Financial Management

Chapter 1 Quiz

1) All of the following are key strengths of a corporation EXCEPT

A) access to capital markets.
B) limited liability.
*C) low organization costs.
D) readily transferable ownership.

2) Which of the following legal forms of organization is most expensive to organize?

A) sole proprietorships
B) partnerships
*C) corporations
D) limited partnerships

3) The true owners of the corporation is/are the

A) board of directors.
B) chief executive officer.
*C) stockholders.
D) creditors.

4) A major weakness of a partnership is

A) limited liability.
*B) difficulty liquidating or transferring ownership.
C) access to capital markets.
D) low organizational costs.

5) Managerial finance
*A) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
B) involves the design and delivery of advice and financial products.
C) recognizes funds on an accrual basis.
D) devotes the majority of its attention to the collection and presentation of financial data.

6) The financial manager recognizes revenues and expenses utilizing

A) the accrual method.
*B) the actual inflows and outflows of cash.
C) standardized, generally accepted, accounting principles.
D) the revenue method.

7) Making financing decisions includes all of the following EXCEPT

A) determining the appropriate mix of short-term and long-term financing.
B) deciding which individual short-term sources are best at a given point in time.
*C) analyzing quarterly budget and performance reports.
D) deciding which individual long-term sources are best at a given point in time.

8) The amount earned during the accounting period on each outstanding share of common stock is called
A) a common stock dividend.
*B) earnings per share.
C) net profits after taxes.
D) net income.
9) Profit maximization does NOT take into consideration
*A) risk and cash flow.
B) cash flow and stock price.
C) risk and eps.
D) eps and stock price.

10) Return and risk are the key determinants in share price. Increased return results in __________, other
things remaining the same.
A) a lower share price.
*B) a higher share price.
C) an unchanged share price.
D) an undetermined share price.

11) A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased
during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it
has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are
A) $0 and $150,000 respectively.
B) $37,500 and -$150,000 respectively.
*C) $37,500 and -$112,500 respectively.
D) $150,000 and $112,500 respectively.

12) The conflict between the goals of a firm's owners and the goals of its nonowner managers is
*A) the agency problem.
B) incompatibility.
C) serious only when profits decline.
D) of little importance in most large U.S. firms.

13) Most businesses raise money by selling their securities in

*A) a public offering.
B) a private placement.
C) a direct placement.
D) a stock exchange.

14) The __________ is created by a number of institutions and arrangements that allow the suppliers and
demanders of long-term funds to make transactions.
A) financial market
*B) capital market
C) money market
D) credit market

15) The tax liability of a corporation with ordinary income of $105,000 is __________.
A) $42,000
B) $35,700
C) $23,950
*D) $24,200
Answers:

1) C
2) C
3) C
4) B
5) A
6) B
7) C
8) B
9) A
10) B
11) C
12) A
13) A
14) B
15) D

Financial Management
Chapter 3 Quiz

1) The stockholder's report may include all of the following EXCEPT

*A) a cash budget.
B) an income statement.
C) a statement of cash flows.
D) a statement of retained earnings.

2) Earnings available to common shareholders are defined as net profits

A) after taxes.
*B) after taxes minus preferred dividends.
C) after taxes minus common dividends.
D) before taxes.

3) The __________ represents a summary statement of the firm's financial position at a given point in time.
A) income statement
*B) balance sheet
C) statement of cash flows
D) statement of retained earnings

4) A firm has the following accounts and financial data for 2012:

Sales Revenue $ 3,060 Cost of goods sold $1,800

Accounts Receivable 500 Preferred stock dividends 18
Interest expense 126 Tax rate 40%
Total oper. expenses 600 Number of shares of common
Accounts payable 240 stocks outstanding 1,000

The firm's net profits after taxes for 2012 is __________.

A) -$206
B) $213
*C) $320
D) $206

5) __________ analysis involves the comparison of different firms' financial ratios at the same point in time.
A) Time-series
*B) Cross-sectional
C) Marginal
D) Quantitative

6) The analyst should be careful when evaluating a ratio analysis that

A) the overall performance of the firm may be judged on a single ratio.
*B) the dates of the financial statements being compared are from the same time.
C) pre-audited statements are used.
D) all of the above.

7) The __________ ratios are primarily measures of return.

A) liquidity
B) activity
C) debt
*D) profitability

8) A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
A) improve its collection practices, thereby increasing cash and increasing its current and quick ratios.
B) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and
increasing the current and quick ratios.
*C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.
D) increase inventory, thereby increasing current assets and the current and quick ratios.

9) The __________ ratio measures the proportion of total assets provided by the firm's creditors.
A) total asset turnover
B) fixed asset turnover
C) current
*D) debt
 FIGURE 2.1

Balance Sheet
Cole Eagan Enterprises
December 31, 2012

Cash $4,500 Accounts Payable $10,000

Accounts Receivable Notes Payable
Inventories Accruals 1,000
Total Current Assets Total Current Liabilities
Net Fixed Assets Long-Term Debt
Total Assets Stockholders’ Equity
Total Liab. & S.E.

Information
1. Sales totaled $110,000.
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.

10) Inventories for CEE in 2012 were __________. (See Figure 2.1.)
A) $36,667
B) $32,448
*C) $27,500
D) $ 9,167

11) The __________ is a popular approach for evaluating profitability in relation to sales by expressing each
item on the income statement as a percent of sales.
A) retained earnings statement
B) source and use statement
*C) common-size income statement
D) profit and loss statement

12) The __________ measures the percentage of each sales dollar remaining after ALL expenses, including
taxes, have been deducted.
*A) net profit margin
B) operating profit margin
C) gross profit margin
D) earnings available to common shareholders
13) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total
liabilities of $750,000 has a return on equity of
A) 20 percent.
B) 15 percent.
C) 3 percent.
*D) 4 percent.

14) In the DuPont system, the return on equity is equal to

A) (net profit margin)x(total asset turnover).
B) (stockholders' equity)x(financial leverage multiplier).
*C) (return on total assets)x(financial leverage multiplier).
D) (return on total assets)x(total asset turnover).

15) A firm with a substandard return on total assets can improve its return on equity, all else remaining the
same, by
*A) increasing its debt ratio.
B) increasing its total asset turnover.
C) decreasing its debt ratio.
D) decreasing its total asset turnover.
Answers:

1) A
2) B
3) B
4) C
5) B
6) B
7) D
8) C
9) D
10) C
11) C
12) A
13) D
14) C
15) A

Financial Management
Chapter 4 Quiz

1) The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for __________
purposes.
A) financial reporting
*B) tax
C) managerial
D) cost accounting

2) A corporation
*A) may use different depreciation methods for tax and financial reporting purposes.
B) must use different depreciation methods for tax and financial reporting purposes.
C) must use the same depreciation method for tax and financial reporting purposes.
D) must use different (than for tax purposes), but strictly mandated, depreciation methods for financial
reporting purposes.

3) Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery
period. What is the depreciation expense in year 3?
A) $1,500
B) $1,200
*C) $1,900
D) $2,100

4) The cash flows from operating activities of the firm include

A) dividends paid.
B) interest expense.
*C) cost of raw materials.
D) stock repurchases.

5) All of the following are uses of cash EXCEPT

A) dividends.
B) a decrease in notes payable.
 C) an increase in inventory.
*D) a decrease in accounts receivable.

6) Cash flows associated with purchase and sale of both fixed assets and business interests are called
*A) investment flows.
B) financing flows.
C) operating flows.
D) none of the above.

7) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered
*A) a financing cash flow and investment cash flow, respectively.
B) an investment cash flow.
C) a financing cash flow and operating cash flow, respectively.
D) a financing cash flow.

