Questions -
Q1. What is one fundamental decision in financial management?
a. Choosing projects for the firm to pursue.
b. Identifying the productive assets the firm should buy
c. determine which bank to use
d. decide which items go into the 10k statement
e. Hiring the audit committee for the board of directors
Q2. A corporation is
a. a legal entity or "person" distinct from its owners
b. only interested in making money
c. two or more owners joined together legally to manage a business
d. owned by a single individual
e. a legal construct used to avoid personal liability
Q3. Net Working Capital is defined as:
a. break-even analysis of project
b. the difference between current assets and current liabilities
c. the cash flows from an investment
d. the time it takes to recover your investment
e. not easily defined
Q4. Which one of the following statements is true?
a. The financial manager is responsible for making decisions that are in the best interest of the firm's owners.
b. The local Republican Party is a stakeholder in a local firm that makes no political donations to either party.
c. A patent is a productive asset for a technology-based firm.
d. Intangible assets generate most of a firm's cash flows.
Q5. Which one of the following statements is false?
a. The demand for a potential business product, as well as the identification of what product or services is to be produced, are both contained in a business plan.
b. The most fundamental way that a business can grow in size is from the reinvestment of cash flows or earnings.
c. A good capital budgeting decision is one in which the benefits are worth more to the firm than the cost of the asset.
d. The dollar difference between long-term assets and liabilities is called working capital.
Q6. Which one of the following statements is true?
a. Maximizing revenue should be the goal of the firm.
b. An agency problem can arise when the agent of the firm is the sole owner of the firm.
c. The owners of a firm are affected by agency costs.
d. Corruption in business does not affect the functioning of the financial markets.
Q7. As of June 30, 2012, Superior Company has Current Assets with a book value of $600,000 and a market value of $550,000. The Long-term Assets have a book value of $980,000 and market value of $850,000. Its Current Liabilities have a book and market value of $300,000 and the Long-term Liabilities have book value of $700,000 with market value of $600,000. What is the difference between the book value and market value of its Stockholders' Equity?
a. $180,000
b. $500,000
c. $80,000
d. $130,000
Q8. In constructing a Cash Flow Statement which of the following working capital account represents a source of cash for the firm?
a. Decrease in Accounts Receivable
b. Increase in Accounts Receivable
c. Decrease in Accounts Payable
d. Decrease in accrued Taxes Payable
Q9. Which of the following statements is CORRECT?
a. The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year.
b. The balance sheet for a given year, say 2012, tells us how much money the company earned during that year.
c. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the book value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
d. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
Q10. On its 2012 balance sheet, Star Wars Galaxy showed $245 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
a. If the company had a positive Net Income in 2013 they must have paid dividends.
b. The company must have had zero net income in 2012.
c. The company must have paid out half of its earnings as dividends.
d. The company must have paid no dividends in 2012.
Q11. Yoda Enterprises recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?
a. The company's operating income declined.
b. The company's interest expense increased.
c. The company's expenditures on fixed assets declined.
d. The company's cost of goods sold increased.
Q12. Catherine Aragon, Inc. and Anne Boleyn & Co. are both marriage planning companies based in New York City. Henry Aite, a financial consultant notices that the current ratio of Catherin Aragon, Inc. is higher than the current ratio of Anne Boleyn & Co. What conclusion can Henry Aite draw about the quick ratio of Anne Boleyn & Co.
a. Anne Boleyn & Co. has a higher quick ratio than Catherine Aragon, Inc.
b. Anne Boleyn & Co. has a lower quick ratio than Catherine Aragon, Inc.
c. There is insufficient information to make a determination about Anne Boleyn & Co's quick ratio.
Q13. Catherine Aragon, Inc. and Anne Boleyn & Co. both reported earnings after the market closed yesterday. Catherine Aragon, Inc. closed at $45 per share while Anne Boleyn & Co. closed at $37.50. Both companies reported exactly the same dollar earnings per share. Which of the following statements is correct:
a. Catherine Aragon, Inc. has a higher market to book ratio.
b. Catherine Aragon, Inc. has a higher Price Earnings ratio.
c. The risk of investing in Catherine Aragon, Inc. is higher than the risk of investing in Anne Boleyn & Co.
d. Anne Boleyn & Co. has a greater growth opportunities.
e. All of the above statements are true.
