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Major Changes in this Edition

Revised Structure of the Test Bank


Difficulty Level


Time Requirements and Financial Calculators


Debugging the Questions


Computerized Test Banks


Student Preparation for a Test Bank Exam

The Examination Process


Other Uses of the Test Bank

Grade Curving and the Computerized Grading System





Microsoft Excel Grade Record




An Overview of Financial Management



Financial Statements, Cash Flow, and Taxes



Analysis of Financial Statements



The Financial Environment:

Markets, Institutions, and Interest Rates



Risk and Rates of Return



Time Value of Money



Bonds and Their Valuation



Stocks and Their Valuation



The Cost of Capital


Chapter 10

The Basics of Capital Budgeting


Chapter 11

Cash Flow Estimation and Risk Analysis


Chapter 12

Other Topics in Capital Budgeting


Chapter 13

Capital Structure and Leverage


Chapter 14

Distributions to Shareholders:
Dividends and Share Repurchases


Chapter 15

Managing Current Assets


Chapter 16

Financing Current Assets


Chapter 17

Financial Planning and Forecasting


Chapter 18

Derivatives and Risk Management


Chapter 19

Multinational Financial Management


Chapter 20

Hybrid Financing:
Preferred Stock, Leasing, Warrants, and Convertibles


Mergers and Acquisitions


Chapter 21


This Test Bank is designed for use with Fundamentals of Financial Management,
Tenth Edition.

Major Changes in this Edition

At the University of Florida, where the introductory finance course is taught
in a mass lecture to over 1,000 students, machine-gradable, multiple-choice
examinations are absolutely necessary.
Further, the questions must be
absolutely unambiguous (or at least very close to unambiguous), because it is
physically impossible to clarify questions once a test is underway (we test in
10 large rooms spread over a large campus), and a testing system that students
perceive as being even slightly unfair would cause a riot. The test questions
should also require an understanding of concepts and relationships, not just a
good memory, and that makes the task of test construction much more difficult.
We have taught the course for the past three years, as we were revising
Fundamentals, and as much time went into the preparation of test questions as
into the text itself. At this point, we are so satisfied with the Test Bank
that we would still use objective exams even if we went back to a class size
of 30.
Significant changes were made in Fundamentals, and the Test Bank
reflects these changes.
Many new problems were added.
This edition of
Fundamentals has been written under the assumption that financial calculators
will be used.
Consequently, only financial calculator solutions are shown,
and there are no separate financial calculator sections.
In addition, to
streamline this edition, some materials have been moved to web appendices.
Test bank problems related to this material have been included in a Web
Appendix Section within each chapter.
Both the regular South-Western computerized test bank (ExamView) and the
Microsoft Word test bank make it easy to construct exams that automatically
have answer keys attached, to edit exam questions, to add your own questions,
and to produce alternative versions of the same exam. More will be said about
the computerized test banks later in this preface.
Instructors who use the paper copy of the Test Bank will also benefit
from the descriptor line for each question/problem.
Rather than searching
through each chapter for questions dealing with specific topics, the
instructor can now turn to the solution listing, which immediately follows the
problem listing, and scan the questions by topic. The descriptor line in the
solution listing has the question topic, difficulty, answer, notation for
whether the problem is new or revised, and worked-out problem solution. The
instructor can select a set of potential exam questions in this manner and
then examine each question individually to construct the actual exam.

Revised Structure of the Test Bank

We have had a test bank for many years.
Over time, as we developed new
questions, we added them to the bottom of the set for the appropriate chapter.
This resulted in a random ordering of questions with regard to both topic and
level of difficulty. This made it difficult for us to insure that the Test
Bank contained a balanced set of questions, and it also made it difficult for
instructors to construct a balanced exam.
To make the Test Bank easier to use, we structured the questions within
each chapter as follows:







Multiple Part



Multiple Part

Within each of these categories, we grouped the questions by topic.

addition, the question descriptor line found above each question includes the
difficulty level, as well as the letters N and R to indicate new and
revised questions to the Test Bank. The difficulty level is preceded by the
label DIFF:.

