Chapter 1 Quiz

Test I Multiple Choice. Write in CAPITAL LETTER the best answer.

NO ERASURES ALLOWED! 2 Points each
1. Limited liability companies are primarily designed to:
A. allow a portion of their owners to enjoy limited liability while
granting the other portion of their owners control over the entity.
B. provide the benefits of the corporate structure only to foreign-
based entities.
C. spin off a wholly owned subsidiary.
D. allow companies to reorganize themselves through the bankruptcy
process.
E. provide limited liability while avoiding double taxation.

2. The issuer of a security must be involved in all _____ transactions

involving that security.
A. exchange-listed
B. secondary market
C. over-the-counter
D. dealer market
E. primary market

3. Which one of the following statements is correct?

A. All secondary markets are dealer markets.
B. All secondary markets are broker markets.
C. All stock trades between existing shareholders are primary market
transactions.
D. All stock transactions are secondary market transactions.
E. All over-the-counter sales occur in dealer markets.
4. Which one of the following is most apt to align management's
priorities with shareholders' interests?
A. Holding corporate and shareholder meetings at high-end resort-
type locations preferred by managers
B. Compensating managers with shares of stock that must be held for
a minimum of three years
C. Paying a special management bonus on every fifth year of
employment
D. Increasing the number of paid holidays that long-term employees
are entitled to receive
E. Allowing employees to retire early with full retirement benefits
5. What is the primary goal of financial management for a sole
proprietorship?
A. Maximize net income given the current resources of the firm
B. Decrease long-term debt to reduce the risk to the owner
C. Minimize the tax impact on the proprietor
D. Maximize the market value of the equity
E. Minimize the reliance on fixed costs

6. The Sarbanes-Oxley Act:

A. requires the corporate officers to personally attest that the financial
statements are a fair representation of the company’s financial
results.
B. requires all corporations to fully disclose its financial dealings to the
general public.
C. places the responsibility for a firm's financial statements solely on
the chief financial officer.
D. requires that the board of directors be solely responsible for the
firm's financial dealings.
E. places total responsibility for the financial statements of a firm on
the auditor who certifies the statements.
7. In a general partnership, each partner is personally liable for:
A. only the partnership debts that he or she personally created.
B. his or her proportionate share of all partnership debts regardless of
which partner incurred that debt.
C. the total debts of the partnership, even if he or she was unaware of
those debts.
D. the debts of the partnership up to the amount he or she invested in
the firm.
E. all personal and partnership debts incurred by any partner, even if
he or she was unaware of those debts.

8. When conducting a financial analysis of a firm, financial analysts:

A. cannot use accounting information as it is historical.
B. rely solely on accounting information.
C. frequently use accounting information.
D. ignore accounting information but do use marketing information.
E. assume the future will be a repeat of the past as reflected in the
firm’s accounting reports.

9. Which one of the following functions is generally a responsibility

assigned to the corporate treasurer?
A. Cost accounting
B. Data processing
C. Corporate taxes
D. Financial accounting
E. Capital expenditures

10. An auction market:

A. is an electronic means of exchanging securities.
B. has a physical trading floor.
C. handles primary market transactions exclusively.
D. is also referred to as an OTC market.
E. is dealer-based.
Test II Identification – 2 points each
11. Researches individual investments, such as stock in a particular
company, and makes a determination as to whether the price is right
12. Refers to a firm’s short-term assets, such as inventory, and its
short-term liabilities, such as money owed to suppliers.
13. Probably be the most commonly cited business goal, but this is
not a very precise objective.
14. Refers to the specific mixture of long-term debt and equity the firm
uses to finance its operations.
15. Provide the means for transferring ownership of corporate
securities

Test III Enumeration – 1 point each

16 to 18 Roles of a Controller
19 to 21 Most Important Financial Management Decisions
In order
22 to 27 The cash flow cycle between the firms and financial market

Chapter 8 Quiz
Test I Multiple Choice. Write in CAPITAL LETTER the best answer. NO
ERASURES ALLOWED! 1 Point each
1. Which one of the following methods of analysis ignores cash flows?
A. Profitability index
B. Payback
C. Average accounting return
D. Modified internal rate of return
E. Internal rate of return

2. Which one of the following methods of analysis is most similar to

computing the return on assets (ROA)?
A. Internal rate of return
B. Profitability index
C. Average accounting return
D. Net present value
E. Payback
3. The average accounting return:
A. measures profitability rather than cash flow.
B. discounts all values to today's dollars.
C. is expressed as a percentage of an investment's current market value.
D. will equal the required return when the net present value equals zero.
E. is used more often by CFOs than the internal rate of return.

