Multiple Choice Answers

. What is the goal of financial management for a sole proprietorship?
A. minimize the reliance on fixed costs
B. maximize the market value of the equity
C. maximize net income given the resources of the firm
D. minimize the tax impact on the proprietor
E. decrease long-term debt to reduce the risk to the owner

. For the past year, the XYZ Co. had cash flow from assets of $45,700, of which $19,800 flowed to the firm’s stockholders. The interest paid was $1,200. What is the amount of the net new borrowing for the year?
A. $25,900
B. $27,100
C. $24,700
D. $25,900
E. $24,700

A firm has net income of $239,000, a return on assets of 7 percent, and a debt-equity ratio of .4. What is the return on equity?
A. 4.20 percent
B. 12.50 percent
C. 2.80 percent
D. 9.80 percent
E. 6.50 percent

Which of the following are advantages of the corporate form of organization?
I. ability to raise large sums of capital
II. ease of ownership transfer
III. corporate taxation
IV. unlimited firm life
A. III and IV only
B. I, II, and IV only
C. I and II only
D. I, II, III, and IV
E. II, III, and IV only

A firm has a return on equity of 14 percent, a return on assets of 9.5 percent, and a 30 percent dividend payout ratio. What is the sustainable growth rate?
A. 4.38 percent
B. 10.86 percent
C. 2.93 percent
D. 7.12 percent
E. 9.58 percent

Which one of the following statements is correct?
A. Book value is equal to the initial cost minus the depreciation to date.
B. Market value is the amount of cash the owner hopes to receive if an asset is sold.
C. Book value is the greater of the depreciated cost or the current market value.
D. Book value is the greater of the initial cost or the current market value.
E. Market value is equal to the replacement value of an asset.

Dividends become a liability of a firm on the:
A. first day of each fiscal year.
B. payment date.
C. last day of each fiscal year.
D. declaration date.
E. date of record.

Callaway, Inc. needs $2.3 million 6 years from now to purchase a machine. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 4 percent interest, compounded annually. How much money must the company deposit today to fully fund the machine purchase?
A. $1,817,723.41
B. $1,815.917.72
C. $1,811,402.09
D. $1,813,534.30
E. $1,819,136.48
Tim needs to borrow $5,000 for two years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Tim?
A. 7.5 percent simple interest
B. 8.0 percent simple interest
C. 7.5 percent interest, compounded monthly
D. 8.0 percent interest, compounded annually
E. 8.0 percent interest, compounded monthly

During the past year, the Rawlins Co. paid $234,800 in interest along with $75,000 in dividends. The company issued $50,000 of stock and $200,000 of new debt. The company reduced the balance due on the old debt by $325,000. What is the amount of the cash flow to creditors for the year?
A. $359,800
B. $125,000
C. $434,800
D. $325,000
E. $384,800
The market where one shareholder sells shares to another shareholder is called the _____ market.
A. main
B. primary
C. secondary
D. dealer
E. principal

Sid’s Video Store will pay an annual dividend of $2.15 next month. The company just announced that future dividends will be increasing by 1.5 percent annually. How much are you willing to pay for one share of this stock if your required return is 14 percent?
A. $15.36
B. $19.42
C. $17.20
D. $18.06
E. $16.13
If I grant another individual the right to vote on my behalf for the directors of a corporation, I am voting by:
A. proxy.
B. consent.
C. the straight method.
D. the cumulative method.
E. preference.

You plan to save $20 every week for the next five years. You expect to earn 6 percent for the first year and 7.5 percent for the last four years. How much do you expect to have saved at the end of the five years?
A. $6,292.99
B. $3,401.67
C. $7,127.42
D. $5,388.21
E. $4,547.33

Kimberly is considering an investment of $2,000 each year for 15 years. The investment will pay 8 percent interest. How much will this investment be worth at the end of the 15 years?
A. $31,441.27
B. $58,648.57
C. $54,304.23
D. $31,650.87
E. $46,728.13
Julie owns a stock with a market price of $43 per share. This stock pays a constant annual dividend of $1.34 a share. If the price of the stock suddenly falls to $31 a share, you would expect the:
I. dividend yield to increase.
II. dividend yield to decrease.
III. capital gains yield to increase.
IV. capital gains yield to decrease.
A. I and III only
B. I only
C. II and IV only
D. II only
E. III only

