Ratio analysis can be useful for:

A. historical trend analysis within a firm.

B. comparison of ratios within a single industry.

C. measuring the effects of financing.

D. all of the above

A short-term creditor would be most interested in:

A. profitability ratios.

B. asset utilization ratios.

C. liquidity ratios.

D. debt utilization ratios.

Which two ratios are used in the DuPont system to create return on assets?

A. Return on assets and asset turnover

B. Profit margin and asset turnover

C. Return on total capital and the profit margin

D. Inventory turnover and return on fixed assets

The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket, its after-tax profit margin is:

A. 5%

B. 12%

C. 20%

D. 25%

ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,000,000. What is the balance in accounts receivable at year-end?

A. $50,000

B. $100,000

C. $500,000

D. $80,000

Asset utilization ratios:

A. relate balance sheet assets to income statement sales.

B. measure how much cash is available for reinvestment into current assets.

C. are most important to stockholders.

D. measures the firm’s ability to generate a profit on sales.

Total asset turnover indicates the firm’s:

A. liquidity.

B. debt position.

C. ability to use its assets to generate sales.

D. profitability.

If accounts receivable stays the same and credit sales go up:

A. the average collection period will go up.

B. the average collection period will go down.

C. accounts receivable turnover will decrease.

D. B and C.

A firm’s long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. What are the current ratio and the quick ratio?

A. Current ratio = 0.5; quick ratio = 1.5

B. Current ratio = 1.0; quick ratio = 2.0

C. Current ratio = 1.5; quick ratio = 2.0

D. Current ratio = 2.5; quick ratio = 2.0

Investors and financial analysts wanting to evaluate the operating efficiency of a firm’s managers would probably look primarily at the firm’s:

A. debt utilization ratios.

B. liquidity ratios.

C. asset utilization ratios.

D. profitability ratios.

An increasing average collection period indicates:

A. the firm is generating more income.

B. accounts receivable are going down.

C. the company is becoming more efficient in its collection policy.

D. the company is becoming less efficient in its collection policy.

In addition to comparison with industry ratios, it is also helpful to analyze ratios using:

A. trend analysis.

B. historical comparisons.

C. neither; only industry ratios provide valid comparisons.

D. both a and b.

If a firm has both interest expense and lease payments:

A. times interest earned will be smaller than fixed charge coverage.

B. times interest earned will be greater than fixed charge coverage.

C. times interest earned will be the same as fixed charge coverage.

D. fixed charge coverage cannot be computed.

Disinflation, as compared to inflation, would normally be good for investments in:

A. bonds.

B. gold.

C. collectible antiques.

D. textbooks.

The __________ method of inventory costing is least likely to lead to inflation-induced profits.

A. FIFO

B. LIFO

C. Weighted average

D. Lower of cost or market

A large extraordinary loss has what effect on cost of goods sold?

A. Raises it

B. Lowers it

C. Has no effect

D. Need more information

Which of the following is a potential problem of utilizing ratio analysis?

A. Trends and industry averages are historical in nature.

B. Financial data may be distorted due to price-level changes.

C. Firms within an industry may not use similar accounting methods.

D. all of the above

If government bonds pay 8.5% interest and insured savings accounts pay 5.5% interest, stockholders in a moderately risky firm would expect return-on-equity values of:

A. 5.5%.

B. 6.5%.

C. 12%.

D. above 8.5%, but the exact amount is uncertain.

The most rigorous test of a firm’s ability to pay its short-term obligations is its:

A. current ratio.

B. quick ratio.

C. debt-to-assets ratio.

D. times-interest-earned ratio.

If the company’s accounts receivable turnover is increasing, the average collection period:

A. is going up slightly.

B. is going down.

C. could be moving in either direction.

D. is going up by a significant amount.

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The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

A. fixed costs

B. variable costs

C. marginal costs

D. semi-variable costs

Which of the following questions does break-even analysis attempt to address?