4. Which one of the following analytical methods is based on net income?

A. Profitability index
B. Internal rate of return
C. Average accounting return
D. Modified internal rate of return
E. Payback

5. Which one of the following is most closely related to the net present
value profile?
A. Internal rate of return
B. Average accounting return
C. Profitability index
D. Payback
E. Discounted payback

6. The internal rate of return is unreliable as an indicator of whether or not

an investment should be accepted given which one of the following?
A. One of the time periods within the investment period has a cash flow
equal to zero.
B. The initial cash flow is negative.
C. The investment has cash inflows that occur after the required payback
period.
D. The investment is mutually exclusive with another investment of a
different size.
E. The cash flows are conventional.

7. Which one of the following statements is correct? Assume cash flows

are conventional.
A. If the IRR exceeds the required return, the profitability index will be less
than 1.0.
B. The profitability index will be greater than 1.0 when the net present
value is negative.
C. When the internal rate of return is greater than the required return, the
net present value is positive.
D. Projects with conventional cash flows have multiple internal rates of
return.
E. If two projects are mutually exclusive, you should select the project with
the shortest payback period.

8. Which one of the following is an indicator that an investment is

acceptable? Assume cash flows are conventional.
A. Modified internal rate of return that is equal to zero
B. Profitability index of zero
C. Internal rate of return that exceeds the required return
D. Payback period that exceeds the required period
E. Negative average accounting return

9. The net present value of an investment represents the difference

between the investment's:
A. cash inflows and outflows.
B. cost and its net profit.
C. cost and its market value.
D. cash flows and its profits.
E. assets and liabilities.

10. Net present value involves discounting an investment's:

A. assets.
B. future profits.
C. liabilities.
D. costs.
E. future cash flows.

11. The payback period is the length of time it takes an investment to

generate sufficient cash flows to enable the project to:
A. produce a positive annual cash flow.
B. produce a positive cash flow from assets.
C. offset its fixed expenses.
D. offset its total expenses.
E. recoup its initial cost.

12. The average net income of a project divided by the project's average
book value is referred to as the project's:
A. required return.
B. market rate of return.
C. internal rate of return.
D. average accounting return.
E. discounted rate of return.

13. The internal rate of return is the:

A. discount rate that causes a project’s aftertax income to equal zero.
B. discount rate that results in a zero net present value for the project.
C. discount rate that results in a net present value equal to the project's
initial cost.
D. rate of return required by the project's investors.
E. project's current market rate of return.

14. The net present value profile illustrates how the net present value of
an investment is affected by which one of the following?
A. Project's initial cost
B. Discount rate
C. Timing of the project's cash inflows
D. Inflation rate
E. Real rate of return

15. The possibility that more than one discount rate can cause the net
present value of an investment to equal zero is referred to as:
A. duplication.
B. the net present value profile.
C. multiple rates of return.
D. the AAR problem.
E. the dual dilemma.

16. Both Projects A and B are acceptable as independent projects.

However, the selection of either one of these projects eliminates the
option of selecting the other project. Which one of the following terms best
describes the relationship between Project A and Project B?
A. Mutually exclusive
B. Conventional
C. Multiple choice
D. Dual return
E. Crosswise

17. Which one of the following can be defined as a benefit-cost ratio?

A. Net present value
B. Internal rate of return
C. Profitability index
D. Accounting rate of return
E. Modified internal rate of return

18. Which one of the following indicates that a project is expected to

create value for its owners?
A. Profitability index less than 1.0
B. Payback period greater than the requirement
C. Positive net present value
D. Positive average accounting rate of return
E. Internal rate of return that is less than the requirement

