Multiple Choice Answers

Cash flow can be said to equal operating income:
A. less taxes plus depreciation.
B. less taxes.
C. before depreciation and taxes plus depreciation.
D. after taxes minus depreciation.

Question 2 of 20
There are several disadvantages to the payback method; among them is that payback:
A. ignores the time value of money.
B. emphasizes receiving money back as fast as possible for reinvestment.
C. is easy to use and to understand.
D. can be used in conjunction with time adjusted methods of evaluation.
Question 3 of 20
The Dammon Corp. has the following investment opportunities.

Year Machine A Inflows Machine B Inflows Machine C Inflows

($15,000 investment) ($22,500 investment) ($37,500 investment)

1            $6,000                               $12,000                                           $-0-

2            9,000                                 12,000                                             30,000

3            3,000                                 10,500                                             30,000

4            -0-                                       10,500                                             15,000

5            -0-                                       -0-                                                      15,000

Under the payback method and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose?
A. Machine A
B. Machine B
C. Machine C
D. Machine A and B

Question 4 of 20
You buy a new piece of equipment for $5,535, and you receive a cash inflow of $1,000 per year for 8 years. What is the internal rate of return?
A. Less than 10%
B. Between 10% and 11%
C. Between 11% and 12%
D. More than 12%

Question 5 of 20
Assuming that a firm has no capital rationing constraint and that a firm’s investment alternatives are not mutually exclusive, the firm should accept all investment proposals:
A. for which it can obtain financing.
B. that have a positive net present value.
C. that have positive cash flows.
D. that provide returns greater than the after-tax cost of debt.
Question 6 of 20
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.
Question 7 of 20
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
Question 8 of 20
Capital rationing:
A. is a way of preserving the assets of the firm over the long term.
B. is a less than optimal way to arrive at capital budgeting decisions.
C. assures stockholder wealth maximization.
D. assures maximum potential profitability.
Question 9 of 20
An asset fitting into the 5-year MACRS category was purchased 2 years ago for $60,000. The book value of this asset is now:
A. $28,800.
B. $31,200.
C. $48,000.
D. $60,000.
Question 10 of 20
In a replacement decision, if an old asset sells below book value, from a tax standpoint there is:
A. a decrease in cash flow.
B. an increase in cash flow.
C. no effect on cash flow.
D. a decrease in net present value.
Question 11 of 20
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 to avoid risk or be compensated with a higher return.
D. only investment proposals with no risk should be accepted.
Question 12 of 20
If one project has a higher standard deviation than another it:
A. has a greater risk.
B. has a higher expected value.
C. has more possible outcomes.
D. may be riskier, but this can only be determined by the coefficient of variation.
Question 13 of 20
A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?
A. $362.50
B. $89.40
C. $94.50
D. $178.30
Question 14 of 20
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.
Question 15 of 20
Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with __________ risk.
A. normal
B. high
C. no
D. low

Question 16 of 20
A Monte Carlo simulation model uses:
A. random variables as inputs.
B. a point estimate.
C. the cost of capital.
D. portfolio risk.

Question 17 of 20
In order to reduce risk in a firm, the firm would seek to enter a business that has:
A. high positive correlation with its present business.
B. zero correlation with its present business.
C. high negative correlation with its present business.
D. high negative variation with its present business.
Question 18 of 20
A correlation coefficient of __________ provides the greatest risk reduction.
A. 0
B. -1
C. +1
D. +.5
Please note that option B is marked as negative if this is positive then from given options Choice A would be correct.
Question 19 of 20
A project that carries a normal amount of risk and does not affect the risk exposure of the firm should be discounted back at the:
A. coefficient of variation.
B. beta.
C. risk-free rate.
D. weighted average cost of capital.

Question 20 of 20
The “efficient frontier” indicates alternatives with:
A. neutral combinations of risk and return.
B. the highest returns.
C. the best combination of risk and return.
D. no risk.

Selection 2 of 3
Question 1 of 20
Working capital management is primarily concerned with the management and financing of:
A. cash and inventory.
B. current assets and current liabilities.
C. current assets.
D. receivables and payables.

Question 2 of 20
Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
A. No external financing is required.
B. $100,000
C. $200,000
D. $300,000

Question 3 of 20
Retail companies like Target and Limited Brands are more likely to have:
A. stable sales and earnings per share.
B. cyclical sales but less volatile earnings per share.
C. cyclical sales and more volatile earnings per share.
D. cyclical sales but stable accounts receivable and inventory.
Question 4 of 20
The term structure of interest rates:
A. changes daily to reflect current competitive conditions in the money and capital markets.
B. plots returns for securities of different risk.
C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc.
D. depicts interest rates for T-bills over the last year.

Question 5 of 20
A “normal” term structure of interest rates would depict:
A. short-term rates higher than long-term rates.
B. long-term rates higher than short-term rates.
C. no general relationship between short- and long-term rates.
D. medium rates (1-5 years) lower than both short-term and long-term rates.

Question 6 of 20
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 7 of 20
Genetech has $2,000,000 in assets, have decided to finance 30% with long-term financing (13% rate) and 70% with short-term financing (9%) rate. What will be their annual interest costs?