8) A firm has just ended the calendar year making a sale in the amount of $150,000 of merchandise purchased
during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it
has yet to collect at year end from the customer. The net profit and cash flow for the year are
A) $37,500 and -$150,000 respectively.
*B) $37,500 and -$112,500 respectively.
C) $0 and $150,000 respectively.
D) $150,000 and $112,500 respectively.

9) The financial planning process begins with _____ plans.

A) operating financial
B) production
C) sales
*D) strategic financial

10) Inputs to short-term financial plans include all of the following EXCEPT
A) sales forecasts.
B) production plans.
C) fixed asset outlays.
*D) all of the above.

11) Cash receipts in the cash budget include

A) cash sales.
B) collections of accounts receivable.
C) interest received.
*D) all of the above.

12) Net cash flow equals

*A) cash receipts minus cash disbursements.
B) ending cash balance minus the desired minimum cash balance.
C) operating cash flow minus net fixed asset investment.
D) cash flow from financing activities plus cash flow from financing activities.

13) The percent-of-sales method for developing a pro forma income statement expresses the various income
statement items as
A) percentages of historical sales.
B) net of sales.
 C) percentages of assets.
*D) percentages of projected sales.

14) A positive value for “external financing required” on the pro forma balance sheet means
A) the firm’s forecast financing is in excess of its needs.
*B) the firm must raise funds externally to support the forecast level of operation.
C) the firm is about to enter bankruptcy.
D) the total assets do not equal the total liabilities and stockholders’ equity.

15) Free cash flow represents the amount of cash flow available to
A) management.
B) employees.
*C) investors.
D) potential stockholders.
Answers:
1. B
2. A
3. C
4. C
5. D
6. A
7. A
8. B
9. D
10. D
11. D
12. A
13. D
14. B
15. C

Financial Management
Exam Chapters 1-3

Multiple Choice – 3 points each

1) Under which of the following legal forms of organization, is ownership readily transferable?
A) limited partnerships
B) partnerships
C) sole proprietorships
D) corporations

2) Agency costs include all of the following EXCEPT

A) cost of goods sold.
B) monitoring expenditures.
C) bonding and structuring expenses.
D) opportunity costs.

3) By definition, the money market involves the buying and selling of

A) stocks and bonds.
B) flows of funds.
C) funds that mature in more than one year.
D) short-term funds.

4) The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is
A) 46 percent.
B) 15 percent.
C) 34 percent.
D) 23 percent.

5) In a corporation, the members of the board of directors are elected by the

A) creditors.
B) employees.
C) chief executive officer.
D) stockholders.

6) The financial manager is interested in the cash inflows and outflows of the firm, rather than the accounting data, in
order to ensure
A) the ability to acquire new assets.
B) the ability to pay dividends.
C) solvency.
D) profitability.

7) The primary goal of the financial manager is

A) minimizing risk.
B) maximizing profit.
C) minimizing return.
D) maximizing wealth.

8) Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations.
Congress did this to
A) avoid double taxation on dividends.
B) encourage corporations to invest in each other.
C) increase tax revenue.
D) lower the cost of equity financing for corporations.

9) Operating profits are defined as

A) sales revenue minus cost of goods sold.
B) gross profits minus operating expenses.
C) sales revenue minus depreciation expense.
D) earnings before depreciation and taxes.

10) Candy Corporation has pretax profits of $1.2 million, an average tax rate of 34 percent, and it pays preferred
dividends of $50,000. There are 100,000 shares outstanding and no interest expenses. What is Candy Corporation's
earnings per share?
A) $7.59
B) $7.42
C) $3.91
D) $4.52

11) To analyze the firm's financial performance, the following types of ratio analyses EXCEPT __________ may be
used.
A) cross-section analysis
B) marginal analysis
C) time-series analysis
D) combined analysis

12) __________ ratios are a measure of the speed with which various accounts are converted into sales or cash.
A) Profitability
B) Liquidity
C) Activity
D) Debt
 FIGURE 2.1

Balance Sheet
Cole Eagan Enterprises
December 31, 2002
___________________________________________________________________
Cash $4,500 Accounts Payable $10,000
Accounts Receivable Notes Payable
Inventories Accruals 1,000
Total Current Assets Total Current Liab.
Net Fixed Assets Long-Term Debt
Total Assets Stockholders' Equity
Total Liab. & S.E.

Information (2002 values)

1. Sales totaled $110,000
2. The gross profit margin was 25 percent.
3. Inventory turnover was 3.0.
4. There are 360 days in the year.
5. The average collection period was 65 days.
6. The current ratio was 2.40.
7. The total asset turnover was 1.13.
8. The debt ratio was 53.8 percent.

13) Total liabilities and stockholders’ equity for CEE in 2002 were __________. (See Figure 2.1.)
A) $45,895
B) $97,345
C) $58,603
D) $124,300

14) A firm with an operating profit margin which meets industry standard and a gross profit margin which is below
industry standard must have excessive
A) principal payments.
B) general and administrative expenses.
C) cost of goods sold.
D) dividend payments.

15) An increase in financial leverage will result in __________ in the return on equity.
A) an increase
B) an undetermined change
C) a decrease
D) no change
 FIGURE 2.2

Dana Dairy Products Key Ratio

_________________________________________________________________
Industry Actual Actual
Average 2001 2002
_________________________________________________________________
Current Ratio 1.3 1.0
Quick Ratio 0.8 0.75
Average collection Period 23 days 30 days
Inventory Turnover 21.7 19
Debt Ratio 64.7% 50%
Times Interest Earned 4.8 5.5
Gross Profit Margin 13.6% 12.0%
Net Profit Margin 1.0% 0.5%
Return on total assets 2.9% 2.0%
Return on Equity 8.2% 4.0%

Income Statement
Dana Dairy Products
For the Year Ended December 31, 2002
_________________________________________________________________
Sales Revenue $100,000
Less: Cost of Goods Sold 87,000
----------
Gross Profits $ 13,000
Less: Operating Expenses 11,000
----------
Operating Profits $ 2,000
Less: Interest Expense 500
----------
Net Profits Before Taxes $ 1,500
Less: Taxes (40%) 600
----------
Net Profits After Taxes $ 900

Balance Sheet
Dana Dairy Products
December 31, 2002
ASSETS
_________________________________________________________________
Cash $ 1,000
Accounts Receivable 8,900
Inventories 4,350
--------
Total Current Assets $14,250
Gross Fixed Assets $35,000
Less: Accumulated Depreciation 13,250
Net Fixed Assets 21,750
--------
Total Assets $36,000

Liabilities & Stockholders' Equity

_________________________________________________________________
Accounts Payable $ 9,000
Accruals 6,675
 --------
Total Current Liabilities $15,675
Long-term Debts 4,125
--------
Total Liabilities $19,800

Common Stock 1,000

Retained Earnings 15,200
--------
Total Stockholders' Equity $16,200
------------
Total Liab. & S.E. $36,000

16) The debt ratio for Dana Dairy Products in 2002 is (See Figure 2.2.)
A) 55 percent.
B) 44 percent.
C) 11 percent.
D) 50 percent.

17) Given the financial manager's preference for faster receipt of cash flows,
A) the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.
B) a longer depreciable life is preferred to a shorter one.
C) the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
D) a shorter depreciable life is preferred to a longer one.

18) All of the following are sources of cash EXCEPT

A) a decrease in accounts receivable.
B) dividends.
C) net profits after taxes.
D) an increase in accruals.

19) For the year ended December 31, 2003, a corporation had cash flow from operating activities of $30,000, cash flow
from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The Statement of Cash Flows
would show a
A) net decrease of $5,000 in cash and marketable securities.
B) net increase of $25,000 in cash and marketable securities.
C) net decrease of $15,000 in cash and marketable securities.
D) net increase of $5,000 in cash and marketable securities.