A. How much do changes in volume effect costs and profits?

B. At what point does the firm break even?

C. What is the most efficient level of fixed assets to employ?

D. all of the above

If sales volume exceeds the break-even point, the firm will experience:

A. an operating loss.

B. an operating profit.

C. an increase in plant and equipment.

D. an increase in stock price.

The break-even point can be calculated as:

A. variable costs divided by contribution margin.

B. total costs divided by contribution margin.

C. variable cost times contribution margin.

D. fixed cost divided by contribution margin.

A highly automated plant would generally have:

A. more variable than fixed costs.

B. more fixed than variable costs.

C. all fixed costs.

D. all variable costs.

If a firm has fixed costs of $30,000, a price of $4, and a breakeven point of 15,000 units, the variable cost per unit is:

A. $5.

B. $2.

C. 50 cents.

D. $4.

If a firm has fixed costs of $20,000, variable cost per unit of 50 cents, and a breakeven point of 5,000 units, the price is:

A. $2.50.

B. $5.

C. $4.

D. $4.50.

If a firm has a price of $4, variable cost per unit of $2.50, and a breakeven point of 20,000 units, fixed costs are equal to:

A. $13,333.

B. $10,000.

C. $30,000.

D. $50,000.

A firm’s break-even point will rise if:

A. fixed costs decrease.

B. contribution margins increase.

C. price per unit rises.

D. variable cost per unit rises.

Which of the following is concerned with the change in operating profit as a result of a change in volume?

A. Financial leverage

B. Break-even point

C. Operating leverage

D. Combined leverage

Cash breakeven analysis:

A. is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially.

B. is important when analyzing long-term profitability.

C. includes depreciation expense as a fixed cost when calculating the degree of financial leverage.

D. none of the above

The degree of operating leverage may be defined as:

A. the percent change in operating income divided by the percent change in unit volume.

B. Q (P-VC) divided by Q (P-VC) – FC.

C. S – TVC divided by S – TVC – FC.

D. all of the above.

The degree of operating leverage is computed as:

A. percent change in operating profit divided by percent change in net income.

B. percent change in volume divided by percent change in operating profit.

C. percent change in EPS divided by percent change in operating income.

D. percent change in operating income divided by percent change in volume.

Financial leverage deals with:

A. the relationship of fixed and variable costs.

B. the relationship of debt and equity in the capital structure.

C. the entire income statement.

D. the entire balance sheet.

A conservative financing plan involves:

A. heavy reliance on debt.

B. heavy reliance on equity.

C. high degree of financial leverage.

D. high degree of combined leverage.

If EBIT equals $160,000 and interest equals $30,000, what is the degree of financial leverage?

A. 5.33x

B. 1.23x

C. 0.8125x

D. 4.33x

The degree of financial leverage is concerned with the relation between:

A. changes in volume and changes in EPS.

B. changes in volume and changes in EBIT.

C. changes in EBIT and changes in EPS.

D. changes in EBIT and changes in operating income.

When a firm employs no debt:

A. it has a financial leverage of one.

B. it has a financial leverage of zero.

C. its operating leverage is equal to its financial leverage.

D. it will not be profitable.

Combined leverage is concerned with the relationship between:

A. changes in EBIT and changes in EPS.

B. changes in volume and changes in EPS.

C. changes in volume and changes in EBIT.

D. changes in EBIT and changes in net income.

If the business cycle were just beginning its upswing, which firm would you anticipate would be likely to show the best growth in EPS over the next year? Firm A has high combined leverage, and Firm B has low combined leverage.

A. Firm A

B. Firm B

C. Indifferent between the two

D. It depends on how much financial leverage each firm has.

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As the compounding rate becomes lower and lower, the future value of inflows approaches:

A. 0.

B. the present value of the inflows.

C. infinity.

D. Need more information.

If you invest $8,000 at 12% interest, how much will you have in 7 years?

A. $18,016

B. $3,616

C. $17,688

D. $80,712

The concept of time value of money is important to financial decision making because:

A. it emphasizes earning a return on invested capital.

B. it recognizes that earning a return makes $1 worth more today than $1 received in the future.

C. it can be applied to future cash flows in order to compare different streams of income.

D. all of the above

As the discount rate becomes higher and higher, the present value of inflows approaches:

A. 0.

B. minus infinity.

C. plus infinity.

D. Need more information.

An annuity may be defined as:

A. a payment at a fixed interest rate.

B. a series of payments of unequal amount.

C. a series of yearly payments.

D. a series of consecutive payments of equal amounts.

You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

A. Present value of an annuity of $1

B. Future value of an annuity

C. Present value of $1

D. Future value of $1

As the interest rate increases, the present value of an amount to be received at the end of a fixed period:

A. increases.

B. decreases.

C. remains the same.

D. not enough information to tell

As the time period until receipt increases, the present value of an amount at a fixed interest rate:

A. decreases.

B. remains the same.

C. increases.

D. not enough information to tell

If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?