Difficulty Level
The questions and problems range from quite easy to very difficult. Some are
easy to categorize, but others are not--what might be a hard problem to one
set of students might be easy to another set. These differences arise due to
differences in students innate abilities and backgrounds, to the time an
instructor spends on a topic, and, for some of the numerical problems, on the
type of calculator a student has. Also, if pre-exam review sessions are held,
and a particular type of problem is covered, then that will lower the
difficulty level for other problems of that type.
Still, the difficulty
groupings will help instructors select a reasonable mix of questions for a
given quiz or exam.

Time Requirements and Financial Calculators

We considered indicating approximately how long it would take to work the
various problems, but due to the differences noted in the previous sections,
this would do more harm than good. Instructors should, therefore, look at the
questions and the worked-out solutions to the numerical problems and decide for

themselves how long it will take their students to work them. Generally, the
harder problems will require the most time.
We always make up an exam, have several student assistants take it, and
then adjust it until it seems feasible for a two-hour exam. Further, we give
exams at night, scheduled for two hours, and generally make them terminate on
schedule. However, if it is obvious early on that the exam is too long even
for the best of the students, we may extend the time for an extra 15 or 20
minutes. We make it clear to the class, though, that these exams are like the
SAT or GMAT exams in that some students will not be able to complete all the
questions within the allotted time.
The type of calculator used is extremely important in determining the
time required to work time value of money, bond valuation, stock valuation,
and capital budgeting problems. At Florida, we made a College-wide decision
to require students to have and to learn to use financial calculators, and
exams reflect that situation--it would be virtually impossible for anyone to
pass the type of exams we use without a financial calculator. With the cost
of a relatively powerful calculator down to about $30, and with their use so
pervasive in business, we concluded that the time had come to force business
students to learn how to use them.
At any rate, it is important for
instructors to think about what type of calculator his or her students will be
using when making up exams.

Debugging the Questions

The questions/problems in the Test Bank have all been used in class, and they
are as unambiguous as such questions can be. Further, they are generic in the
sense that they can be answered on the basis of material found in the text
rather than instructor-specific information.
Obviously, we took care to
insure that they are accurate, and that the correct answer is listed in the
set of possible answers. Indeed, the quality control procedures were more
strenuous for the Test Bank than for the text per se. Still, because of the
severe consequences of giving an exam that contains errors, we would never
give an exam without first taking it, and in a large class without having
several teaching assistants also take it, both to check for errors and to get
an idea of how long it will take.

Computerized Test Banks

The Test Bank comes in three versions:
(1) the paper copy which you are
reading, (2) diskettes which contain South-Westerns regular computerized test
bank (ExamView), and (3) diskettes formatted in Microsoft Word.
The third
option was originally added because we had word processing files and we
personally, along with a number of other instructors who were familiar with
the word processing programs, felt that it was easier to work with these files
than with South-Westerns regular computerized test bank.
Now, though, the
South-Western ExamView test bank has been improved to the point where even
people who are familiar with Microsoft Word might want to invest the time
required to learn the ExamView system.