20) Cash disbursements may include all of the following EXCEPT

A) rent payments.
B) tax payments.
C) fixed asset outlays.
D) depreciation expense.

21) The __________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts
while others are calculated. In this method, the firm's external financing is used as a balancing, or plug, figure.
A) accrual
B) percent-of-sales
C) judgmental
D) cash

22) Under MACRS, an asset which originally cost $50,000 is being depreciated using a 5-year normal recovery period.
The depreciation expense in year 5 is __________.
A) $6,000
B) $10,000
C) $16,000
D) $2,500

FIGURE 3.1

RUFF SANDPAPER CO.

Balance Sheets
For the Years Ended 2002 and 2003

2003 2002
___________________________________________________________________
Assets
Cash 800 600
Marketable securities 200 200
Accounts receivable 1,200 1,000
Inventories 2,000 1,800
Gross fixed assets 3,000 2,800
Less Accumulated Depreciation 1,000 800
Net fixed assets 2,000 2,000
_____ _____
Total assets 6,200 5,600
===== =====
Liabilities
Accounts payable 200 100
Notes payable 800 900
Accruals 100 100
Long-term debt 2,000 1,500
Stockholders' equity
Common stock at par 500 500
Paid-in capital in excess of par 2,000 2,000
Retained earnings 600 500
_____ _____
Total liabilities and equity 6,200 5,600
===== =====

Net profits after taxes for 2003: $150.00

23) Common stock dividends paid in 2003 amounted to __________. (See Figure 3.1.)
A) $600
B) $50
C) $150
D) $100

24) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000,
respectively. The firm makes 10 percent of its sales in cash, collects 40 percent of its sales one month following the sale,
and collects the balance two months following the sale. The firm's total expected cash receipts in January
A) are $1,900.
B) are $2,100.
C) are $700.
D) cannot be determined with the information provided.

FIGURE 3.4

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for
Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at
$105,000 and the firm plans to pay cash dividends of $150,000 during 2004. Hennesaw Lumber, Inc.'s income statement
for the year ended December 31, 2003 is shown below.

Income Statement
Hennesaw Lumber, Inc.
For the Year Ended December 31, 2003

Sales Revenue $4,200,000

Less: Cost of goods sold 3,570,000
--------------
Gross profits $ 630,000
Less: Operating expenses 210,000
--------------
Operating profits $ 420,000
Less: Interest expense 105,000
-------------
Net profits before taxes $ 315,000
Less: Taxes (40%) 126,000
-------------
Net profits after taxes $ 189,000
Less: Cash dividends 120,000
-------------
To: Retained earnings $ 69,000

25) The pro forma cost of goods sold for 2004 is __________. (See Figure 3.4.)
A) $3,825,000
B) $4,000,000
C) $3,500,000
D) $3,750,000

SHORT ANSWER

1) (10 points) Given the following balance sheet, income statement, historical ratios and industry averages, calculate the
Pulp, Paper, and Paperboard, Inc. financial ratios for the most recent year. Analyze its overall financial situation for the
most recent year. Analyze its overall financial situation from both a cross-sectional and time-series viewpoint.

Income Statement
Pulp, Paper and Paperboard, Inc.
For the Year Ended December 31, 2008
__________________________________________________________
Sales Revenue $2,080,976
Less: Cost of Goods Sold 1,701,000
Gross Profits $ 379,976
Less: Operating Expenses 273,846
Operating Profits $ 106,130
Less: Interest Expense 19,296
Net Profits Before Taxes $ 86,834
Less: Taxes (40%) 34,810
Net Profits After Taxes $ 52,024

Balance Sheet
Pulp, Paper and Paperboard, Inc.
December 31, 2008
ASSETS
 Cash $ 95,000
Accounts receivable 237,000
Inventories 243,000
Total current assets $ 575,000
Gross fixed assets 500,000
Less: Accumulated depreciation 75,000
Net fixed assets $ 425,000
Total assets $1,000,000

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable $ 89,000
Notes payable 169,000
Accruals 87,000
Total current liabilities $ 345,000
Long-term debts 188,000
Total liabilities $ 533,000
Stockholders' equity
Common stock 255,000
Retained earnings 212,000
Total stockholders' equity $ 467,000
Total liabilities and stockholders' equity $1,000,000

Historical and Industry Average Ratios

Pulp, Paper and Paperboard, Inc.
Industry average
Ratio 2006 2007 2008 2008
Current Ratio 1.6 1.7 _____ 1.6
Quick Ratio 0.9 1.0 _____ 0.9
Inventory Turnover 8.1 9.3 _____ 8.4
Total Asset Turnover 2.3 2.2 _____ 2.2
Debt Ratio 60% 56% _____ 58%
Return on total assets 4.1% 3.5% _____ 3.08%
Return on Equity 10.3% 7.9% _____ 7.3%

2) (5 points) Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following sales and cash
disbursement estimates for the period August through December of the current year.

Month Sales Cash disbursements

August $400 $300
September 500 500
October 500 700
November 600 400
December 700 500

Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a
cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance for October is $25.
Prepare a cash budget for the month of October only, noting any needed financing or excess cash available.

Magna Fax, Inc.

Income Statement For the Year Ended December 31, 2008

Sales revenue $150,000

Cost of goods sold $117,500
Gross Profits 32,500
Selling expense 4,500
General and administrative expense 4,000
Depreciation expense 4,000
Operating profits $ 20,000
Interest expense 2,500
Net profit before taxes $ 17,500
Taxes (40%) 7,000
Net profit after taxes $ 10,500

Magna Fax, Inc.

Balance Sheet For the Years Ended December 31, 2007 and 2008

Assets 2008 2007

Cash $24,000 $21,000
Accounts receivable 45,000 39,000
Inventory 30,000 27,000
Gross fixed assets $42,000 $40,000
Acc. depreciation 22,000 18,000
Net fixed assets 20,000 22,000
Total assets $119,000 $109,000

Liabilities and Equity

Accounts payable $25,000 $30,000
Notes payable 50,000 40,000
Accruals 1,000 2,000
Long-term debts 10,000 8,000
Common stock at par 1,000 1,000
Paid-in capital in excess of par 4,000 4,000
Retained earnings 28,000 24,000
Total liabilities and equity $119,000 $109,000
3) (5 points) Prepare the cash flow from operating activities section of the statement of cash flows for the year ended
December 31, 2008 for Magna Fax, Inc.

