**Chapter 1**

____ 1. Which

of the following statements is CORRECT?

a. |
One advantage of forming a corporation |

b. |
Corporations face fewer regulations than |

c. |
One disadvantage of operating a business |

d. |
It is generally less expensive to form a |

**Chapter 1**

____ 2. The

primary operating goal of a publicly-owned firm interested in serving its

stockholders should be to

a. |
Maximize its expected total corporate |

b. |
Maximize its expected EPS. |

c. |
Minimize the chances of losses. |

d. |
Maximize the stock price per share over |

**Chapter 1**

____ 3. Which

of the following statements is CORRECT?

a. |
Compensating managers with stock options |

b. |
Restrictions can be included in credit |

c. |
The threat of takeovers reduces conflict |

d. |
Compensating managers with stock options |

**Chapter 1**

____ 4. Which

of the following statements is CORRECT?

a. |
One disadvantage of organizing a |

b. |
Using restrictive covenants in debt |

c. |
Managers genelly welcome hostile |

d. |
The entrenched managers of established, |

**Chapter 2**

____ 5. Kramer

Corporation recently announced that its net income was lower than last year.

However, analysts estimate that the company’s net cash flow increased. What

factors could explain this discrepancy?

a. |
The company’s depreciation and |

b. |
The company’s interest expense declined. |

c. |
The company had an increase in its |

d. |
All of these statements are correct. |

**Not covered this semester**

____ 6. Scranton

Shipyards has $30 million in total investor-supplied operating capital. The

company’s cost of capital is 10 percent and the tax rate is 40%. The firm’s net income is $3 million and its

interest expense also is $3 million.

What is Scranton’s

EVA?

a. |
$ 400,000 |

b. |
$ 1,800,000 |

c. |
$1,200,000 |

d. |
$2,000,000 |

e. |
$4,000,000 |

**Not covered this semester**

____ 7. Byrd

Lumber has 2 million shares of common stock outstanding and its stock price is

$15 a share. On the balance sheet, the company has $40 million of common

equity. What is the company’s Market Value Added (MVA)?

a. |
-$80,000,000 |

b. |
-$20,000,000 |

c. |
-$10,000,000 |

d. |
$20,000,000 |

e. |
$80,000,000 |

**Chapter 2**

____ 8. A

stock market analyst has forecasted the following year-end numbers for Raedebe

Technology:

Sales |
$70 million |

EBITDA |
$20 million |

Depreciation |
$ 7 million |

Amortization |
$ 0 |

The company’s tax rate is 40 percent. The

company does not expect any changes in its net operating working capital. This

year the company’s planned gross capital expenditures will total $12 million.

(Gross capital expenditures represent capital expenditures before deducting

depreciation.) What is the company’s forecasted free cash flow for the year?

a. |
$ |

b. |
$ |

c. |
$ |

d. |
$12.8 million |

e. |
$26.8 million |

**Chapter 3**

____ 9. Harte

Motors and Mills Automotive each have the same total assets, the same level of

sales, and the same return on equity (ROE). Harte Motors, however, has less

equity and a higher debt ratio than does Mills Automotive. Which of the

following statements is most correct?

a. |
Mills Automotive has a higher net income |

b. |
Mills Automotive has a higher profit |

c. |
Mills Automotive has a higher return on |

d. |
All of the statements above are correct. |

**Not covered this semester**

____ 10. Which

of the following statements is most correct?

a. |
If two firms have the same ROE and the |

b. |
If a firm has positive EVA, this implies |

c. |
If a firm has positive ROE, this implies |

d. |
All of the statements are correct. |

**Chapter 3**

____ 11. Selzer

Inc. sells all its merchandise on credit. It has a profit margin of 6 percent,

days sales outstanding equal to 30 days, receivables of $200,000, total assets

of $5 million, and a debt ratio of 0.4. What is the firm’s return on equity

(ROE)? Assume a 365-day year.

a. |
7.1% |

b. |
33.4% |

c. |
4.9% |

d. |
71.0% |

e. |
8.1% |

**Chapter 3**

____ 12. A

firm has a debt/equity ratio of 50 percent. Currently, it has interest expense

of $500,000 on $5,000,000 of total debt outstanding. Its tax rate is 40

percent. If the firm’s ROA is 6 percent, by how many percentage points is the

firm’s ROE greater than its ROA?

a. |
0.0% |

b. |
3.0% |

c. |
5.2% |

d. |
7.4% |

e. |
9.0% |

**Chapter 3**

____ 13. Company

A has sales of $1,000, assets of $500, a debt ratio of 30 percent, and an ROE

of 15 percent. Company B has the same sales, assets, and net income as Company

A, but its ROE is 30 percent. What is B’s debt ratio? (Hint: Begin by looking

at the Du Pont equation.)

a. |
25.0% |

b. |
35.0% |

c. |
50.0% |

d. |
52.5% |

e. |
65.0% |

**Chapter 6**

____ 14. The

future value of a lump sum at the end of five years is $1,000. The nominal

interest rate is 10 percent and interest is compounded semiannually. Which of

the following statements is most correct?

a. |
The present value of the $1,000 is |

b. |
The effective annual rate is less than |

c. |
The periodic interest rate is 5 percent. |

d. |
All of these statements are correct. |

**Chapter 6**

____ 15. Which

of the following statements is most correct?

a. |
An investment that compounds interest |

b. |
The present value of a 3-year $100 |

c. |
The proportion of the payment of a fully |

d. |
All of these statements are correct. |

**Chapter 6**

____ 16. What

is the present value of a 5-year ordinary annuity with annual payments of $200,

evaluated at a 15 percent interest rate?

a. |
$ |

b. |
$ |

c. |
$1,169.56 |

d. |
$1,348.48 |

e. |
$1,522.64 |

**Chapter 6**

____ 17. You

have the opportunity to buy a perpetuity that pays $1,000 annually. Your

required rate of return on this investment is 15 percent. What is the value of

this investment?

a. |
$5,000.00 |

b. |
$6,000.00 |

c. |
$6,666.67 |

d. |
$7,500.00 |

e. |
$8,728.50 |

**Chapter 6**

____ 18. Which

one of the following investments provides the highest effective rate of return?

a. |
An investment that has a 9.9 percent |

b. |
An investment that has a 9.7 percent |

c. |
An investment that has a 10.2 percent |

d. |
An investment that has a 10 percent |

**Chapter 6**

____ 19. You

have been offered an investment that pays $500 at the end of every 6 months for

the next 3 years. The nominal interest rate is 12 percent; however, interest is

compounded quarterly. What is the present value of the investment?

a. |
$2,458.66 |

b. |
$2,444.67 |

c. |
$2,451.73 |

d. |
$2,463.33 |

e. |
$2,437.56 |

**Chapter 6**

____ 20. THIS

IS THE BONUS QUESTION – IN MY OPINION THE MOST DIFFICULT, SO SAVE IT FOR

LAST. An investment costs $3,000 today

and provides cash flows at the end of each year for 20 years. The investment’s

expected return is 10 percent. The projected cash flows for Years 1, 2, and 3

are $100, $200, and $300, respectively. What is the annual cash flow received

for each of Years 4 through 20 (17 years)? (Assume the same payment for each of

these years.)

a. |
$285.41 |

b. |
$313.96 |

c. |
$379.89 |

d. |
$417.87 |

e. |
$459.66 |

**Chapter 3**

____ 21. Ramala

Corp’s sales last year were $48,000, and its total assets were $25,500. What

was its total assets turnover ratio (TATO)?

a. |
1.88 |

b. |
1.99 |

c. |
1.10 |

d. |
1.21 |

e. |
1.32 |