The principle of diversification states that spreading an


1. Deciding whether or not to open a new store is part of the process known as:

A) Capital budgeting.
B) Credit management.
C) Capital structure.
D) Cash management.
E) Working capital management.

2. . The total market value of the firm's equity is determined by _______________.

A) the corporate treasurer
B) the firm's financial manager
C) the firm's stakeholders
D) the firm's stockholders
E) regulatory authorities

3. Which of the following are disadvantages of the partnership form of ownership?

A) Personal liability and double taxation
B) Personal liability and limited firm life
C) Double taxation and limited firm life
D) Ease of formation and unlimited firm life
E) Ease of formation and ease of ownership transfer

4. Which of the following is generally true regarding liquidity as it relates to the firm?

A) Liquidity is detrimental to a firm because it allows the firm to pay its bills more easily, thereby avoiding financial distress
B) Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value
C) Liquidity is valuable to a firm because a firm can borrow money using its liquid assets, such as a warehouse, as collateral
D) Assets are generally listed on a firm's balance sheet in the order of increasing liquidity
E) Liquid assets generally earn a large return, especially in comparison to illiquid assets

5. An income statement _____________________.

A) measures performance as a snapshot on a specific date
B) prepared according to GAAP, will show revenue when it accrues
C) excludes accrued taxes payable
D) includes expenses only when they are ultimately paid off in cash
E) is an accurate representation of a firm's net cash flows

6. Suppose you have the 2003 income statement for a firm, along with the 12/31/2002 and 12/31/2003 balance sheets. How would you calculate net capital spending?

A) Ending net fixed assets (2003) minus beginning net fixed assets (2002) plus 2003 depreciation
B) Beginning net fixed assets (2002) minus ending net fixed assets (2003) plus 2003 depreciation
C) Beginning net fixed assets (2002) plus ending net fixed assets (2003) minus 2003 depreciation
D) Ending net fixed assets (2003) minus beginning net fixed assets (2002) plus 2003 taxes paid
E) Ending net fixed assets (2003) plus beginning net fixed assets (2002) minus 2003 taxes paid

7. The net change in cash over a period of time is equal to

A) cash uses plus operating cash flows
B) additions to current assets minus expenditures on fixed assets
C) net income plus depreciation, minus taxes and dividends
D) ending cash minus changes in long-term debt minus additions to fixed assets
E) cash flow from operating activities plus net cash from investment and financing activities

8. The financial manager of Gothic, Inc., tells her banker that Gothic's accounts receivable declined by $275,000 that day. Based on this, the bank knows that Gothic's current ratio:

A) Must have increased from the day before.
B) Must have decreased from the day before.
C) Did not change from the day before.
D) Declined but the quick ratio was unchanged from the day before.
E) Would possibly be affected, but more information is needed to know in which direction.

9. Which of the following is (are) a measure of long-term solvency?

A) Total debt ratio
B) Cash coverage ratio
C) Price-earnings ratio
D) Two of the above
E) All of the above

10. In creating pro forma statements, if we assume that costs, assets, and short-term debt vary directly with changes in sales, that the payout ratio is fixed, and that the change in long-term debt only results from payments made as required on the debt contracts, then the item required for the balance sheet to balance will probably be:

A) Dividends.
B) Total debt.
C) Long-term debt.
D) New equity sales.
E) Retained earnings.

11. If total assets increase by the same percentage as sales increase,

A) it is likely assets and sales will increase by identical dollar amounts.
B) the larger the increase in sales, the more likely there will be a need for external financing.
C) the firm is assumed to be operating at full capacity.
D) B and C are correct.
E) None of the above.

12. Total assets divided by sales is called the _____ ratio.

A) Capital intensity
B) Return on assets
C) Capital budgeting
D) Total asset turnover
E) Interval measure

13. Which of the following combinations of attributes would make a capital expenditure project desirable to a financial manager?
I. The project is worth more to the firm than the cost to acquire it.
II. The value of the cash flow generated by the project exceeds the project's cost.
III. The project's cash flows have acceptable levels of risk and size, but not timing.

A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II, and III

14. Kay purchases a $100, 30-year annuity. Kam purchases a $100 perpetuity. In both cases, payments begin in one year, and the appropriate interest rate is 10%. What is the present value of Kam's payments that will occur from year 31 onwards?

A) $57.31
B) $58.11
C) $81.21
D) More than $100

15. The Buckeye Co. needs $14 million to finance a new project. The company plans to issue new shares of common stock at a price of $19 per share to fund this project. The underwriting fee is 7%. How many new shares of stock must company issue?

A) 688,637
B) 788,421
C) 789,098
D) 792,303
E) 801,357

16. Erin has $6,000 in her investment account. She wants to withdraw her funds when her account reaches $10,000. A decrease in the rate of return she earns will:

A) Increase the value of her account faster.
B) Cause her to wait longer before withdrawing her money.
C) Cause the present value of her account to decrease.
D) Allow her to withdraw more money sooner.
E) Cause the compounding effect to increase.