4) (5 points)
Income Statement
Huddleston Manufacturing Company
For the Year Ended December 31, 2008

Sales $2,800,000
Less: Cost of goods sold 1,820,000
Gross profits $ 980,000
Less: Operating expenses 240,000
Operating Profits $ 740,000
Less: Interest expense 70,000
Net profits before taxes $ 670,000
Less: Taxes (40%) 268,000
Net profits after taxes $ 402,000
Less: Cash Dividends 132,000
To: Retained earnings $ 270,000

Huddleston Manufacturing estimates its sales in 2009 will be $3 million. Interest expense is expected to remain
unchanged at $70,000, and the firm plans to pay cash dividends of $140,000 during 2009. Cost of goods sold
includes $200,000 in fixed costs, and operating expenses include $50,000 in fixed costs. Use the percent-of-sales
method to prepare a pro forma income statement for the year ended December 31, 2009, based on the 2008
income statement shown above.
Answers:

1) D
2) A
3) D
4) D
5) D
6) C
7) D
8) A
9) B
10) B
11) B
12) C
13) B
14) C
15) A
16) A
17) D
18) B
19) D
20) D
21) C
22) A
23) B
24) B
25) A

1.Historical and Industry Average Ratios

Pulp, Paper and Paperboard, Inc.
Industry
Ratio 2006 2007 2008 2008
Current Ratio 1.6 1.7 1.67 1.6
Quick Ratio 0.9 1.0 0.96 0.9
Inventory Turnover 8.1 9.3 7.0 8.4
Total Asset Turnover 2.3 2.2 2.1 2.2
Debt Ratio 60% 56% 53% 58%
Return on total assets 4.1% 3.5% 5.2% 3.08%
Return on Equity 0.3% 7.9% 11.1% 7.3%

LIQUIDITY: The liquidity of 3P is on target with the industry standard in 2008 and shows no trend since 2006.
ACTIVITY: Inventory and accounts receivable management has deteriorated since 2006 and is inferior when compared to
the industry standard. The low inventory turnover may be caused by overstocking and/or obsolete inventories. The high
average collection period may have resulted from poor collections procedures. Further investigation is necessary to
determine the
cause of the variances.
DEBT: 3P has less debt than the industry average. The trend since 2006 has been toward reducing the debt ratio. The
firm, therefore, is subject to less financial risk than the average firm in the industry.

PROFITABILITY: Although the gross profit margin is inferior to the industry average, the operating and net profit
margin far exceed the standards, boosting return on total assets and return on equity. The trend in the gross profit margin
is unfavorable and may either be caused by a slide in product prices or an escalation in cost of sales. The cause of the
poor gross profit margin should be investigated.

Overall, the firm needs to focus attention on inventory and accounts receivable management and the cause of the poor
gross profit margin. In general, the firm is in good financial condition.
2) A Cash Budget for Best Valu Supermarkets
Oct.
Cash receipts
Sales (cash 90%) $450
Sales Collected(1 mo. lag 10%) 50
Total cash receipts $500

Total cash disbursements 700

Net cash flow (200)
Beg. cash balance 25
Ending cash balance (175)
Minimum balance 50
Required financing 225

3) Magna Fax, Inc.

Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flow from operating activities:
Net profits after taxes $10,500
Depreciation 4,000
Inc. in Accounts Receivable - 6,000
Inc. in Inventory - 3,000
Dec. in Accounts Payable - 5,000
Dec. in Accruals - 1,000
Net decrease in cash $ -500

4. Pro Forma Income Statement

Huddleston Manufacturing Company
For the Year Ended December 31, 2009

Sales $3,000,000
Less: Cost of goods sold (57.9% + $200,000) 1,935,714
Gross profits $1,064,286
Less: Operating expenses (6.8% + $50,000) 253,571
Operating Profits $ 810,715
Less: Interest expense 70,000
Net profits before taxes $ 740,715
Less: Taxes (40%) 296,286
Net profits after taxes $ 444,429
Less: Cash Dividends 140,000
To: Retained earnings $ 304,429

Financial Management
Chapter 5 Quiz

1) The future value interest factor is

*A) always greater than 1.0.
B) sometimes negative.
C) always less than 0.
D) never greater than 25.

2) The future value of $200 received today and deposited at 8 percent for three years is __________.
A) $248
*B) $252
 C) $158
D) $200

3) The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is
__________.
A) $50
B) $200
C) $518
*D) $77

4) The annual rate of return is variously referred to as

A) the discount rate.
B) the opportunity cost.
C) the cost of capital.
*D) all of the above.

5) The future value of a dollar __________ as the interest rate increases and __________ the farther in the
future an initial deposit is to be received.
A) decreases; decreases
B) decreases; increases
*C) increases; increases
D) increases; decreases

6) The present value of an $20,000 perpetuity at a 7 percent discount rate is __________.

A) $186,915
*B) $285,714
C) $140,000
D) $325,000

7) Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the
end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have
at the end of the twentieth year?
A) $19,292
B) $14,938
C) $40,000
*D) $144,104

8) The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost
of 11 percent, is __________.
A) $ 1,020
B) $27,869
C) $18,800
*D) $12,093

9) Find the future value at the end of year 3 of the following stream of cash flows received at the end of each
year, assuming the firm can earn 8 percent on its investments.
 Year Amount
1 $10,000
2 16,000
3 19,000

A) $45,000
B) $53,396
*C) $47,940
D) $56,690

10) The future value of $100 received today and deposited in an account for four years paying semiannual
interest of 6 percent is __________.
A) $450
*B) $126
C) $889
D) $134

11) If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years
of $100, what is the annual rate of return on the bond?
*A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent

12) Marla borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual
installments. The actual end-of-year payment is __________.
A) $942
B) $1,125
*C) $1,482
D) $2,641

13) Donna makes annual end-of-year payments of $5,043.71 on a four year loan with an interest rate of 13
percent. The original principal amount was __________.
A) $24,462
*B) $15,000
C) $ 3,092
D) $20,175

14) Young Sook owns stock in a company which has consistently paid a growing dividend over the last 10
years. The first year Young Sook owned the stock, she received $4.50 per share and in the 10th year, she
received $4.92 per share. What is the growth rate of the dividends over the last 10 years?
A) 5 percent
B) 4 percent
C) 2 percent
*D) 1 percent

15) In comparing an ordinary annuity and an annuity due, which of the following is true:
*A) The future value of an annuity due is always greater than the future value of an otherwise identical
ordinary annuity.
B) The future value of an ordinary annuity is always greater than the future value of an otherwise
identical annuity due.
C) The future value of an annuity due is always less than the future value of an otherwise identical
ordinary annuity, since one less payment is received with an annuity due.
D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.
Answers:

1) A
2) B
3) D
4) D
5) C
6) B
7) D
8) D
9) C
10) B
11) A
12) C
13) B
14) D
15) A

Financial Management
Chapter 6 Quiz

1) The __________ is the annual rate of interest earned on a security purchased on a given date and held to
maturity.
A) term structure
B) yield curve
C) risk-free rate
*D) yield to maturity

2) __________ yield curve reflects lower expected future rates of interest.

A) An upward-sloping
B) A flat
*C) A downward-sloping
D) A linear

3) Generally, an increase in risk will result in __________ required return or interest rate.
A) a lower
*B) a higher
C) an unchanged
D) an undetermined

4) An upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term
borrowing costs is called
*A) a normal yield curve.
B) an inverted yield curve.
C) a flat yield curve.
D) none of the above.

5) The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term
rates is called
A) the expectation hypothesis.
*B) the liquidity preference theory.
 C) the market segmentation theory.
D) none of the above.

6) All of the following are examples of long-term debt EXCEPT

A) bonds.
*B) lines of credit.
C) term loans.
D) debentures.

7) All of the following are examples of restrictive debt covenants EXCEPT

A) a prohibition on selling accounts receivable.
*B) supplying the creditor with audited financial statements.
C) a constraint on subsequent borrowing.
D) a prohibition on entering certain types of lease arrangements.

8) The __________ feature allows the bondholder to change each bond into a stated number of shares of stock.
A) call
*B) conversion
C) put
D) capitalization

9) In the present value model, risk is generally incorporated into

A) cash flows.
B) the timing.
*C) the discount rate.
D) the total value.

10) The __________ value of a bond is also called its face value. Bonds which sell at less than face value are
priced at __________, while bonds which sell at greater than face value sell at __________.
A) discount; par; a premium
B) premium; a discount; par
*C) par; a discount; a premium
D) coupon; a premium; a discount

11) The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D
matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent
A) Bond D will have a greater change in price.
*B) Bond E will have a greater change in price.
C) the price of the bonds will be constant.
D) the price change for the bonds will be equal.

12) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue
pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently
earning 11 percent, the firm's bond will sell for __________ today.
A) $1,000
B) $716.67
*C) $840.67
D) $1,123.33
13) What is the approximate yield to maturity for a $1000 par value bond selling for $1120 that matures in 6
years and pays 12 percent interest annually?
A) 8.5 percent
*B) 9.4 percent
C) 12.0 percent
D) 13.2 percent

14) What is the current price of a $1000 par value bond maturing in 12 years with a coupon rate of 14 percent,
paid semiannually, that has a YTM of 13 percent?
A) $604
B) $1090
*C) $1060
D) $1073

15) The value of a bond is the present value of the

A) dividends and maturity value.
B) interest and dividend payments.
C) maturity value.
*D) interest payments and maturity value.
Answers:

1) D
2) C
3) B
4) A
5) B
6) B
7) B
8) B
9) C
10) C
11) B
12) C
13) B
14) C
15) D

Financial Management
Chapter 7 Quiz

1) Holders of equity capital

*A) own the firm.
B) receive interest payments.
C) receive guaranteed income.
D) have loaned money to the firm.

2) All of the following features may be characteristic of preferred stock EXCEPT

A) callable.
B) no maturity date.
*C) tax-deductible dividends.
D) convertible.

3) An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash
dividend of __________.
A) $4.00
*B) $8.00
C) $8.80
D) $80.00

4) Shares of stock currently owned by the firm's shareholders are called

A) authorized.
B) issued.
*C) outstanding.
D) treasury shares.

5) Treasury stock results from the

A) firm selling stock for greater than its par value.
B) cumulative feature on preferred stock.
*C) repurchase of outstanding stock.
D) authorization of additional shares of stock by the board of directors.
6) Advantages of issuing common stock versus long-term debt include all of the following EXCEPT
*A) the effects of dilution on earnings and voting power.
B) no maturity.
C) it increases a firm's borrowing power.
D) there is no fixed payment obligation.

7) All of the following are characteristics of common stock EXCEPT

A) voting rights which permit selection of the firm's directors.
B) claims on income and assets which are subordinate to the creditors of the firm.
*C) fully tax-deductible dividends.
D) no fixed payment obligation.

8) A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required
return of 10 percent. The value of a share of the firm's common stock is __________.
A) $120
B) $10
*C) $12
D) $100

9) The __________ is utilized to value preferred stock.

A) constant growth model
B) variable growth model
*C) zero-growth model
D) Gordon model

10) Emmy Lou, Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10
percent, and a required return of 20 percent. The value of a share of Emmy Lou, Inc.'s common stock is
__________.
A) $28.00
*B) $56.00
C) $22.40
D) $18.67

11) According to the efficient market theory,

A) prices of actively traded stocks can be under- or over-valued in an efficient market, and bear
searching out.
B) prices of actively traded stocks can only be under-valued in an efficient market.
*C) prices of actively traded stocks do not differ from their true values in an efficient market.
D) prices of actively traded stocks can only be over-valued in an efficient market.

12) If expected return is less than required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause the expected return to reach the level of the
required return.
*B) sell the asset, which will drive the price down and cause the expected return to reach the level of the
required return.
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the
required return.
D) buy the asset, since the price is expected to increase.
13) __________ is the value of the firm's ownership in the event that all assets are sold for their exact
accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided
among common stockholders.
A) Liquidation value
*B) Book value
C) The P/E multiple
D) The present value of the common stock

14) The use of the __________ is especially helpful in valuing firms that are not publicly traded.
A) liquidation value
B) book value
*C) P/E multiple
D) present value of the dividends

15) __________ in the beta coefficient normally causes __________ in the required return and therefore
__________ in the price of the stock, all else remaining the same.
A) An increase; an increase; an increase
B) An increase; a decrease; an increase
*C) An increase; an increase; a decrease
D) A decrease; a decrease; a decrease
Answers:

1) A
2) C
3) B
4) C
5) C
6) A
7) C
8) C
9) C
10) B
11) C
12) B
13) B
14) C
15) C

Financial Management
Exam Chapters 5, 6, 7

Multiple Choice – 3 points each

1) As the interest rate increases for any given period, the future value of an amount will
A) decrease.
B) remain unchanged.
*C) increase.
D) move toward 1.

2) Bob plans to fund his individual retirement account (IRA) with the maximum contribution of $5,000 at the end of each
year for the next 15 years. If Bob can earn 10 percent on his contributions, how much will he have at the end of
the fifteenth year?
A) $144,104
*B) $158,862
C) $38,030
D) $14,938

3) $100 is received at the end of year 1, $200 is received at the end of year 2, and $300 is received at the end of year 3. If
the opportunity cost is 12 percent, their combined present value today is __________.
A) $600
*B) $462
C) $1,245
D) $1,536

4) If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100,
what is the annual rate of return on the bond?
*A) 8 percent
B) 9 percent
C) 7 percent
D) 6 percent

5) Marion makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The
original principal amount was
*A) $25,000.
 B) $20,000.
C) $31,000.
D) $30,000.

6) Indicate which of the following is true about annuities.

A) An ordinary annuity is an equal payment paid or received at the end of each period, that increases by an equal
amount each period.
*B) An annuity due is an equal payment paid or received at the beginning of each period.
C) An ordinary annuity is an equal payment paid or received at the beginning of each period.
D) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal
amount each period.

7) A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they
can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each
year?
A) $95,000
B) $19,000
*C) $190,000
D) $18,000

8) The present value of $500 received four years from now if your opportunity cost is 8 percent (paid semiannually) is
__________.
A) $684
B) $456
*C) $365
D) $500

9) Darlene wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the
next 10 years. If Darlene can earn 5 percent on her investments, how much must she deposit at the end of each year?
A) $5,000
*B) $3,975
C) $4,513
D) $6,475

10) A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term
borrowing costs is called
A) normal yield curve.
*B) inverted yield curve.
C) flat yield curve.
D) none of the above.

11) Corporate bonds typically have

A) a face value of $5,000.
B) a market price of $1,000.
C) a specified coupon rate paid annually.
*D) a par value of $1,000.

12) A feature that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity is called
A) stock purchase warrants.
*B) call feature.
C) conversion feature.
D) None of the above.

13) If the required return is less than the coupon rate, a bond will sell at
 A) par.
B) a discount.
*C) a premium.
D) book value.

14) Generally, long-term loans have higher interest rates than short-term loans because of
*A) the general expectation of higher future rates of inflation.
B) greater demand for short-term rather than long-term loans relative to the supply of such loans.
C) lender preferences for longer-term, less liquid loans.
D) all of the above.

15) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest
annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's
bond will sell for __________ today.
A) $1,000
B) $716.67
C) $840.67
*D) $1,098.18

16) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11
percent, $1,000 par value, interest paid annually, eight years to maturity?
A) 14 percent
B) 11 percent
*C) 13 percent
D) 12 percent

17) What is the current price of a $1000 par value bond maturing in 10 years with a coupon rate of 14 percent, paid
semiannually, that has a YTM of 15 percent?
A) $1,050
B) $604
*C) $949
D) $1,088

18) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual
dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of
directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid
prior to paying dividends to common stockholders?
A) $ 8,000
B) $16,000
*C) $24,000
D) $25,000

19) Shares of stock that have been repurchased by the corporation are called
A) authorized.
B) issued.
C) outstanding.
*D) treasury shares.

20) As a form of financing, equity capital

A) has priority over bonds.
B) has a maturity date.
*C) is only liquidated in bankruptcy.
D) is temporary.
21) A firm has experienced a constant annual rate of dividend growth of 3 percent on its common stock and expects the
dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk investments. The value of
the firm’s common stock is _____.
A) $22.50/share
B) $9/share
*C) $30/share
D) $90/share

22) If expected return is above the required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
*B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required
return.
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required
return.
D) buy the asset, since price is expected to decrease.