A. Present value of $1

B. Future value of $1

C. Present value of an annuity of $1

D. Future value of an annuity of $1

The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?

A. $2,500

B. $2,000

C. $1,778

D. none of the above

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college?

A. $11,250

B. $12,263

C. $24,003

D. $23,079

Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period?

A. $2,915

B. $3,570

C. $6,254

D. $8,570

Sharon Smith will receive $1 million in 50 years. The discount rate is 14. As an alternative, she can receive $2,000 today. Which should she choose?

A. the $1 million dollars in 50 years

B. $2,000 today

C. She should be indifferent.

D. need more information

Dr. J. wants to buy a Dell computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?

A. $627.93

B. $697.00

C. $823.15

D. $531.81

Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

A. Between 11% and 12%

B. Between 8% and 9%

C. 17%

D. none of the above

The shorter the length of time between a present value and its corresponding future value:

A. the lower the present value, relative to the future value.

B. the higher the present value, relative to the future value.

C. the higher the interest rate used in the present-valuation.

D. none of the above

A dollar today is worth more than a dollar to be received in the future because:

A. the dollar can be invested today and earn interest.

B. of the risk of nonpayment in the future.

C. inflation will reduce purchasing power of a future dollar.

D. none of the above

The higher the rate used in determining the future value of a $1 annuity:

A. the smaller the future value at the end of the period.

B. the greater the future value at the end of a period.

C. the greater the present value at the beginning of a period.

D. None of the above â€“ the interest has no effect on the future value of an annuity.

Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

A. 3%

B. Between 14% and 16%

C. 13%

D. none of the above

Increasing the number of periods will increase all of the following EXCEPT:

A. the present value of an annuity.

B. the present value of $1.

C. the futuare value of $1.

D. the future value of an annuity.

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The market allocates capital to companies based on:

A. risk.

B. efficiency.

C. expected returns.

D. all of the above

Which of the following financial assets is likely to have the highest required rate of return based on risk?

A. Corporate bond

B. Treasury bill

C. Certificate of Deposit

D. Common stock

A bond that has a yield to maturity greater than its coupon interest rate will sell for a price:

A. below par.

B. at par.

C. above par.

D. that is equal to the face value of the bond plus the value of all interest payments.

Which of the following is not one of the components that makes up the required rate of return on a bond?

A. Risk premium

B. Real rate of return

C. Inflation premium

D. Maturity payment

A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the market value of the bond? Use annual analysis.

A. over $1,000

B. under $1,000

C. over $1,200

D. Not enough information given to tell

A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently yielding 6% annually, what is the market value of the bond? Use semi-annual analysis.

A. $1,000

B. $1127.50

C. $1297.85

D. $2549.85

A 30-year zero-coupon bond that yields 12% percent is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)?

A. $33

B. $83

C. $8,333

D. $3,888

A 14-year zero-coupon bond was issued with a $1000 par value to yield 12%. What is the approximate market value of the bond?

A. $597

B. $205

C. $275

D. $482

Which of the following does not influence the yield to maturity for a security?

A. Required real rate of return

B. Risk free rate

C. Business risk

D. Yields of similar securities

An increase in the riskiness of a particular security would NOT affect:

A. the risk premium for that security.

B. the premium for expected inflation.

C. the total required return for the security.

D. investors’ willingness to buy the security.

If the inflation premium for a bond goes up, the price of the bond:

A. is unaffected.

B. goes down.

C. goes up.

D. is unpredictable.

The risk premium is likely to be highest for:

A. U.S. government bonds.

B. corporate bonds.

C. gold mining expedition.

D. Either b or c

A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity?

A. 9.33%

B. 7.94%

C. 12.66%

D. 8.10%

The relationship between a bond’s price and the yield to maturity:

A. changes at a constant level for each percentage change of yield to maturity.

B. is an inverse relationship.

C. is a linear relationship.

D. has no relationship.

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.

What is the approximate yield to maturity for a seven-year bond that pays 11% interest on a $1000 face value annually if the bond sells for $952?