17. An account was opened with $1,000 ten years ago. Today, the account balance is $1,500. If the account paid interest compounded annually, how much interest on interest was earned?

A) $86.20
B) $93.10
C) $102.39
D) $130.28
E) $500.00

18. Jack and Jill both want to have $5,000 in three years. Jack expects to earn 8% on his investments and Jill expects a 7% rate of return. Which one of the following statements is correct concerning the amount of money they each need to invest today?

A) Jill needs to deposit $112.33 more than Jack today.
B) Jill needs to deposit $173.33 more than Jack today.
C) Jack needs to deposit $3,699.16 today.
D) Jill needs to deposit $3,081.49 today.
E) Both Jill and Jack should deposit $3,969.16 today.

19. The principle of diversification states that spreading an investment over a number of assets will eliminate:

A) All of the risk.
B) All of the systematic risk and part of the unsystematic risk.
C) All of the unsystematic risk and part of the systematic risk.
D) Most of the systematic risk.
E) Most of the unsystematic risk.

20. Which one of the following will decrease the risk of a portfolio that consists of stocks, Canadian Treasury bills, and gold?

A) Decreasing the number of securities in the portfolio
B) Selling stocks and replacing them with Canadian Treasury bills
C) Selling a .90 beta stock and buying a 1.1 beta stock
D) Selling the gold and buying more diversified stocks
E) Selling the large-company stocks and buying small-company stocks

21. What is the expected return on asset A if it has a beta of 0.3, the expected market return is 14%, and the risk-free rate is 5%?

A) 6.0%
B) 9.2%
C) 7.2%
D) 7.7%
E) 4.5%

22. Andrew bought an 8.5% annual coupon bond at par. One year later, he sold the bond at a quoted price of 98. During the year, market interest rates rose and inflation was 3%. What real rate of return did Andrew earn on this investment?

A) 3.40%
B) 3.50%
C) 6.40%
D) 6.50%
E) 6.70%

23. Okie, Inc. has some 8% preferred stock (stated value $100) outstanding. How much are you willing to pay for one share of Okie preferred stock if you require a 7% rate of return?

A) $87.50
B) $98.11
C) $114.29
D) $123.87
E) $125.14

24. Muon purchased 1,000 shares of Quark stock this morning at a price of $45.67 a share. The stock paid a dividend last year of $1.80 per share. Muon's required rate of return is 13% on this type of investment. What is the capital gains yield on Quark stock?

A) 7.41%
B) 8.72%
C) 9.06%
D) 13.85%
E) 16.94%

25. The weights placed on each source of financing when computing the WACC are based on the:

A) Most recent book values available.
B) The latest book values filed with the OSC.
C) Market value of the equity portion and the face value of the debt portion.
D) Market value of both the equity and the debt outstanding.
E) Par value of the equity and the face value of the debt outstanding.

26. Which one of the following will increase the WACC of a firm?

A) An increase in the marginal tax
B) An increase in the debt-equity ratio
C) An increase in the risk-free rate of return
D) A decrease in the level of risk of a project
E) A decrease in the yield-to-maturity of the bonds

27. A proposed project lasts three years and has an initial investment of $200,000. The after tax cash flows are estimated at $60,000 for year 1, $120,000 for year 2, and $135,000 for year 3. The firm has a target debt/equity ratio of 1.2. The firm's cost of equity is 14% and its cost of debt is 9%. The tax rate is 34%. What is the NPV of this project?

A) -$12,370
B) $13,687
C) $37,723
D) $46,120
E) $57,185

28. The internal rate of return should:

A) Not be used for ranking mutually exclusive projects.
B) Only be applied to small projects.
C) Be relied upon more heavily than the net present value.
D) Always result in the same decision as discounted payback.
E) Lead to correct decisions when comparing mutually exclusive projects.

29. Thomas's Tank Engines is considering a project that will cost $1.2 million to start. The project is expected to produce cash flows starting in year 2 of $269,000 a year for the following six years. What is the internal rate of return on this project?

A) 4.09%
B) 5.62%
C) 6.97%
D) 8.32%
E) 9.19%

30. Texa Soil Co. purchased a tract of land last year for $1.2 million. At that time, the company spent $50,000 in legal fees to have the land rezoned for commercial use and another $175,000 to have the land graded so that it is usable. The company is now trying to decide if they want to build one large retail store on the property or a strip mall consisting of smaller stores. Which of the costs identified above should be included in the project analysis to determine the best use of the property?

A) All of the identified costs
B) Only the cost of the land and the grading
C) Only the legal fees and the grading costs
D) Only the cost of the grading
E) None of the identified costs

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