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1. Maximizing profit as the manager’s goal has several flaws, including:
a. Earnings figures focus on past performance rather than current or future performance
b. The timing of the profits may be ignored
c. Focusing on earnings does not mean that the firm will necessarily have enough cash on hand to pay its bills
d. Risk is ignored
e. All of the above
2. Working capital management:
a. Involves managing the firm’s long-term assets, such as plant and equipment
b. Requires very little in terms of people skills as it mostly involves analyzing numbers
c. Deals with the firm’s seasonal financing, inventory needs, collecting accounts receivable and investing surplus cash
d. All of the above
e. None of the above
3. What is the goal of financial management?
a. Maximize corporate profits.
b. Maximize shareholder wealth.
c. Minimize costs.
d. Maximize earnings.
4. Which of the following statements is true?
a. Net working capital is a firm’s current assets divided by its current liabilities.
b. Net working capital is a firm’s current assets minus its current liabilities.
c. Net working capital measures a firm’s ability to meet its short-term obligations.
d. All of the above statements are false.
5. Which financial ratio measures the effectiveness of management in generating returns to common stockholders with its available assets?
a. Gross profit margin
b. Return on equity
c. Return on assets
d. Current ratio
Stone Cold Incorporated
Balance Sheet: 12/31/04
Assets 2004 2003
Cash and Marketable Securities 10 80
Accounts Receivable 375 315
Inventories 615 415
Total Current Assets 1,000 810
Net plant and equipment 1,000 870
TOTAL ASSETS 2,000 1,680
Liabilities and Equity 2004 2003
Accounts Payable 60 40
Notes Payable 140 60
Accruals 110 130
Total Current Liabilities 310 230
Long Term Bonds 754 580
TOTAL DEBT 1,064 810
Preferred Stock 40 40
Common Stock 130 130
Retained earnings 766 700
TOTAL COMMON EQUITY 896 830
TOTAL LIABILITIES AND EQUITY 2,000 1,680
Income Statement: 12/31/04 2004 2003
Net Sales 3,200 2,850
Operating Costs (excludes Dep/Amortization) 2,700 2,497
EBITDA 500 353
Depreciation 100 90
Amortization 0 0
Depreciation and Amortization 100 90
EBIT 400 263
Less Interest 88 60
EBT 312 203
Taxes (40%) 124.8 81.2
NET INCOME (before Preferred Dividends) 187.2 121.8
Preferred Dividends 4 4
NET INCOME 183.2 117.8
Common Dividends 117 53
Addition to Retained Earnings 66.2 64.8
6. Refer to Stone Cold. For 2004, what was the return on assets?
a. 9.16%
b. 12.40%
c. 15.60%
d. 20.00%
7. Refer to Stone Cold. For 2004, what was the debt-to-equity ratio?
a. 0.81
b. 0.84
c. 0.98
d. 1.19
8. Refer to Stone Cold. For 2004, what was the times interest earned ratio for 2004?
a. 2.13
b. 2.77
c. 3.55
d. 4.55
9. An annuity is considered:
a. an ordinary annuity if the payments occur at the beginning of each period.
b. an annuity due if the payments occur at the end of each period.
c. an ordinary annuity if the payments occur at the end of each period
d. an annuity due if the payments occur at the beginning of each period.
e. Both (c) and (d)
10. If you invest $2,500 in a bank account that pays 6% interest compounded monthly, how much will you have in five years?
a. $1,853.43
b. $3,345.56
c. $2,505.20
d. $3,372.13
11. A stainless steel products manufacturer with an 8.5% cost of capital receives a $3,000,000 order, payable at the end of three years. What is the annual payment amount made at the end of each year with the equivalent present value?
a. $660,864
b. $919,618
c. $949,473
d. $997,785
12. A bond is trading on the secondary market and will mature in 10 years. The bond has a face value of $1,000 that will be paid at maturity. Further, the bond pays an annual coupon at 9% of face value. What should the trading price be for the bond if investors seek a 12% on their investment?
a. $1,192.53
b. $830.49
c. $827.95
d. $508.52
13. Unsecured bonds that have legal claims inferior to other outstanding bonds are
a. debentures.
b. mortgage bonds.
c. subordinated debentures.
d. discount bonds.
14. The value of any asset
a. is based upon the benefits provided by the asset in prior years.
b. is based upon the benefits that the asset will provide the owner of the asset this year.
c. equals the present value of future benefits accruing to the asset’s owner.
d. is not described by any of the above.
15. Which of the following stock exchanges has the most strict listing requirements?
a. American Stock Exchange
b. NASDAQ
c. New York Stock Exchange
d. Pacific Stock Exchange