23) A group formed by an investment banker to share the financial risk associated with underwriting new securities is a(n)
*A) underwriting syndicate.
B) selling group.
C) investment banking consortium.
D) broker pool.

24) Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What
is the required rate of return?
A) 10%
B) 12%
C) 13%
*D) 14%

25) At year end, Tangshan China Company balance sheet showed total assets of $60 million, total liabilities (including
preferred stock) of $45 million, and 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting
that it will have net income of $1.5 million. If the average PE multiple in Tangshan's industry is 15, what should be the
price of Tangshan's stock?
A) $15.00
*B) $22.50
C) $52.50
D) $75.00

Short Answer

1. (5 points) To buy his favorite car, Larry is planning to accumulate money by investing his Christmas bonuses for
the next five years in a security which pays a 10 percent annual rate of return. The car will cost $20,000 at the end
of the fifth year and Larry's Christmas bonus is $3,000 a year. Will Larry accumulate enough money to buy the
car? How much additional will he either need or have?

2. (10 points) Marc has purchased a car for $15,000. He paid $2,500 as a down payment and he paid the balance by
a loan from his hometown bank. The loan is to be paid on a monthly basis for two years charging 12 percent
interest.

a. How much are the monthly payments?

b. How much interest will he pay in his second monthly payment?

3. (5 points) The H&H Computer Company has an outstanding issue of bond with a par value of $1,000, paying 12
percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the
value of the bond assuming 14 percent market interest rate?

4. (5 points) Compute the value of a share of common stock of a company whose most recent dividend was $2.50
and is expected to grow at 6 percent per year for the next 2 years, after which the dividend growth rate will
decrease to 3 percent per year indefinitely. Assume a 10 percent required rate of return.
Answers:

1) C
2) B
3) B
4) A
5) A
6) B
7) C
8) C
9) B
10) B
11) D
12) B
13) C
14) A
15) D
16) C
17) C
18) C
19) D
20) C
21) C
22) B
23) A
24) D
25) B

Short Answer:

1. N=5, I/Y=10, PV=0, PMT=3,000, CPT FV=$18,315.30

No, Larry will need an additional $1,684.70 to purchase the car.

2. N=24, I/Y=1, PV = 15,000 - 2,500 = $12,500, FV=$0, CPT PMT = $588.42

Month Beginning Payment Interest Principal Ending

Principal paid Principal
1 12500.00 588.42 125.00 463.42 12036.58
2 12036.58 588.42 120.37 468.05 11568.53

3. N=10, I/Y=7, PMT=60, FV=1000, CPT PV=$929.76

4. D0 = $2.50
D1 = $2.50 x 1.06 = $2.65
D2 = $2.65 x 1.06 = $2.81
D3 = $2.81 x 1.03 = $2.89
$2.89 / (.10 - .03) = $41.29
CF0 = $0
C01 = $2.65
C02 = $2.81 + $41.29 = $44.10
CPT NPV at 10% = $38.85
Financial Management
Chapter 8 Quiz

1) If a person's required return does not change when risk increases, that person is said to be
 A) risk-seeking.
*B) risk-neutral.
C) risk-averse.
D) risk-aware.

2) The __________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the
optimistic outcome.
A) return
B) standard deviation
C) probability distribution
*D) range

3) The __________ is a measure of relative dispersion used in comparing the risk of assets with differing
expected returns.
*A) coefficient of variation
B) chi square
C) mean
D) standard deviation

4) Given the following expected returns and standard deviations of assets B, M, Q, and D, which asset should
the prudent financial manager select?

Asset Expected Return Standard Deviation

B 10% 5%
M 16% 10%
Q 14% 9%
D 12% 8%

*A) Asset B
B) Asset M
C) Asset Q
D) Asset D

5) The goal of an efficient portfolio is to

A) maximize risk for a given level of return.
B) maximize risk in order to maximize profit.
C) minimize profit in order to minimize risk.
*D) minimize risk for a given level of return.

6) Perfectly __________ correlated series move exactly together and have a correlation coefficient of
__________, while perfectly __________ correlated series move exactly in opposite directions and have a
correlation coefficient of __________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
*D) positively; +1; negatively; -1

7) In general, the lower (less positive and more negative) the correlation between asset returns,
A) the less the potential diversification of risk.
 *B) the greater the potential diversification of risk.
C) the lower the potential profit.
D) the less the assets have to be monitored.

8) The portion of an asset's risk that is attributable to firm-specific, random causes is called
*A) unsystematic risk.
B) non-diversifiable risk.
C) systematic risk.
D) none of the above.

9) A beta coefficient of +1 represents an asset that

A) is more responsive than the market portfolio.
*B) has the same response as the market portfolio.
C) is less responsive than the market portfolio.
D) is unaffected by market movement.

10) An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will
be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000
will be invested in asset F, with a beta of .5. The beta of the portfolio is __________ .
A) 1.25
B) 1.33
*C) 1.45
D) unable to be determined from the information provided

TABLE 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

11) Given the information in Table 8.2, what is the expected annual return of this portfolio?
*A) 11.3%
B) 10.0%
C) 11.0%
D) 11.7%

12) Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio
of assets is 12 percent. The asset's required return is
A) 7.2 percent.
B) 6.0 percent.
*C) 13.2 percent.
 D) 10 percent.

13) An increase in the beta of a corporation indicates __________, and, all else being the same, results in
__________.
A) a decrease in risk; a higher required rate of return and hence a lower share price.
*B) an increase in risk; a higher required rate of return and hence a lower share price.
C) a decrease in risk; a lower required rate of return and hence a higher share price.
D) an increase in risk; a lower required rate of return and hence a higher share price.

14) In the capital asset pricing model, the beta coefficient is a measure of
A) economic risk.
B) diversifiable risk.
*C) nondiversifiable risk.
D) unsystematic risk.

15) Strikes, lawsuits, regulatory actions, and increased competition are all examples of
*A) diversifiable risk.
B) nondiversifiable risk.
C) economic risk.
D) systematic risk.
Answers:

1) B
2) D
3) A
4) A
5) D
6) D
7) B
8) A
9) B
10) C
11) A
12) C
13) B
14) C
15) A

Financial Management
Chapter 9 Quiz

1) The __________ is the rate of return a firm must earn on its investments in projects in order to maintain the market
value of its stock.
A) net present value
*B) cost of capital
C) internal rate of return
D) gross profit margin

2) The four basic sources of long-term funds for the business firm are
A) current liabilities, long-term debt, common stock, and preferred stock.
B) current liabilities, long-term debt, common stock, and retained earnings.
C) long-term debt, paid-in capital in excess of par, common stock, and retained earnings.
*D) long-term debt, common stock, preferred stock, and retained earnings.

3) The firm's optimal mix of debt and equity is called its

A) optimal ratio.
*B) target capital structure.
C) maximum wealth.
D) maximum book value.

4) A tax adjustment must be made in determining the cost of __________.

*A) long-term debt
B) common stock
C) preferred stock
D) retained earnings

5) The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The after-tax cost of debt
is
A) 4.8 percent.
B) 6.0 percent.
*C) 7.2 percent.
D) 12 percent.

6) A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling
the stock was $2 per share. The firm's marginal tax rate is 40 percent. The cost of the preferred stock is
A) 3.9 percent.
B) 6.1 percent.
C) 9.8 percent.
*D) 10.2 percent.

7) When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amount
by considering
A) the risk.
*B) the flotation costs.
C) the approximate returns.
D) the taxes.