Mr. Jones just won a lottery prize that will pay him $5,000 a year for thirty years. He will receive the first payment today. If Mr. Jones can earn 5.5 percent on his money, what are his winnings worth to him today?
A. $73,475.00
B. $76,665.51
C. $72,668.73
D. $74,286.38
E. $75,971.42

Lambert, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon, pay interest semiannually, and mature in 11 years. What is the current price of these bonds if the yield to maturity is 8.79 percent?
A. $1,641.04
B. $710.36
C. $1,014.62
D. $1,020.15
E. $705.14

A lender would prefer a borrower have which one of the following sets of ratios?
A. cash coverage ratio = 3.4; debt-equity ratio = 0.4
B. times interest earned = 2.0; debt-equity ratio 3.5
C. times interest earned = 0.5; debt-equity ratio = 1.3
D. equity multiplier = 0.9; total debt ratio = 1.1
E. cash coverage ratio = 0.8; debt-equity ratio = 1.6
You can deposit $850 today into a savings account. How long must you wait for the investment to grow to $5,000 if you can earn 6 percent on this money?
A. 22.63 years
B. 23.81 years
C. 59.95 years
D. 31.45 years
E. 30.41 years

Square Industries does not expect to pay any dividends for the next three years. Four years from now, the firm hopes to pay $.60 a share and double that amount each year for the following three years. After that, the dividend is expected to increase in value by 3 percent annually. What is the value of this stock today if the required return is 12 percent?
A. $32.81
B. $31.76
C. $27.13
D. $30.38
E. $29.30

Which one of the following statements is correct?
A. Accounts payable is the amount due from customers.
B. Depreciation increases total assets.
C. Net working capital can be positive, negative, or zero.
D. Bonds are included in net working capital.
E. The amount of retained earnings is found on the income statement.

You want to be elected to the board of directors of the Greenberg Corp. The firm has a policy of using straight voting. To ensure your election to the board, assuming no one else votes for you, you will need to:
A. purchase the entire firm.
B. vote by proxy whether or not you attend the shareholders’ meeting.
C. own a majority of the outstanding shares.
D. own more shares of the firm than any other shareholder.
E. own more than one-third of the outstanding shares.

SRS, Inc. just paid an annual dividend of $1.20 last month. The required return is 15 percent and the growth rate is 3 percent. What is the expected value of this stock ten years from now?
A. $13.84
B. $12.00
C. $12.83
D. $13.05
E. $13.44

The matching principle advocates:
A. recording costs when the liability for those costs occurs.
B. matching current assets with current liabilities.
C. matching cash flows with net income.
D. matching costs with revenues.
E. recording inventory purchases as soon as payment occurs.

The interest rate per period multiplied by the number of periods in a year is called the:
A. effective annual rate.
B. perpetual rate.
C. compounded rate.
D. annual percentage rate.
E. simple rate.

Which of the following represent problems encountered when analyzing financial statements?
I. Conglomerates do not fit neatly into any one industrial classification.
II. Firms use different methods of accounting.
III. Firms with seasonal sales may have different fiscal years.
IV. Many firms have global operations.
A. I and II only
B. II and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

Amy found a bond lying in a street. She picked it up, detached the appropriate bond coupon, and collected the current interest payment. Which type of bond did Amy find?
A. street
B. secure
C. bearer
D. registered
E. coupon

Which one of the following ratios indicates how long a firm can pay its bills given its current cash balance?
A. cash coverage ratio
B. debt ratio
C. cash ratio
D. quick ratio
E. current ratio

A business organization owned by two or more individuals or entities, each of whom has unlimited liability for the firm’s debts, is called a:
A. limited liability company.
B. dual company.
C. general partnership.
D. joint stock company.
E. limited partnership.

The price at which an investor can purchase a bond from a dealer is called the _____ price.
A. coupon
B. put
C. asked
D. bid
E. call
Capital budgeting includes which of the following?
I. determining the amount of cash needed on a daily basis to operate a firm
II. identifying assets that produce value in excess of the cost to acquire those assets
III. evaluating the size and timing of future cash flows from a project
IV. evaluating the risks associated with a proposed project
A. II, III, and IV only
B. I, II, and IV only
C. II only
D. I, II, III, and IV
E. I only

The security that represents the residual ownership of a firm and has no priority in bankruptcy is called:
A. senior debt.
B. preferred stock.
C. a convertible bond.
D. common stock.
E. retained earnings.