Adopters may obtain the regular computerized test bank or the Microsoft
Word version by contacting their local South-Western sales representative.
To use ExamView, one must install it on his or her computer and then
read through the documentation provided.
Like all sophisticated software,
this requires a couple of hours. However, if you plan to use the Test Bank
and will be making up a number of exams, the product is worth the time
invested--it really is good.
If you are familiar with Microsoft Word and do not want to invest the
time to learn how to use ExamView, then we would recommend the Microsoft Word
files. Most departmental secretaries can use Microsoft Word or some
comparable system, and with our files the physical construction of exams is
quite easy. First, scan through the paper copy and select what you regard as
the proper mix of questions and problems.
Make a list of them, by number.
Then retrieve (or delegate the job to the departmental secretary) both the
Header.doc file and the file for the first chapter covered. The Header.doc
file contains the exam heading and exam instructions that can be edited, along
with the appropriate font specifications. Questions copied from the original
test bank diskette should be pasted onto the Header.doc file.
With the appropriate chapter file retrieved, scroll down to the first
question to be taken from that chapter, copy the question (do not cut the
question as this will alter the original test bank file) except for the first
line containing the answer, open the Header.doc file and paste the question to
the Header.doc file, switch back to the original test bank file, screen to the
second selected question, and so forth. The font may change when the question
is pasted into the Header.doc file. This can be easily corrected by selecting
Replace from the Edit pull-down menu, clicking on the Format button at
the bottom of the Dialog box and clicking on Font.
Select Times New
Roman as the Find Font, then click OK.
Click in the Replace With
field, then click the Format button again.
Click Font, then select
Courier New and Size 10 before clicking OK.
Then click Find Next
When the text is highlighted click Replace All.
Word makes the
change for all text in Times New Roman.
We generally use 20 questions on an exam, and it takes us about 30
minutes to construct an exam once the questions have been selected. Its even
easier to give the list of questions and the diskette to the departmental
secretary; he or she can then get it done in about 15 minutes.
We realize that Microsoft Word is not the only word processing system.
Although we are at this point unable to offer the diskette in other formats,
it is easy to translate from one system to another, at least for most systems.

Student Preparation for a Test Bank Exam

The test bank
at the end of
from the Test
prepared for

questions and problems are different from most of the problems

the text chapters, and if a student goes cold into an exam taken
Bank, he or she will be thrown for a loop. Students need to be
a test bank exam, and working end-of-chapter problems is not

sufficient preparation.


The difficulty is that the end-of-chapter problems are designed

primarily to help students learn the material, including how it is used in
practice, whereas the test bank questions are designed to test how much
knowledge the students have attained.
Many of the test bank questions are
convoluted, and this forces students to work backwards, from what would
normally be the answer to what would normally be an input. Also, students do
not have severe time constraints when they work end-of-chapter problems, and
this makes the test bank questions seem even more difficult. We believe that
all conscientious students should be able to work all of the end-of-chapter
problems without help, but we like for our exams to challenge even the best of
our students, and problems that are challenging to the top students turn out
to be virtually impossible, in view of the time constraints, for weaker or
even average students.
With all this in mind, we put a number of test-bank-type questions into
the text (in the end-of-chapter problems, identified as exam-type problems),
into the Study Guide, and into Blueprints. Our students tell us that working
through the Study Guide is particularly useful in getting ready for the exams.
Also, we always put some of our old exams in a Course Pack which students
can purchase from an off-campus copy center, so our students can get a good
idea of what the exams will be like.
Finally, our TAs go over test-type
questions in pre-exam review sessions.

The Examination Process

At Florida we give two 2-hour midterms plus a 2-hour final exam.
We have
approximately 1,000 students per semester, and they all take a common exam.
We have tried using a few essay questions or regular problems, but we
concluded that it is too much work to grade them, so we now use only machinegradable multiple-choice exams.
Our students must sit close together during the exam, so cheating is a
potential problem.
We control it by making up four exams--each one on
different color paper. The only difference in the exams is that the questions
are arranged in different order. (This is easy to do with the Microsoft Word
version as the test questions have been numbered using endnotes, so questions
can be rearranged within the file and will renumber automatically.
remember to save the file with the renumbered questions as a separate new
file.) Exams are passed out so that no student sits next to anyone with the
same color exam. Students are allowed to use formula sheets (taken from the
back of the textbook), calculators, compound interest tables, and scratch
paper. Also, we allow students to construct an 8 by 11 inch, front-and-back,
cheat sheet with anything they want to include. (Students consistently tell
us that they rarely use the cheat sheets during the exam, but they learn a lot
making them up, and having them reduces stress before and during exams.)
Students must bring picture ID cards, and a number of TAs proctor the exams.
With this process, we believe (and our students share our perception) that
virtually no cheating occurs.
(Some other large courses have had terrible
problems, even to the extent of having had to throw out and redo an exam.) We
use the same process when we teach a class with 25 to 30 students, except for
the IDs and student proctors.

We use 10 conceptual multiple-choice questions and numerical problems on

each exam. We do not use true/false questions because they can be a problem-guessing can play too large a role in determining grades.
However, if you
want to use true/false questions, the multiple-choice conceptual statements
can be broken down to make five true/false questions.

