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Question 1
1. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the
A. options pricing model.
B. theories of working capital management.
C. theories of risk-return and portfolio theory.
D. theories of international capital budgeting.
Question 2
2. In the past, the study of finance has included
A. mergers and acquisitions.
B. raising capital.
C. bankruptcy.
D. all of these.
Question 3
3. Companies that perform well
A. can sell their stock for a lower price
B. can minimize dilution when issuing new shares
C. can issue debt at a lower interest rate
D. two of the above
Question 4
4. Companies that have higher risk than a competitor in the same industry will generally have
A. to pay a higher interest rate than its competitors.
B. a lower relative stock price than its competitors.
C. a higher cost of funds than its competitors.
D. all of these.
Question 5
5. What is the primary goal of financial management?
A. Increased earnings
B. Maximizing cash flow
C. Maximizing shareholder wealth
D. Minimizing risk of the firm
Question 6
6. Regarding risk levels, financial managers should
A. pursue higher risk projects because they increase value
B. avoid higher risk projects because they destroy value
C. focus primarily on market fluctuations
D. evaluate investor’s desire for risk
Question 7
7. A firm has $1,000,000 in its common stock account and $2,500,000 in its paid-in capital account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold?
A. $35 per share
B. $25 per share
C. $10 per share
D. Not enough information to tell
Question 8
8. An item which may be converted to cash within one year or one operating cycle of the firm is classified as a
A. current liability.
B. long-term asset.
C. current asset.
D. long-term liability.
Question 9
9. Preferred stock dividends __________ earnings available to common stockholders.
A. increase
B. decrease
C. do not effect
D. not enough information to tell
Question 10
10. Earnings per share is
A. operating profit divided by number of shares outstanding.
B. net income divided by number of shares outstanding.
C. net income divided by stockholders’ equity.
D. net income minus preferred dividends divided by number of shares outstanding.
Question 11
11. A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock?
A. $40 per share
B. $44 per share
C. $4 per share
D. $3 per share
Question 12
12. If Randolph Co. has sales of $2,000,000, net income of $120,000, and total asset turnover of 2x, what is their ROA?
A. 33%
B. 17%
C. 12%
D. 6%
Question 13
13. Income can be distorted by factors other than inflation. The most important causes of distortion for inter-industry comparisons are:
A. timing of revenue receipts and nonrecurring gains or losses.
B. tax write-off policy and use of different inventory methods.
C. All of these.
D. None of these.
Question 14
14. In examining the liquidity ratios, the primary emphasis is the firm’s
A. ability to effectively employ its resources.
B. overall debt position.
C. ability to pay short-term obligations on time.
D. ability to earn an adequate return.
Question 15
15. In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps?
A. 1,2,3,4
B. 3,2,4,1
C. 2,1,3,4
D. 3,2,1,4
Question 16
16. If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then
A. DOL equals 1, and DFL equals 0.
B. DOL equals 0, and DFL equals 1.
C. DOL equals 1, and DFL equals 1.
D. none of these
Question 17
17. Net cash flow is equal to:
A. income after taxes minus depreciation.
B. income after taxes minus dividends.
C. cash receipts minus cash payments.
D. cash receipts minus cash payments minus depreciation.
Question 18
18. The key initial element in developing pro forma statements is
A. a sales forecast.
B. an income statement.
C. a cash budget.
D. a collections schedule.
Question 19
19. Firms with a high degree of operating leverage are
A. easily capable of surviving large changes in sales volume
B. usually trading off lower levels of risk for higher profits.
C. significantly affected by changes in interest rates.
D. trading off higher fixed costs for lower per-unit variable costs.
Question 20
20. If a firm has fixed costs of $20,000, variable cost per unit of $.50, and a breakeven point of 5,000 units, the price is:
A. $4.50
B. $5.00
C. $4.00
D. $2.50
Question 21
21. Kuznets Rental Center requires $1,000,000 in financing over the next two years. Kuznets can borrow long-term at 9 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 7 percent interest in the first year. Then, Kuznets projects paying 10 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?