8) The cost of new common stock financing is higher than the cost of retained earnings due to
*A) flotation costs and underpricing.
B) flotation costs and overpricing.
C) flotation costs and commission costs.
D) commission costs and overpricing.

9) A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of
the coming year. The growth rate in dividends has been 5 percent. The cost of the firm's common stock equity is
A) 5 percent.
B) 8 percent.
C) 10 percent.
*D) 13 percent.

10) Weighing schemes for calculating the weighted average cost of capital include all of the following EXCEPT
A) book value weights.
*B) optimal value weights.
C) market value weights.
D) target weights.
Answers:

1) B
2) D
3) B
4) A
5) C
6) D
7) B
8) A
9) D
10) B

Financial Management
Chapter 10 Quiz

1) The __________ is the exact amount of time it takes the firm to recover its initial investment.
A) average rate of return
B) internal rate of return
C) net present value
*D) payback period

2) Among the reasons many firms use the payback period as a guideline in capital investment decisions are all
of the following EXCEPT
A) it gives an implicit consideration to the timing of cash flows.
*B) it recognizes cash flows which occur after the payback period.
C) it is a measure of risk exposure.
D) it is easy to calculate.

3) A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in
year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is
A) 1 year.
B) 2 years.
C) between 1 and 2 years.
*D) between 2 and 3 years.

4) A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows
presently valued at $4,000. The net present value of the investment is __________.
*A) -$1,000
B) $0
C) $1,000
D) $1.25

5) The __________ is the discount rate that equates the present value of the cash inflows with the initial
investment.
A) payback period
B) average rate of return
C) cost of capital
*D) internal rate of return

6) A firm would accept a project with a net present value of zero because
*A) the project would maintain the wealth of the firm's owners.
 B) the project would enhance the wealth of the firm's owners.
C) the return on the project would be positive.
D) the return on the project would be zero.

7) A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are
as follows:

Internal rate
Project of Return
1 12%
2 15
3 13

The firm should __________.

A) accept Project 2 and reject Projects 1 and 3
*B) accept Projects 2 and 3 and reject Project 1
C) accept Project 1 and reject Projects 2 and 3
D) accept Project 3 and reject Projects 1 and 2

8) The underlying cause of conflicts in ranking for projects by internal rate of return and net present value
methods is
*A) the reinvestment rate assumption regarding intermediate cash flows.
B) that neither method explicitly considers the time value of money.
C) the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of
capital.
D) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal
rate of return.

9) Comparing net present value and internal rate of return analysis

A) always results in the same ranking of projects.
*B) always results in the same accept/reject decision.
C) may give different accept/reject decisions.
D) is only necessary on mutually exclusive projects.

10) In comparing the internal rate of return and net present value methods of evaluation,
A) internal rate of return is theoretically superior, but financial managers prefer net present value.
*B) net present value is theoretically superior, but financial managers prefer to use internal rate of
return.
C) financial managers prefer net present value, because it is presented as a rate of return.
D) financial managers prefer net present value, because it measures benefits relative to the amount
invested.
Answers:

1) D
2) B
3) D
4) A
5) D
6) A
7) B
8) A
9) B
10) B

Financial Management
Exam Chapters 8-10

Multiple Choice – 3 points each

1) The ______ the coefficient of variation, the ______ the risk.

*A) lower, lower
B) higher, lower
C) lower, higher
D) more stable, higher

2) Since for a given increase in risk, most managers require an increase in return, they are
A) risk-seeking
B) risk-indifferent
*C) risk-averse
D) risk-free

3) Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received
dividends of $1.45 per share. The stock is currently selling for $57.75 per share. What rate of return did Mike earn over
the year?
*A) 11.7 percent.
B) 13.2 percent.
C) 14.1 percent.
D) 15.9 percent.

4) The purpose of adding an asset with a negative or low positive correlation is to

A) reduce profit.
*B) reduce risk.
C) increase profit.
D) increase risk.

5) The relevant portion of an asset's risk attributable to market factors that affect all firms is called
A) unsystematic risk.
*B) systematic risk.
C) diversifiable risk.
D) none of the above.

6) Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an
overall risk that
A) increases to a level above that of either asset.
B) remains unchanged.
 C) decreases to a level below that of either asset.
*D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk.

7) The higher an asset's beta,

A) the less responsive it is to changing market returns.
*B) the more responsive it is to changing market returns.
C) the higher the expected return will be in a down market.
D) the lower the expected return will be in an up market.

FIGURE 5.02

You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

8) The beta of the portfolio in Figure 5.02, containing assets X, Y, and Z, is

*A) 1.6.
B) 2.4.
C) 2.0.
D) 1.5.

9) In order to recognize the interrelationship between financing and investments, the firm should use __________ when
evaluating an investment.
A) the least costly source of financing
B) the most costly source of financing
*C) the weighted average cost of all financing sources
D) the current opportunity cost

10) A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost
of issuing and selling the stock was $4 per share. The cost of the preferred stock is
A) 7.2 percent.
B) 12 percent.
*C) 12.4 percent.
D) 15 percent.

11) If a corporation has an average tax rate of 40 percent, the annual after-tax cost of debt for a 15-year, 12 percent,
$1,000 par value bond, selling at $950 is
A) 10 percent.
B) 10.6 percent.
*C) 7.6 percent.
D) 6.0 percent.

12) Debt is generally the least expensive source of capital. This is primarily due to
A) fixed interest payments.
B) its position in the priority of claims on assets and earnings in the event of liquidation.
*C) the tax deductibility of interest payments.
D) the secured nature of a debt obligation.
13) A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. The
estimated cost of common stock equity is
A) 6 percent.
B) 7.2 percent.
C) 14 percent.
*D) 15.6 percent.

14) A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the
end of the coming year. The dividends are expected to grow at a constant rate of 7% per year. A new issue of stock is
expected to be sold for $97 after $2 per share and $1 per share flotation costs are deducted from the market price.
The cost of this new issue of common stock is
A) 5.8 percent.
B) 7.7 percent.
C) 10.8 percent.
*D) 12.8 percent.

15) Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is
A) new common stock, retained earnings, preferred stock, long-term debt.
B) common stock, preferred stock, long-term debt, short-term debt.
C) preferred stock, retained earnings, common stock, new common stock.
*D) long-term debt, preferred stock, retained earnings, new common stock.

16) When discussing weighing schemes for calculating the weighted average cost of capital, the preferences can be stated
as
*A) market value weights are preferred over book value weights and target weights are preferred over historic
weights.
B) book value weights are preferred over market value weights and target weights are preferred over historic
weights.
C) book value weights are preferred over market value weights and historic weights are preferred over target
weights.
D) market value weights are preferred over book value weights and historic weights are preferred over target
weights.

17) A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the
following sources and target market value proportions:

Target market
Source of capital proportions After-tax cost
Long-term debt 40% 6%
Preferred stock 10 11
Common stock equity 50 15

The weighted average cost of capital is

A) 6 percent.
B) 10.7 percent.
*C) 11 percent.
D) 15 percent.

18) A firm has determined its cost of each source of capital and optimal capital structure which is composed of the
following sources and target market value proportions.

Target Market
Source of Capital proportions After-tax Cost
Long-term Debt 35% 9%
Preferred Stock 10 14
Common Stock Equity 55 20

The firm is considering an investment opportunity, which has an internal rate of return of 10 percent. The project
A) should not be considered because its internal rate of return is less than the cost of long-term debt.
B) should be considered because its internal rate of return is greater than the cost of debt.
*C) should not be considered because its internal rate of return is less than the weighted average cost of capital.
D) should be considered because its internal rate of return is greater than the weighted average cost of capital.