19. The net present value:

A. decreases as the required rate of return increases.
B. is equal to the initial investment when the internal rate of return is equal
to the required return.
C. method of analysis cannot be applied to mutually exclusive projects.
D. ignores cash flows that are distant in the future.
E. is unaffected by the timing of an investment's cash flows.
20. Which one of the following is generally considered to be the best form
of analysis if you have to select a single method to analyze a variety of
investment opportunities?
A. Payback
B. Profitability index
C. Accounting rate of return
D. Internal rate of return
E. Net present value

21. Which one of the following statements is correct?

A. The net present value is a measure of profits expressed in today's
dollars.
B. The net present value is positive when the required return exceeds the
internal rate of return.
C. If the initial cost of a project is increased, the net present value of that
project will also increase.
D. If the internal rate of return equals the required return, the net present
value will equal zero.
E. Net present value is equal to an investment's cash inflows discounted
to today's dollars.

22. If an investment is producing a return that is equal to the required

return, the investment's net present value will be:
A. positive.
B. greater than the project's initial investment.
C. zero.
D. equal to the project's net profit.
E. less than, or equal to, zero.

23. Which one of the following indicates that a project should be rejected?
Assume the cash flows are normal, i.e., the initial cash flow is negative.
A. Average accounting return that exceeds the requirement
B. Payback period that is shorter than the requirement period
C. Positive net present value
D. Profitability index less than 1.0
E. Internal rate of return that exceeds the required return

24. Which one of the following indicators offers the best assurance that a
project will produce value for its owners?
A. PI equal to zero
B. Negative rate of return
C. Positive AAR
D. Positive IRR
E. Positive NPV

25. Which one of the following statements is correct?

A. A longer payback period is preferred over a shorter payback period.
B. The payback rule states that you should accept a project if the payback
period is less than one year.
C. The payback period ignores the time value of money.
D. The payback rule is biased in favor of long-term projects.
E. The payback period considers the timing and amount of all of a
project's cash flows.

26. Generally speaking, payback is best used to evaluate which type of

projects?
A. Low-cost, short-term
B. High-cost, short-term
C. Low-cost, long-term
D. High-cost, long-term
E. Any size of long-term project

27. Which one of the following is the primary advantage of payback

analysis?
A. Incorporation of the time value of money concept
B. Ease of use
C. Research and development bias
D. Arbitrary cutoff point
E. Long-term bias

28. The payback method of analysis ignores which one of the following?
A. Initial cost of an investment
B. Arbitrary cutoff point
C. Cash flow direction
D. Time value of money
E. Timing of each cash inflow

29. Which one of the following methods of analysis ignores the time value
of money?
A. Net present value
B. Internal rate of return
C. Discounted cash flow analysis
D. Payback
E. Profitability index
30. Which one of the following methods of analysis has the greatest bias
toward short-term projects?
A. Net present value
B. Internal rate of return
C. Average accounting return
D. Profitability index
E. Payback

Test II: Enumeration

Give five (5) criteria used to evaluate proposed
investments

Chapter 9 Quiz
Test I Multiple Choice. Write in CAPITAL LETTER the best answer. NO
ERASURES ALLOWED! 2 Points each
1. Which one of the following is a correct value to use if you are conducting a
best-case scenario analysis?
A. Sales price that is most likely to occur
B. Lowest expected level of sales quantity
C. Lowest expected salvage value
D. Highest expected need for net working capital
E. Lowest expected value for fixed costs
2. The tax shield approach to computing the operating cash flow, given a tax-
paying firm:
A. ignores both interest expense and taxes.
B. separates cash inflows from cash outflows.
C. considers the changes in net working capital resulting from a new project.
D. ignores all noncash expenses and their effects.
E. recognizes that depreciation creates a cash inflow.

3. The amount by which a firm's tax bill is reduced as a result of the

depreciation expense is referred to as the depreciation:
A. tax shield.
B. credit.
C. erosion.
D. opportunity cost.
E. adjustment.