You are comparing two savings accounts. Account A has an APR of 4.65 percent and an EAR of 4.75 percent. Account B has an APR of 4.70 percent and an EAR of 4.70 percent. Given this, you should invest in account:
A. A because it has the lower APR.
B. B because its APR is equal to its EAR.
C. A because it has the higher EAR.
D. B because it has the lower EAR.
E. B because it has the higher APR.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:
A. be greater than the initial investment amount.
B. be equal to $0.
C. remain constant, regardless of the investment time period.
D. decrease if the investment time period is shortened.
E. decrease if the investment time period is lengthened.
Sonny borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is 7 years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does Sonny have?
A. complex
B. amortized
C. interest-only
D. pure discount
E. compounded

An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a $1,000 face value and a yield to maturity of 4.88 percent. How many years will it be until this bond matures?
A. 17.29 years
B. 8.65 years
C. 15.91 years
D. 16.00 years
E. 8.00 years

Scenic Images paid an annual dividend of $1.85 per share last year. Management just announced that future dividends will increase by 3 percent annually. What is the amount of the expected dividend in year 4?
A. $2.08
B. $1.96
C. $2.14
D. $1.91
E. $2.02
The National Bank offers personal loans at 8 percent compounded monthly. The Global Bank offers similar loans at 8.25 percent compounded quarterly. Which one of the following statements is correct concerning these two banks?
A. The National Bank loan has an effective rate of 8.33 percent.
B. The Global Bank loan has an effective rate of 8.51 percent.
C. The National Bank loan has a higher effective rate than the Global Bank loan.
D. The National Bank loan has an effective rate of 8.27 percent.
E. The Global Bank loan has an effective rate of 8.30 percent.

Which of the following can be calculated?
I. future value of an ordinary annuity
II. future value of a perpetuity
III. present value of a perpetuity
IV. present value of an annuity due
A. I and III only
B. II, II, and IV only
C. I, III, and IV only
D. I and II only
E. I, II, III, and IV

The daily financial operations of a firm are primarily controlled by managing the:
A. capital structure.
B. long-term liabilities.
C. capital budget.
D. total debt level.
E. working capital.

A note is:
A. the formal agreement between a firm and its bondholders.
B. a formal loan secured by real estate.
C. unsecured debt that is generally payable within the next ten years.
D. long-term debt secured by part, or all, of the assets of the borrower.
E. any liability classified as short-term debt on a financial statement.

. Which one of the following is a perpetuity?
A. social security payments of $1,100 a month for life
B. $680 a month over the life of a lease
C. car payments of $260 a month for 60 months
D. $1,000 annual payments from a trust fund forever
E. student loan payments of $360 a month for five years

The rate of return you earn on an investment before adjusting for inflation is called the _____ rate.
A. real
B. coupon
C. premium
D. nominal
E. discounted

National Distributors, Inc. would like to issue some new bonds at par. Comparable bonds have a current yield of 8.85 percent, an effective annual yield of 9.15 percent, and a yield to maturity of 9 percent. What coupon rate should National Distributors, Inc. set on its bonds?
A. 9.00 percent
B. 9.50 percent
C. 9.15 percent
D. 8.85 percent
E. 9.25 percent

The annual interest on a bond divided by the bond’s market price is called the:
A. yield to maturity.
B. total yield.
C. current yield.
D. required yield.
E. yield to call.

Compound interest is defined as the interest earned:
A. during any one-month period.
B. on prior reinvested interest payments.
C. on both the initial principal and all interest earned and reinvested in prior periods.
D. during a one-year period but paid in multiple payments.
E. on the initial amount invested.

The Turner Co. has one bond issue outstanding. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision.
A. market
B. deferred call
C. liquidity
D. sinking fund
E. debenture
A bond has a yield to maturity of 7.12 percent, a 6.5 percent coupon rate, a face value of $1,000, a market price of $961.85, and semiannual interest payments. The current yield is _____ percent and the effective annual yield is _____ percent.
A. 6.76; 6.87
B. 6.50; 7.25
C. 3.38; 7.12
D. 6.76; 7.25
E. 6.50; 7.12

When comparing loans of equal amounts and equal time periods, you should select the loan that has the lowest:
A. quoted rate.
B. effective annual rate.
C. nominal rate.
D. stated rate.
E. annual percentage rate.