A. 10.5%

B. 10.6%

C. 11.9%

D. 12.0%

A higher interest rate (discount rate) would:

A. reduce the price of corporate bonds.

B. reduce the price of preferred stock.

C. reduce the price of common stock.

D. all of the above

A bond pays 9% yearly interest in semi-annual payments for 6 years. The current yield on similar bonds is 12%. To determine the market value of this bond, you must:

A. find the interest factors (IFs) for 12 periods at 12%.

B. find the interest factors (IFs) for 6 periods at 9%.

C. find the interest factors (IFs) for 12 periods at 6%.

D. find the interest factors (IFs) for 6 periods at 6%.

A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? Use annual analysis.

A. Over $1,000

B. Under $1,000

C. Over $1,200

D. not enough information to tell

A 10-year bond pays 8% on a face value of $1,000. If similar bonds are currently yielding 10%, what is the market value of the bond? Use annual analysis.

A. Less than $900

B. More than $900 and less than $1100

C. More than $1100

D. not enough information to tell

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Financial capital does not include:

A. stock.

B. bonds.

C. preferred stock.

D. working capital.

The overall weighted average cost of capital is used instead of costs for specific sources of funds because:

A. use of the cost for specific sources of capital would make investment decisions inconsistent.

B. a project with the highest return would always be accepted under the specific cost criteria.

C. investments funded by low cost debt would have an advantage over other investments.

D. Both A and C

Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu’s pretax cost of equity is 12%. It’s pretax cost of preferred equity is 7%, and it’s pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

A. Between 7% and 8%

B. Between 8% and 9%

C. Between 9% and 10%

D. Between 10% and 12%

For a firm paying 7% for new debt, the higher the firm’s tax rate:

A. the higher the after-tax cost of debt.

B. the lower the after-tax cost of debt.

C. after-tax cost is unchanged.

D. Not enough information to judge.

If a firm’s bonds are currently yielding 8% in the marketplace, why would the firm’s cost of debt be lower?

A. Interest rates have changed.

B. Additional debt can be issued more cheaply than the original debt.

C. There should be no difference; cost of debt is the same as the bond’s market yield.

D. Interest is tax-deductible.

A firm’s cost of financing, in an overall sense, is equal to its:

A. weighted average cost of capital.

B. required yield that investors seek for various kinds of securities.

C. required rate of return that investors seek for various kinds of securities.

D. All of the above

A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm has $18 million in retained earnings, at what asset level will the firm need to issue additional stock? (Assume no growth in retained earnings.)

A. The firm should have already issued additional stock.

B. The firm can increase assets to $30 million.

C. The firm can increase assets to $41.67 million.

D. There is insufficient information to determine an answer.

The pre-tax cost of debt for a new issue of debt is determined by:

A. the investor’s required rate of return on issued stock.

B. the coupon rate of existing debt.

C. the yield to maturity of outstanding bonds.

D. All of the above

The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of:

A. the existence of taxes.

B. the existence of flotation costs.

C. investors’ unwillingness to purchase additional shares of common stock.

D. the existence of financial leverage.

If the flotation cost goes up, the cost of retained earnings will:

A. go up.

B. go down.

C. stay the same.

D. slowly increase.

Why is the cost of debt normally lower than the cost of preferred stock?

A. Preferred stock dividends are tax deductions.

B. Interest is tax deductible.

C. Preferred stock dividends must be paid before common stock dividends.

D. Common stock dividends are not tax deductible.

If flotation costs go down, the cost of new preferred stock will:

A. go up.

B. go down.

C. stay the same.

D. slowly increase.

A firm’s debt to equity ratio varies at times because:

A. a firm will want to sell common stock when prices are high and bonds when interest rates are low.

B. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run.

C. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital.

D. All of the above

Using the constant dividend growth model for common stock, if Po goes up:

A. the assumed cost goes up.

B. the assumed cost goes down.

C. the assumed cost remains unchanged.

D. need further information

New common stock is more expensive than Ke:

A. to compensate for risk.

B. to compensate for more dividends.

C. to compensate for expansionary problems.

D. to cover distribution costs.

In computing the cost of common equity, if D1 goes downward and Po goes up, Ke will:

A. go up.

B. go down.

C. stay the same.

D. slowly increase.

In determining the cost of retained earnings:

A. the dividend valuation model is inappropriate.

B. flotation costs are included.

C. growth is not considered.

D. the capital asset pricing model can be used.

Within the capital asset pricing model:

A. the risk-free rate is usually higher than the return in the market.

B. the higher the beta the lower the required rate of return.

C. beta measures the volatility of an individual stock relative to a stock market index.

D. None of the above

Using the constant growth model, a firm’s expected (D1) dividend yield is 3% of the stock price, and it’s growth rate is 7%. If the tax rate is .35%, what is the firm’s cost of equity?