19)
When the net present value is positive, the internal rate of return is ________ the cost of capital.
*A)
greater than
B)
greater than or equal to
C)
less than
D)
equal to

20)
Which of the following capital budgeting techniques ignores the time value of money?
*A)
Payback.
B)
Net present value.
C)
Internal rate of return.
D)
Two of the
above

21)
Which of the following statements is false?
A)
If the payback period is less than the maximum acceptable payback period, accept the project.
B)
If the payback period is greater than the maximum acceptable payback period, reject the project.
*C)
If the payback period is less than the maximum acceptable payback period, reject the project
D)
Two of the
above.

22)
What is period for Tangshan Mining company's new project if its initial after tax cost is $5,000,000 and it is expected to
the provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and
payback $1,800,000 in year 4?
A)
4.33 years.
*B)
3.33 years.
C)
2.33 years.
D)
None of the
above.

23)
What is following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to
the NPV provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and
for the $1,300,000 in year 4?
A)
$1,700,000.
B)
$371,764.
*C)
($137,053).
D)
None of the
above.

24)
What is for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating
the IRR cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A)
15.57%.
B)
0.00%.
*C)
13.57%.
D)
None of the
above.

25)
Consider g projects, X and Y, where the firm can only choose one. Project X costs $600 and has cash flows of $400 in
the each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2
followin years, respectively. Which investment should the firm choose if the cost of capital is 10 percent?
*A)
Project X.
B)
Project Y.
C)
Neither.
D)
Not enough tell.
information to

SHORT ANSWER

1. (5 points) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that
period. What is the asset's rate of return if it can be sold for $26,750 today?

2. (10 points) The following historical returns have been reported for Best Buy:

2002 9%
2003 11.5%
2004 3%
2005 7.0%
2006 10.0%

A) What was the average return for Best Buy during this five year period?

B) What is the standard deviation of Best Buy’s returns for this period?

C) What is the coefficient of variation of Best Buy?

3. (5 points) A capital project has an initial investment of $100,000 and cash flows in years 1-6 of $25,000,
$10,000, $50,000, $10,000, $10,000, and $60,000, respectively. Given a 15 percent cost of capital,

(a) compute the net present value.

(b) compute the internal rate of return

(c) should the project be accepted? Why or why not?

4. (10 points) Promo Pak has compiled the following financial data:
Source of Capital Book Value Market Value Cost

Long-term debt $10,000,000 $ 8,500,000 5.0%

Preferred stock 1,000,000 1,500,000 14.0

Common stock equity 9,000,000 15,000,000 20.0

------------ ------------

$20,000,000 $25,000,000
 a. Calculate the weighted average cost of capital using book value weights.

b. Calculate the weighted average cost of capital using market value weights.

Answers:

1)
A
2)
C

3)
A

4)
B

5)
B

6)
D

7)
B

8)
A

9)
C

10)
C

11)
C

12)
C

13)
D

14)
D

15)
D

16)
A

17)
C

18)
C

19)
A

20)
A

21)
C

22)
B

23)
C

24)
C

25)
A

Short answer:

1. ($26,750 – 25,000 +1,500) / 25,000 = 13%

2.
A) (9.0+11.5+3.0+7.0+10.0)/5 = 8.1%
B) 3.29%
C) 3.29 / 8.1 = .4062

3.
A) NPV = $98,850.33 - $100,000 = -$1,194.67
B) IRR = 14.60%
C) No, the project should be rejected since the NPV is negative and the IRR < cost of capital

4.
A) (0.50 x 5.0) + (0.05 x 14.0) + (0.45 x 20.0) = 12.2%
B) (0.34 x 5.0) + (0.06 x 14.0) + (0.60 x 20.0) = 14.54%

Financial Management
Chapter 11 Quiz

1) The final step in the capital budgeting process is

A) implementation.
*B) follow-up monitoring.
C) re-evaluation.
D) education.

2) A $60,000 outlay for a new machine with a usable life of 15 years is called
*A) capital expenditure.
B) operating expenditure.
C) replacement expenditure.
D) none of the above.

3) A conventional cash flow pattern associated with capital investment projects consists of an initial
A) outflow followed by a broken cash series.
B) inflow followed by a broken series.
*C) outflow followed by a series of inflows.
D) inflow followed by a series of outflows.

4) Projects that compete with one another, so that the acceptance of one eliminates the others from further
consideration are called
A) independent projects.
*B) mutually exclusive projects.
C) replacement projects.
D) none of the above.

5) When evaluating a capital budgeting project, the change in net working capital must be considered as part of
A) the operating cash inflows.
 *B) the initial investment.
C) the incremental operating cash inflows.
D) the operating cash outflows.

6) A corporation is considering expanding operations to meet growing demand. With the capital expansion, the
current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable
by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals
by $10,000, and long-term debt by $100,000. The change in net working capital is __________.
A) an increase of $120,000
B) a decrease of $40,000
C) a decrease of $120,000
*D) an increase of $60,000

7) The tax treatment regarding the sale of existing assets which are sold for more than the book value but less
than the original purchase price results in
A) an ordinary tax benefit.
B) a capital gain tax liability.
*C) recaptured depreciation taxed as ordinary income.
D) a capital gain tax liability and recaptured depreciation taxed as ordinary income.

8) A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being
depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the
assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is
*A) $0 tax liability.
B) $840 tax liability.
C) $3,160 tax liability.
D) $3,160 tax benefit.

9) A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset
originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The
existing asset can be sold for $25,000.The new asset will cost $75,000 and will also be depreciated under
MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital
gains, the initial investment is __________.
A) $42,000
B) $52,440
*C) $54,240
D) $50,000

10) One basic technique used to evaluate after-tax operating cash flows is to
*A) add noncash charges to net income.
B) subtract depreciation from operating revenues.
C) add cash expenses to net income.
D) subtract cash expenses from noncash charges.
Answers:

1) B
2) A
3) C
4) B
5) B
6) D
7) C
8) A
9) C
10) A

Financial Management
Chapter 13 Quiz

1) The firm's __________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0.
A) cash break-even point
B) financial break-even point
*C) operating break-even point
D) total break-even point

2) Which of the following is NOT a variable cost?

A) materials used
*B) rent
C) delivery costs
D) direct labor

3) If a firm's fixed operating costs decrease, the firm's operating break-even point will
*A) decrease.
B) increase.
C) remain unchanged.
D) change in an undetermined direction.

4) A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The
firm's operating break-even point in dollars is ___________.
A) $150,000
B) $176,471
*C) $1,000,000
D) $1,425,000

5) The three basic types of leverage are:

A) operating, production, and financial.
B) operating, production, and total.
C) production, financial, and total.
*D) operating, financial, and total.

6) The higher financial leverage causes __________ to increase more for a given increase in __________.
A) EBIT, sales
B) EPS, sales
*C) EPS, EBIT
D) EBIT, EPS

7) Generally, __________ in leverage result in __________ return and __________ risk.

A) increases, decreased, increased
B) increases, decreased, decreased
*C) increases, increased, increased
D) decreases, increased, decreased

8) The firm's __________ is the mix of long-term debt and equity utilized by the firm, which may significantly affect its
value by affecting return and risk.
A) dividend policy
B) capital budget
*C) capital structure
D) working capital

9) __________ risk is the risk of being unable to cover operating costs.

*A) Business
B) Financial
C) Leverage
D) Total

10) According to the traditional approach to capital structure, the value of the firm will be maximized when
A) the financial leverage is maximized.
B) the cost of debt is minimized.
*C) the weighted average cost of capital is minimized.
D) the dividend payout is maximized.
Answers:

1) C
2) B
3) A
4) C
5) D
6) C
7) C
8) C
9) A
10) C