16. A share of preferred stock pays a $2 annual dividend, but pays the dividend in four equal quarterly installments. Investors seek a 12% annual percentage return on the investment. What price should the preferred stock trade?
a. $4.17
b. $6.67
c. $8.50
d. $16.67
17. Bavarian Sausage just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever. If the required return on the stock investment is 14%, what should be the price of the stock in 5 years?
a. $18.32
b. $23.33
c. $17.44
d. $22.26
18. Which statement is TRUE regarding diversification?
a. The greater the systematic risk, the greater the return required by the investor.
b. The greater the diversifiable risk, the greater the return required by the investor.
c. We are able to remove all systematic risk if enough stocks are added to a portfolio.
d. Systematic risk is diversifiable.
Year Return
Stock A Stock B Stock C
1 15% 12% 5%
2 25% 14% -6%
3 8% 9% 10%
4 16% 25% 1%
5 5% 3%
15%
19. What is the average return of a portfolio that has 45% invested in stock A, 35% invested in stock B and the rest invested in stock C?
a. 9.92%
b. 11.62%
c. 10.62%
d. 12.48%
20. Which of the following statements is true?
a. It is very difficult for investors to remove their exposure to unsystematic risk.
b. It is very easy for investors to remove their exposure to systematic risk.
c. It is very easy for investors to remove their exposure to unsystematic risk.
d. Both (a) and (b) are true
e. None of the above statements is true
21. Security I has a beta of 1.3, the risk-free rate is 4%, and the expected market risk premium is 11%. What is the expected return for Security I?
a. 15.0%
b. 18.3%
c. 14.6%
d. 13.1%
22. Investors can eliminate what type of risk by diversifying?
a. systematic risk
b. unsystematic risk
c. beta risk
d. total risk
Swerling Company
Swerling Company is considering a project with the following cash flows.
Year Cash Flow
0 ($20,000)
1 $ 3,000
2 $ 4,000
3 $ 5,000
4 $ 6,000
5 $ 7,000
23. What is the payback period of the proposed Swerling Company project?
a. 1.28years
b. 2.28 years
c. 3.28 years
d. 4.28 years
24. What is the net present value of the proposed Swerling Company project if the discount rate is 6%?
a. $572
b. $1,572
c. $10,572
d. $100,572
Year Cash Flow
0 ($20,000)
1 $ 3,000
2 $ 4,000
3 $ 5,000
4 $ 6,000
5 $ 7,000
25. What is the profitability index of the proposed Swerling Company project if the discount rate is 6%?
a. .03
b. 1.03
c. 2.03
d. 3.03
Year Cash Flow
0 ($20,000)
1 $ 3,000
2 $ 4,000
3 $ 5,000
4 $ 6,000
5 $ 7,000
26. Should a firm invest in projects with NPV = $0?
a. Yes
b. No
c. The firm is indifferent between accepting or rejecting projects with zero NPVs
d. The firm should look at the PI and IRR of the projects
27. Net working capital decreases when
a. inventory falls, accounts receivable falls, or accounts payable increases
b. inventory increases, accounts receivable increases, or accounts payable falls
c. cost of goods sold falls, or interest rate falls
d. operating expenses fall, or current assets increase
28. The idea that a company may be unable to accept all projects that are expected to have positive NPVs due to the lack of funds is known as:
a. capital rationing
b. capital budgeting
c. capital constraints
d. cannibalization
e. capital structure
29. A firm has a capital structure containing 40 percent debt, 10 percent preferred stock, and 50 percent common stock equity. The firm’s debt has a yield to maturity of 9.50 percent. Its preferred stock’s annual dividend is $7.50 and the preferred stock’s current market price is $50.00 per share. The firm’s common stock has a beta of 0.90 and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent, respectively. The firm is subject to a 40 percent marginal tax rate. What is the WACC for the firm?
a. 8.75%
b. 8.93%
c. 9.16%
d. 10.06%
Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $12.50 per share. The firm’s debt is publicly traded and was recently quoted at 90% of face value. It has a total face value of $10 million, and it is currently priced to yield 8%. The risk free rate is 2% and the market risk premium is 8%. You’ve estimated that the firm has a beta of 1.20. The corporate tax rate is 40%.
30. Refer to Running Shoes, Inc. What is the cost of equity?
a. 9.20%
b. 9.60%
c. 10.40%
d. 11.60%
31. What is the percentage of equity used by Running Shoes, Inc.?
a. 74.63%
b. 73.53%
c. 72.46%
d. 68.97%
32. A security offering that raises capital for firms is called a(n)
a. primary security offering
b. secondary security offering
c. securitization
d. all of the above
33. Which of the following is not considered an advantage of going public?
a. new capital for the company
b. listed stock for use as compensation
c. stock price emphasis
d. personal wealth and liquidity

34. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share proceeds that Bavarian will receive?
a. $11.59
b. $10.67
c. $13.41
d. $12.50
35. The uncertainty caused by the variability of a firm’s cash flows is called . . .
a. financial risk
b. business risk
c. financial leverage
d. none of the above
36. Perfect capital markets describe markets without frictions such as
a. Taxes.
b. trading costs.
c. problems transferring information between managers and investors.
d. all of the above.
37. If a 9%, $100,000 loan has a balance of $83,724 and an annual payment of $13,965 is to be made, what will the allocation of principal and interest be?
a. $9,000 interest, $4,965 principal
b. $7,535 interest, $6,430 principal
c. $6,430 interest, $7,535 principal
d. $4,965 interest, $9,000 principal

38. A balloon payment is
a. payment made on circus debt.
b. a large front-end debt payment, followed by smaller payments.
c. a large lump-sum payment at maturity of a debt.
d. none of the above.
39. A call feature
a. allows the bondholder to redeem the bond prior to maturity.
b. allows the bond issuer to redeem the bond prior to maturity.
c. allows the bondholder to increase the coupon rate on the bond at specific points in time over the bond’s life.
d. forces the bond issuer to buy back the bond prior to maturity at the bondholder’s discretion.
40. Place the following dates related to dividend payments in proper order:
a. record date, announcement date, payment date, ex-dividend date
b. announcement date, ex-dividend date, record date, payment date
c. announcement date, record date, ex-dividend date, payment date
d. record date, announcement date, ex-dividend date, payment date
41. Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns $5.50 in 2007 and follows a constant nominal payout policy, its dividend will be
a. $3.30
b. $3.00
c. $2.20
d. $2.00
42.Choc-lattes Corp. earned $5.00 per share in 2006, and paid a dividend of $2.00 per share. If it earns $5.50 in 2007 and managers seek to increase the dividend to $2.75, its payout ratio will be
a. 55%
b. 50%
c. 45%
d. 40%