Other Uses of the Test Bank

The primary use of the Test Bank is to make up objective exams for use in
large classes where it is simply not feasible to grade papers in the
traditional way. However, the questions can be used for several other
1. To make up a regular exam. It is easy to use the conceptual questions and
numerical problems to make up a regular exam--just delete the set of
answers and ask for an essay answer or worked-out problem solution.
2. For additional problems. We draw from the Test Bank to make up problems
that our TAs use in their pre-exam review sessions.
One could also use
them for make-up exams, extra-credit work, and the like.
3. To create new multiple-choice test questions. The computerized versions of
the Test Bank make it easy to create new problems and questions.
example, statements in different multiple-choice questions can be shuffled
to create new questions. Similarly, data in the problems, such as years to
maturity, coupon rates, growth rates, betas, et cetera, can be changed, and
wording can be altered, to expand the Test Bank to an almost unlimited

Grade Curving and the Computerized Grading System

One problem that we have encountered involves situations where one exam turns
out to be more difficult than another.
This becomes a problem if some
students are excused from one of the exams, or if we use make-up exams that
turn out to be more or less difficult than the regular exams. (This problem
is not restricted to courses where one uses the Test Bank, and it is
especially severe if one permits students to drop the lowest grade in a series
of exams.) To solve this problem, we developed a Microsoft Excel model that
automatically curves all of the grades on each exam and adjusts them to a
common mean and standard deviation. Thus, a students grade will not be helped
or hurt if he or she happens to have been excused from an exam that turns out
to be easier or harder than the others. All of this makes the final grades
more accurately reflect students knowledge, and it improves students
perceptions of the fairness of the grading system.
The Excel model is also useful for three other
matically averages students grades, and it produces
generally weight the midterms 30 percent each and the
We can specify a mean grade on each exam such that the

purposes: (1) It autoa weighted average (we

final 40 percent). (2)
grade distribution will

produce any specified GPA. For example, if we want to end up with a 2.7 GPA,
the model will produce that result.
This is useful in the 1,000-student
course, but it is also useful in our advanced courses, where there are
multiple sections of a given course and we would prefer that students grades
not be too dependent on which instructor they were assigned to.
(3) The
program makes it easy to sort by students grades to obtain a listing of
students by rank order, and to sort by social security number for purposes of
posting grades without names.
Since other instructors may find the model useful, we have included it
in the test bank diskette, under the filename GRADES.xls.
More detail and
instructions on the use of the model are given following this Preface.

We would like to thank Professors Andy McCollough, Craig Tapley, Lou Gapenski,
Bob Radcliffe, and Carolyn Takeda for permitting us to use some of their old
exam questions, and also for giving us many insights into the whole
examination process. We also appreciate the work done by a whole host of TAs
and graduate students, over many years, in helping to develop and debug the
questions/problems. Dana Aberwald Clark did her usual good job of riding herd
on all of us, and making sure the Test Bank was completed on time and was
consistent with the text of Fundamentals. Finally, Susan Whitman took care of
the massive typing job; her care and dedication is much appreciated.

We would very much appreciate hearing from test bank users--what difficulties
are you having, and what can we do to improve it? If you have any complaints
or suggestions, please address your correspondence to Joel Houston at the
address below.
Eugene F. Brigham
Joel F. Houston
4723 NW 53rd Ave., Suite A
Gainesville, FL 32606
e-mail address:



