1) The goal
of the firm should be

A. maximization
of profits

B. maximization
of shareholder wealth

C. maximization
of consumer satisfaction

D. maximization
of sales

2) An
example of a primary market transaction is

A. a
new issue of common stock by AT&T

B. a
sale of some outstanding common stock of AT&T

repurchasing its own stock from a stockholder

D. one
stockholder selling shares of common stock to another individual

3) According
to the agency problem, _________ represent the principals of a corporation.

A. shareholders

B. managers

C. employees

D. suppliers

4) Which of
the following is a principle of basic financial management?

A. Risk/return

B. Derivatives

C. Stock

D. Profit
is king

5) Another
name for the acid test ratio is the

A. current

B. quick

C. inventory
turnover ratio

D. average
collection period

6) The
accounting rate of return on stockholders’ investments is measured by

A. return
on assets

B. return
on equity

C. operating
income return on investment

D. realized
rate of inflation

7) If you
are an investor, which of the following would you prefer?

A. Earnings
on funds invested compound annually

B. Earnings
on funds invested compound daily

C. Earnings
on funds invested would compound monthly

D. Earnings
on funds invested would compound quarterly

8) The
primary purpose of a cash budget is to

A. determine
the level of investment in current and fixed assets

B. determine
accounts payable

C. provide
a detailed plan of future cash flows

D. determine
the estimated income tax for the year

9) Which of
the following is a non-cash expense?

A. Depreciation

B. Interest

C. Packaging

D. Administrative

10) The
break-even model enables the manager of a firm to

A. calculate
the minimum price of common stock for certain situations

B. set
appropriate equilibrium thresholds

C. determine
the quantity of output that must be sold to cover all operating costs

D. determine
the optimal amount of debt financing to use

11) A
zero-coupon bond

A. pays
no interest

B. pays
interest at a rate less than the market rate

C. is
a junk bond

D. is
sold at a deep discount at less than the par value

12) If you
have $20,000 in an account earning 8% annually, what constant amount could
you withdraw each year and have nothing remaining at the end of 5 years?

A. $3,525.62

B. $5,008.76

C. $3,408.88

D. $2,465.78

13) At what
rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

A. 6%

B. 5%

C. 7%

D. 8%

14) The
present value of a single future sum

A. increases
as the number of discount periods increase

B. is
generally larger than the future sum

C. depends
upon the number of discount periods

D. increases
as the discount rate increases

15) Which of
the following is considered to be a spontaneous source of financing?

A. Operating

B. Accounts

C. Inventory

D. Accounts

16) Compute
the payback period for a project with the following cash flows, if the
company’s discount rate is 12%.

Initial outlay = $450

Cash flows:
Year 1 = $325
Year 2 = $65
Year 3 = $100

A. 3.43

B. 3.17

C. 2.88

D. 2.6

17) For the
NPV criteria, a project is acceptable if the NPV is __________, while for the
profitability index, a project is acceptable if the profitability index is

A. less
than zero, greater than the required return

B. greater
than zero, greater than one

C. greater
than one, greater than zero

D. greater
than zero, less than one

18) Which of
the following is considered to be a deficiency of the IRR?

A. It
fails to properly rank capital projects.

B. It
could produce more than one rate of return.

C. It
fails to utilize the time value of money.

D. It
is not useful in accounting for risk in capital budgeting.

19) The firm
should accept independent projects if

A. the
payback is less than the IRR

B. the
profitability index is greater than 1.0

C. the
IRR is positive

D. the
NPV is greater than the discounted payback

20) The most
expensive source of capital is

A. preferred

B. new
common stock

C. debt

D. retained

21) The cost
associated with each additional dollar of financing for investment projects

A. the
incremental return

B. the
marginal cost of capital

C. risk-free

D. beta

22) The XYZ
Company is planning a $50 million expansion. The expansion is to be financed
by selling $20 million in new debt and $30 million in new common stock. The
before-tax required rate of return on debt is 9%, and the required rate of
return on equity is 14%. If the company is in the 40% tax bracket, what is
the marginal cost of capital?

A. 14.0%

B. 9.0%

C. 10.6%

D. 11.5%

23) Shawhan
Supply plans to maintain its optimal capital structure of 30% debt, 20%
preferred stock, and 50% common stock far into the future. The required return
on each component is: debt–10%; preferred stock–11%; and common stock–18%.
Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan
Supply earn on its investments if the value of the firm is to remain

A. 18.0%

B. 13.0%

C. 10.0%

D. 14.2%

24) Lever
Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if
its current capital structure is too conservative. Lever Brothers’ present
EBIT is $3 million, and profits available to common shareholders are
$1,560,000, with 342,857 shares of common stock outstanding. If the firm were
to instead have a debt ratio of 60%, additional interest expense would cause
profits available to stockholders to decline to $1,440,000, but only 228,571
common shares would be outstanding. What is the difference in EPS at a debt
ratio of 60% versus 40%?

A. $1.75

B. $2.00

C. $3.25

D. $4.50

25) Zybeck
Corp. projects operating income of $4 million next year. The firm’s income
tax rate is 40%. Zybeck presently has 750,000 shares of common stock which
have a market value of $10 per share, no preferred stock, and no debt. The
firm is considering two alternatives to finance a new product: (a) the
issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares
of common stock. If Zybeck issues common stock this year, what will be the
projected EPS next year?

A. $4.94

B. $2.96

C. $5.33

D. $3.20

26) _________
risk is generally considered only a paper gain or loss.

A. Transaction

B. Translation

C. Economic

D. Financial

27) Capital
markets in foreign countries

A. offer
lower returns than those obtainable in the domestic capital markets

B. provide
international diversification

C. in
general are becoming less integrated due to the widespread availability of
interest rate and currency swaps

D. have
been getting smaller in the past decade

28) Buying
and selling in more than one market to make a riskless profit is called

A. profit

B. arbitrage

C. international

D. an
efficient market

29) What
keeps foreign exchange quotes in two different countries in line with each

A. Cross

B. Forward

C. Arbitrage

D. Spot

30) One reason
for international investment is to reduce

A. portfolio

B. price-earnings
(P/E) ratios

C. advantages
in a foreign country

D. exchange
rate risk