A. 10%

B. 6.65%

C. 8.95%

D. More information is required.

For many firms, the cheapest and most important source of equity capital is in the form of:

A. debt.

B. common stock.

C. preferred stock.

D. retained earnings.

The reason cash flow is used in capital budgeting is because:

A. cash rather than income is used to purchase new machines.

B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.

C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.

D. All of the above

The first step in the capital budgeting process is:

A. collection of data.

B. idea development.

C. assign probabilities.

D. determine cashflow.

Capital budgeting is primarily concerned with:

A. capital formation in the economy.

B. planning future financing needs.

C. evaluating investment alternatives.

D. minimizing the cost of capital.

The longer the life of an investment:

A. the more significant the discount rate.

B. the less significant the discount rate.

C. makes no difference.

D. None of the above

If projects are mutually exclusive:

A. they can only be accepted under capital rationing.

B. the selection of one alternative precludes the selection of other alternatives.

C. the payback method should be used.

D. the net present-value should be used.

The internal rate of return and net present value methods:

A. always give the same investment decision answer.

B. never give the same investment decision answer.

C. usually give the same investment decision answer.

D. always give answers different from the payback method.

A characteristic of capital budgeting is:

A. a large amount of money is always involved.

B. $456.00the internal rate of return must be less than the cost of capital.

C. the internal rate of return must be greater than the cost of capital.

D. the time horizon is at least five years.

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method:

A. assumes that cash flows are reinvested at the project’s internal rate of return.

B. concentrates on the liquidity aspects of investment projects.

C. assumes that cash flows are reinvested at the firm’s weighted average cost of capital.

D. None of the above

The __________ assumes returns are reinvested at the cost of capital.

A. payback method

B. internal rate of return

C. net present value

D. capital rationing

In using the internal rate of return method, it is assumed that cash flows can be reinvested at:

A. the cost of equity.

B. the cost of capital.

C. the internal rate of return.

D. the prevailing interest rate.

The term “risk averse” means that:

A. an individual refuses to take risks.

B. most investors and businessmen seek risk.

C. an individual will seek either to avoid risk or to be compensated with a higher return.

D. a and bonly investment proposals with no risk should be accepted.

The coefficient of variation (V) can be defined as the:

A. expected value multiplied by the standard deviation.

B. standard deviation divided by the expected value.

C. expected value divided by the standard deviation.

D. standard deviation squared, divided by the expected value.

In determining the appropriate discount rate for an individual project, the financial manager will be most influenced by the:

A. expected value.

B. internal rate of return.

C. standard deviation.

D. coefficient of variation.

Which of the following is a characteristic of beta?

A. Beta measures only the volatility of returns on an individual bond relative to a bond market index.

B. A beta of 1.0 is of equal risk with the market.

C. A beta of greater than 1.0 has less risk than the market.

D. Two of the above are true.

Which investment has the least amount of risk?

A. Coefficient of variation =11%, expected return = $800

B. Coefficient of variation =11%, Standard deviation = $200

C. Standard deviation = $500, expected return = $5,000

D. Standard deviation = $100, expected return = $80

Risk may be integrated into capital budgeting decisions by:

A. adjusting the standard deviation of possible outcomes.

B. determining the expected value.

C. adjusting the discount rate.

D. adjusting the time horizon.

The firm’s highest risk-adjusted discount should be applied to:

A. the repair of old machinery.

B. a new product in a related field.

C. a new product in a foreign market.

D. the purchase of new equipment.

Using the risk-adjusted discount rate approach, projects with high coefficients of variation will have __________ net present values than projects with low coefficients of variation.

A. somewhat higher

B. substantially higher

C. lower

D. Either A or B

Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with:

A. normal risk.

B. high risk.

C. no risk.

D. low risk.

Using the risk-adjusted discount rate approach, the firm’s weighted average cost of capital is applied to projects with:

A. no risk.

B. low risk.

C. normal risk.

D. high risk.