Microsoft Excel GRADE RECORD

Several of us at Florida use a Microsoft Excel program to record and adjust
students grades. The program is saved on the test bank diskette under the
filename GRADES.xls, and a printout is given in Table 1 below. Here are some
notes on why we like the program, and some hints on how to use it.
1. One reason for using a spreadsheet gradesheet is the ease with which one
can calculate students final grades on a weighted-average basis, adjust
raw exam scores so as to produce a uniform average across exams, sort so
as to obtain a rank ordering of students standings in the class, and so
on. Spreadsheets are great for such things.
2. For simplicity, the model given on the diskette and shown in Table 1 is
for only 5 students and 3 exams. It would be easy enough to add rows and
columns to accommodate any number of students and exams, to include
quizzes, homework, term papers, and so on, and to base the final weighted
grades on all this work.
Care must, of course, be taken to modify the
formulas when additional columns are added.
Also, in practice, we use
named ranges, but we used direct cell references in the model given on the
diskette because this facilitates understanding.
3. Consider next the matter of getting a weighted average, say giving 30
percent of the weight to each of two midterms and 40 percent to the final
exam. It is time consuming to make this calculation by hand for a large
class, but almost trivial using a spreadsheet. More complicated schemes
can be introduced, such as disregarding the lowest exam score and giving
more weight to the remaining ones, and the like. The sample spreadsheet
given in Table 1 calculates the final weighted average in Column J, and it
is programmed to give equal weights, but by adjusting the formula in J5
and copying to the range J6.J9, one can produce any weighting scheme.
4. There is an advantage to having uniform averages across exams, primarily
in the event that some students miss exams, take makeups, or are allowed
to exempt out of an exam, but also because students get traumatized if the
exam turns out to be relatively difficult and the grades are consequently
low, or overly confident if the grades are unusually high.
We can tell
students that the final grades will be curved, but they are still confused
and upset.
We reduce this problem by using a formula that adjusts all
exams to a common mean. The formula is shown in spreadsheet language in
the lower part of Table 1, but in words, here is what it does:
Adj. Grade = (Raw grade - Raw average)(Forced SD/Raw SD) + Forced average.
We input the forced average grade into Cell L18 and the forced standard
deviation (SD) into Cell L19. Those values are then used in the formula
in Column B (and above) to calculate each students Adjusted Grade. The
average of the Adjusted Grades, for the exam, is equal to the forced mean,
and the final standard deviation is equal to the forced standard


5. At Florida we do not force Grade Point Averages for a class to equal any
particular number, but GPAs for different courses are published, and many
of us try to insure that the grades in our own courses are not too far out
of line with those in other courses, and especially with other sections of
the same course.
Therefore, we built a feature into the Excel model
which can be used to help produce a student letter grade distribution
which produces a reasonable class GPA. The same process also produces a
situation where 90 and up = A, 80-89 = B, 70-79 = C, 60-69 = D, and below
60 = F (or any other setup, including the use of + and - grades). This
subroutine involves formulas in Columns L and M which look up a students
points as shown in Column J in the Lookup table contained in the range
A16.C20 and then assign the student a Grade Point and a letter grade. The
model also shows (in Cell N15) the class GPA.
If the class GPA is too
high or too low given our target reference range, we merely change the
forced average grade shown in L18, and the entire worksheet is instantly
We change the value in Cell L18 until we get a
reasonable class GPA. With only 5 students, as in the sample model, it
is difficult to produce a precise target GPA, but with 20 or more
students, this is not difficult.
6. When we use the model, we build it up slowly over the term, having just
one data set after the first exam, two after the second, and so on. Also,
we sort on the total points and use the printout to show the ranked order
to students (identified by SSN) when they ask about where they stand in
the class. This is easy, and it lets students know their standing with a
minimum of explanation.
Students understand and approve of our grading system. The cost to the
instructor is low, and the value to the students is high. If you have easy
access to a spreadsheet program and are familiar with it, we recommend that
you consider using our program.

1In actual use, we set the worksheet on manual recalculation to speed up data entry.

Table 1



When copying the formula for the adjusted grades to Column E

after the 2nd midterm, it is necessary to change all Cs to Fs,
and then to Is when copying the formula into Column H.


Copy B11.C13 into E11.F13 and then to H11.I13 after the 2nd
midterm and the final exam.


There is nothing magic about the forced SD; rather arbitrarily,

we decided to use 15.0.
That tends to put 68 percent of the
class within the range 65.0 - 95.0 when combined with an 80


We work toward a target class GPA as shown in N15. We put the

pointer on L18 and adjust the forced average until we obtain the
GPA we want. The procedure works well with a large class.