A. Kuznets will definitely end up paying more under the long-term financing plan.
B. Kuznets will definitely end up paying less under the long-term financing plan.
C. Kuznets will probably pay more under the short-term financing plan.
D. Kuznets will probably pay less under the short-term financing plan.
Question 22
22. Riley Co. is considering a short-term or long-term financing plan for $6,000,000 in assets. They expect the following 1 year rates over the next 3 years: 7%, 9%, and 12%. Their long-term interest rate will be 9% for the 3 years. Assuming the rates follow their expectations, what will be the difference in interest costs over the 3 years?
A. Long-term interest will be $60,000 more than short-term interest
B. Long-term interest will be $60,000 less than short-term interest
C. Long-term interest will be $1,140,00 less than short-term interest
D. None of these
Question 23
23. Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A. Illiquid assets and heavy short-term borrowing
B. Illiquid assets and heavy long-term borrowing
C. Liquid assets and heavy long-term borrowing
D. Liquid assets and heavy short-term borrowing
Question 24
24. The following are the expected 1 year T-bill rates for the next 4 years: 11%, 15%, 8%, and 10%. What would you expect the rate for 3 year securities would be?
A. 14.7%
B. 11%
C. 8%
D. 11.3%
Question 25
25. Eurodollars
A. can only be redeemed at U.S. banks or their branches in European countries.
B. are U.S. dollars which have been converted into several European currencies.
C. may be borrowed by anyone who wishes to hold dollars.
D. can only be redeemed at U.S. banks or their branches in any foreign country.
•Not 100% sure of question 25

• Question 26
26. The three primary policy variables to consider when extending credit include all of the following except
A. credit standards.
B. the level of inflation.
C. the terms of trade.
D. collection policy.
Question 27
27. Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable. What is the return on investment?
A. 3%
B. 25%
C. 5%
D. none of these
Question 28
28. Commercial paper is very popular with many firms because
A. it can usually be issued below the prime rate.
B. it satisfies the firm’s need for long-term funds.
C. there are no required lines of credits at the bank.
D. it is very easy to roll over (refinance) in times of economic turmoil.
Question 29
29. Koopman’s Chickens, Inc. plans to borrow $300,000 from its bank for one year. The rate of interest is 10 percent, but a compensating balance of 15 percent is required. What is the effective rate of interest?
A. Less than 11.4 percent
B. More than 11.4 percent, but less than 11.6 percent
C. More than 11.6 percent, but less than 11.8 percent
D. More than 11.8 percent
Question 30
30. Hedging refers to
A. avoiding high-risk investment opportunities.
B. a transaction that reduces risk exposure.
C. the same thing as asset diversification.
D. avoiding the financial futures market.
Question 31
31. If Analog computers can borrow at 9.5% for 3 years, what is the effective rate of interest on a $800,000 loan where a 15% compensating balance is required?
A. 11.18%
B. 17.27%
C. 9.50%
D. none of these
Question 32
32. To save for her newborn son’s college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12 percent. What is the future value?
A. $7,690.
B. $34,931.
C. $63,440.
D. $55,750.
Question 33
33. Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?
A. $2,915
B. $3,570
C. $6,254
D. $8,570
Question 34
34., the future value of inflows approaches
A. 0
B. the present value of the inflows
C. infinity
D. need more information
Question 35
35. Lou Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:
A. $1,558
B. $658
C. $742
D. $885
Question 36
36. Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate.
A. $19,033
B. $27,870
C. $32,389
D. none of these
Question 37
37. The longer the time to maturity:
A. the greater the price increase from an increase in interest rates.
B. the less the price increase from an increase in interest rates.
C. the greater the price increase from a decrease in interest rates.
D. the less the price decrease from a decrease in interest rates.
Question 38
38. Required return by investors is directly influenced by all of the following except:
A. Inflation
B. U.S. Treasury rates
C. Dividends
D. Risk
Question 39
39. An issue of common stock has just paid a dividend of $4.00. Its growth rate is equal to 8%. If the required rate of return is 13%, what is its current price?
A. $19.04
B. $80
C. $86.40
D. none of these
Question 40