Q14. Robber Baron Inc. currently shows a debt of $1 million on its balance sheet on which it pays interest of $100,000/year. Common Equity is $4 million. On its most recent income statement it showed an EBIT of $1 million and it paid taxes at the rate of 40% on its EBT. Robber Baron Inc. has negotiated an additional loan of $1 million from Money Shark & Co. which will double its interest expenses for the coming year. If operating income remains at 20% of total assets, and if its tax rate does not change, which of the following will be true:
a. The company's net income will increase.
b. The company's return on assets will fall.
c. The company's return on equity will remain the same.
d. Statements a and b are correct.
e. All of the answers above are correct.
Q15. A significant limitation of financial statement and ratio analysis is:
a. Managers can easily underestimate cash flows
b. A high degree of dependence on leverage to maximize profits
c. The use of forecasted earnings and future sales projections
d. The lack of theory to guide the decision maker
Q16. A rational individual would prefer a loan based on __________ interest and an investment earning __________ interest.
a. compound; compound
b. compound; simple
c. simple; compound
d. simple; simple
e. complex; compound
Q17. Someone is purchasing a 20-year, 6 percent annuity at a cost of $72,000. The annuity will pay annual payments. What is the amount of each payment?
a. $6,997.08
b. $7,100.00
c. $6,896.72
d. $6,277.29
e. $7,410.69
Q18. Which of the following interest rates will come closest to doubling invested money in five years? Do not use the rule of 72.
a. 13%
b. 14%
c. 15%
d. 16%
Q19. Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old. If the fund earns 10 percent interest compounded annually, what is the value of the fund today?
a. $104,602
b. $6,575
c. $5,985
d. $6,875
Q20. CAPM predicts that return on a stock is 11.2%. Risk-free rate is 4% and the market risk premium is 6%. What is stock's beta?
a. 1.8
b. 1.2
c. 1.4
d. .8
Q21. A portfolio of three stocks has an expected rate of return of 14%. Stock A makes 25 % of the portfolio and has an expected rate of return of 6%; Stock B makes 50% and has a expected rate of return of 10%. Stock C is the third stock in the portfolio. The expected Rate of Return on stock C will be:
a. 25%
b. 20%
c. 30%
d. 32%
Q22. Common stock of company Zeta has a return of 4% with a probability of .2; return of 10% with a probability of .6 and a return of 20% with a probability of .2. The standard deviation of the stock return will be;
a. 7.30%
b. 8.25%
c. 5.15%
d. 4.32%
Q23. Bill Gates decides to invest all of his savings into Apple stock.
What is your best response regarding his investment decision?
a. Great idea because Apple's products are much cooler than Microsoft's.
b. Poor idea because Apple stock is overvalued.
c. Great idea because Apple stock is undervalued.
d. Poor idea because Bill's portfolio will not be diversified.
Q24. On August 5, 2011, Standard & Poor's downgraded U.S. Treasury securities from AAA to AA+ for the first time in history. What does this mean?
a. The Capital Asset Pricing Model no longer works properly.
b. There is a slightly higher default risk for U.S. Treasury securities.
c. Nothing because Moody's and Fitch did not lower their ratings.
d. U.S. Treasury bills are no longer risk free.
Q25. As an investor adds more and more securities to her portfolio, which of the following is FALSE:
a. Standard deviation will decrease.
b. Diversification will eventually have minimal effect.
c. Systematic risk will approach zero.
d. Diversifiable risk will approach zero.
Q26. Suppose you are considering two projects, A and B, that each have a required rate of return of 10%. Both projects cost $5,000 and have a Net Present Value of $50. Project A has an IRR of 16% and Project B has an IRR of 15%. What is the crossover rate for the NPV profiles of these two projects?
a. 0%
b. 10%
c. 15%
d. 16%
e. 12%
Q27. Superior analytical techniques, such as NPV, used in combination with cost of capital adjustments, can overcome the problem of poor cash flow estimation in decision making.
A) TRUE
B) FALSE
Q28. What is the Modified Internal Rate of Return of a project with a three year duration, cost of capital of 10%, initial outlay of -10,000, and cash inflows of $5,000 per year between years 1 through 3 (round to the nearest percent)?
a. 12%
b. 14%
c. 16%
d. 18%
Q29. What is the discounted payback period of a project with initial outlay of $60,000 and cash inflows of $30,000 over the first three years of the project and $20,000 over the following three years of the project and a cost of capital of 10%?
a. 2.1 years
b. 2.4 years
c. 3.3 years
d. 3.6 years