. c. semistrong form efficient. d. efficient at any level. e. aware that the trader is an insider.

Answer 32

strong form efficient

Question 33

If the financial markets are semistrong form efficient, then: a. only the most talented analysts can determine the true value of a security. b. only individuals with private information have a marketplace advantage. c. technical analysis provides the best tool to use to gain a marketplace advantage. d. no one individual has an advantage in the marketplace. e. every security offers the same rate of return.

Answer 33

only individuals with private information have a marketplace advantage

Question 34

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? a. Expected return b. Real return c. Market rate d. Systematic return e. Risk premium

Answer 34

Expected return

Question 35

Systematic risk is defined as: any risk that affects a large number of assets. b. the total risk of an individual security. c. diversifiable risk. d. asset-specific risk. e. the risk unique to a firm's management.

Answer 35

any risk that affects a large number of asset

Question 36

Unsystematic risk can be defined by all of the following except: a. unrewarded risk. b. diversifiable risk. c. market risk. d. unique risk. e. asset-specific risk.

Answer 36

market risk

Question 37

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: a. squared deviation. b. beta coefficient. c. standard deviation. d. mean. e. variance.

Answer 37

beta coefficient

Question 38

The security market line is a linear function that is graphed by plotting data points based on the relationship between the: a. risk-free rate and beta. b. market rate of return and beta. c. market rate of return and the risk-free rate. d. risk-free rate and the market rate of return. e. expected return and beta.

Answer 38

expected return and beta

Question 39

ecurity market line is a positively sloped straight line showing the relationship between

Answer 39

expected return and beta of either a security or a portfolio

Question 40

Shelton Company purchased a parcel of land six years ago for $865,500. At that time, the firm invested $137,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $50,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $917,000. What value should be included in the initial cost of the warehouse project for the use of this land?

Answer 40

917000

Question 41

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? a. Weighted average cost of capital b. Pure play cost c. Cost of equity d. Subjective cost e. Cost of debt

Answer 41

cost of equity

Question 42

Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: a. pure play cost. b. cost of debt. c. weighted average cost of capital. d. subjective cost. e. cost of equity.

Answer 42

cost of debt

Question 43

Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? a. Amount of debt used to finance the project b. Use, or lack, of preferred stock as a financing option c. Mix of funds used to finance the project d. Risk level of the project e. Length of the project's life

Answer 43

Risk level of the project

Question 44

The results of the dividend growth model: a. vary directly with the market rate of return. b. can only be applied to projects that have a growth rate equal to that of the current firm. c. are highly dependent upon the beta used in the model. d. are sensitive to the rate of dividend growth. e. are most reliable when the growth rate exceeds 10 percent.

Answer 44

sensitivity to .rate of dividend growth

Question 45

In an efficient market, the cost of equity for a highly risky firm: a. will be less than the market rate but higher than the risk-free rate. b. must equal the market rate of return. c. changes by 1 percent for every 1 percent change in the risk-free rate. d. decreases as the beta of the firm's stock increases. e. increases in direct relation to the stock's systematic risk.

Answer 45

ncreases in direct relation to the stock's systematic risk

Question 46

Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the:

Answer 46

risk free rate decreases