A. $78,000
B. $126,000
C. $440,000
D. $204,000
Question 8 of 20
What is generally the largest source of short-term credit small firms?
A. Bank loans
B. Commercial paper
C. Installment loans
D. Trade credit
Question 9 of 20
The cost of not taking the discount on trade credit of 2/20, net 60 is equal to:

A. 18.36%.
B. 16.32%.
C. 18.00%.
D. 17.41%
Question 10 of 20
LIBOR is:
A. a resource used in production.
B. an interest rate paid on Eurodollar loans in the London market.
C. an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks.
D. the interest rate paid by the British government on its long-term bonds.
Question 11 of 20
In determining the cost of bank financing, which is the important factor?
A. Prime rate
B. Nominal rate
C. Effective rate
D. Discount rate

 
Question 12 of 20
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.
A. 11.18%
B. 19.00%
C. 22.35%
D. 8.08%
Question 13 of 20
Which of the following is the largest category of asset-backed securities?
A. Student Loans
B. Automobile Loans
C. Home Equity Loans
D. Manufactured Housing Loans
Question 14 of 20
What is the effective rate on an $10,000 installment loan with bi-monthly payments, $1,600 in interest, for 2 years?
A. 16%
B. 7.4%
C. 29.5%
D. 14.8%

 
Question 15 of 20
During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from:
A. Russia’s difficulty in transforming its economy into a capitalistic one.
B. Japan’s prolonged recession and banking crisis.
C. the Euro-zone countries comprising the European Monetary Union and a single currency.
D. the huge Chinese economy and its billion plus people.

 
Question 16 of 20
In general when interest rates are expected to rise, financial managers:
A. try to lock in long-term financing at low cost.
B. balance the company’s debt structure with more short-term debt and less long-term debt.
C. accept more risk.
D. rely more on internal sources of funds rather than external sources.
Question 17 of 20
The major supplier of funds for investment in the whole economy is:
A. businesses.
B. households.
C. government.
D. financial institutions.
Question 18 of 20
What type of trading accounts for over 90% of stocks traded on the Chicago and Pacific regional exchanges?
A. Dealer Trading
B. Dual Trading
C. Options Trading
D. None of the above
Question 19 of 20
The Securities Act of 1933 is primarily concerned with:
A. original issues of securities.
B. secondary trading of securities.
C. national securities market.
D. protecting customers of bankrupt securities firms.

Question 20 of 20
Financial intermediaries include all of the following EXCEPT:
A. commercial banks.
B. life insurance companies.
C. corporations.
D. pension plans.

Selection 3 of 3
Question 1 of 20
Working capital management is primarily concerned with the management and financing of:
A. cash and inventory.
B. current assets and current liabilities.
C. current assets.
D. receivables and payables.
Question 2 of 20
Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
A. No external financing is required.
B. $100,000
C. $200,000
D. $300,000
Question 3 of 20
Retail companies like Target and Limited Brands are more likely to have:
A. stable sales and earnings per share.
B. cyclical sales but less volatile earnings per share.
C. cyclical sales and more volatile earnings per share.
D. cyclical sales but stable accounts receivable and inventory.
Question 4 of 20
The term structure of interest rates:
A. changes daily to reflect current competitive conditions in the money and capital markets.
B. plots returns for securities of different risk.
C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc.
D. depicts interest rates for T-bills over the last year.
Question 5 of 20
A “normal” term structure of interest rates would depict:
A. short-term rates higher than long-term rates.
B. long-term rates higher than short-term rates.
C. no general relationship between short- and long-term rates.
D. medium rates (1-5 years) lower than both short-term and long-term rates.
Question 6 of 20
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 7 of 20
Genetech has $2,000,000 in assets, have decided to finance 30% with long-term financing (13% rate) and 70% with short-term financing (9%) rate. What will be their annual interest costs?
A. $78,000
B. $126,000
C. $440,000
D. $204,000
Question 8 of 20
What is generally the largest source of short-term credit small firms?
A. Bank loans
B. Commercial paper
C. Installment loans
D. Trade credit
Question 9 of 20
The cost of not taking the discount on trade credit of 2/20, net 60 is equal to:
A. 18.36%.
B. 16.32%.
C. 18.00%.
D. 17.41%
Question 10 of 20
LIBOR is:
A. a resource used in production.
B. an interest rate paid on Eurodollar loans in the London market.
C. an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks.
D. the interest rate paid by the British government on its long-term bonds.
Question 11 of 20
In determining the cost of bank financing, which is the important factor?
A. Prime rate
B. Nominal rate
C. Effective rate
D. Discount rate
Question 12 of 20
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.
A. 11.18%
B. 19.00%
C. 22.35%
D. 8.08%
Question 13 of 20
Which of the following is the largest category of asset-backed securities?
A. Student Loans
B. Automobile Loans
C. Home Equity Loans
D. Manufactured Housing Loans
Question 14 of 20
What is the effective rate on an $10,000 installment loan with bi-monthly payments, $1,600 in interest, for 2 years?
A. 16%
B. 7.4%
C. 29.5%
D. 14.8%
Question 15 of 20
During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from:
A. Russia’s difficulty in transforming its economy into a capitalistic one.
B. Japan’s prolonged recession and banking crisis.
C. the Euro-zone countries comprising the European Monetary Union and a single currency.
D. the huge Chinese economy and its billion plus people.

 
Question 16 of 20
In general when interest rates are expected to rise, financial managers:
A. try to lock in long-term financing at low cost.
B. balance the company’s debt structure with more short-term debt and less long-term debt.
C. accept more risk.
D. rely more on internal sources of funds rather than external sources.

 
Question 17 of 20
The major supplier of funds for investment in the whole economy is:
A. businesses.
B. households.
C. government.
D. financial institutions.
Question 18 of 20
What type of trading accounts for over 90% of stocks traded on the Chicago and Pacific regional exchanges?
A. Dealer Trading
B. Dual Trading
C. Options Trading
D. None of the above
Question 19 of 20
The Securities Act of 1933 is primarily concerned with:
A. original issues of securities.
B. secondary trading of securities.
C. national securities market.
D. protecting customers of bankrupt securities firms.
Question 20 of 20
Financial intermediaries include all of the following EXCEPT:
A. commercial banks.
B. life insurance companies.
C. corporations.
D. pension plans.