4. Any changes to a firm's projected future cash flows that are caused by
adding a new project are referred to as:
A. eroded cash flows.
B. deviated projections.
C. incremental cash flows.
D. directly impacted flows.
E. opportunity cash flows.

5. Ignoring the option to wait:

A. may overestimate the internal rate of return on a project.
B. may underestimate the net present value of a project.
C. ignores the ability of a manager to increase output after a project has been
implemented.
D. is the same as ignoring all strategic options.
E. ignores the value of discontinuing a project early.

6. Sensitivity analysis:
A. looks at the most reasonably optimistic and pessimistic results for a project.
B. helps identify the variable within a project that presents the greatest
forecasting risk.
C. is used for projects that cannot be analyzed by scenario analysis because
the cash flows are unconventional.
D. is generally conducted prior to scenario analysis just to determine if the
range of potential outcomes is acceptable.
E. illustrates how an increase in operating cash flow caused by changing both
the revenue and the costs simultaneously will change the net present value for
a project.
7. The opportunities that a manager has to modify a project once the project
has started are called:
A. sensitivity choices.
B. managerial options.
C. scenario adjustments.
D. restructuring options.

8. Which one of the following terms refers to the best option that was foregone
when a particular investment is selected?
A. Side effect
B. Erosion
C. Sunk cost
D. Opportunity cost
E. Marginal cost

9. Which of the following create cash inflows from net working capital?
A. Decrease in accounts payable and increase in accounts receivable
B. Decrease in both accounts receivable and accounts payable
C. Increase in accounts payable and decrease in inventory
D. Increase in both accounts receivable and inventory
E. Increase in inventory and decrease in cash

10. Assume an all-equity firm has positive net earnings. The operating cash
flow of this firm:
A. ignores both depreciation and taxes.
B. is unaffected by the depreciation expense.
C. must be negative.
D. increases when the tax rate decreases.
E. is equal to net income minus depreciation.
11. The operating cash flows of a project:
A. are unaffected by the depreciation method selected.
B. are equal to the project's total projected net income.
C. decrease when net working capital increases.
D. include any after-tax salvage values.
E. include erosion effects.

12. Which one of the following principles refers to the assumption that a
project will be evaluated based on its incremental cash flows?
A. Forecast assumption principle
B. Base assumption principle
C. Fallacy principle
D. Erosion principle
E. Stand-alone principle

13. The analysis of a new project should exclude:

A. tax effects.
B. erosion effects.
C. side effects.
D. sunk costs.
E. opportunity costs.

14. Which one of the following refers to the option to expand into related
businesses in the future?
A. Strategic option
B. Contingency option
C. Soft rationing
D. Hard rationing
E. Capital rationing option

Test II Enumeration – 1 point each

1 to 5 – Managerial Options in Capital Budgeting
6 to 7 Tools widely used to evaluate the impact of assumptions made about
future cash flows and NPV Estimates.
Test III Identification – 1 point each
8. The possibility that errors in the projected cash flows will lead to incorrect
decisions.
9. The cash flows of a new project that come at the expense of a firm’s
existing projects.
10. The difference between a firm’s future cash flows with a project and those
without the project.
11. The most valuable alternative that is given up if a particular investment is
undertaken.
Chapters 8, 9 and 10 Quiz.
Test I Multiple Choice. Write in CAPITAL LETTER the best answer. NO ERASURES ALLOWED! 2 Points each
Do not write anything on this test questionnaire. Write your test questionnaire number on the upper right corner of your yellow paper. Erasures will
only be allowed with the use of correction tape/fluid; otherwise, it will invalidate your answers. Only one (1) yellow paper is allowed. ALL FINAL
ANSWERS SHOULD BE BOXED.
1. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess
return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium

2. The standard deviation measures the _____ of a security's returns over time.
A. average value
B. frequency
C. volatility
D. mean
E. arithmetic average

3. When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns?
A. When the set of returns includes only risk-free rates
B. When the set of returns has a wide frequency distribution
C. When the set of returns has a very narrow frequency distribution
D. When all of the rates of return in the set of returns are equal to each other
E. Never

4. Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?
A. The risk premium on any security in that market will be zero.
B. The price of any one security in that market will remain constant at its current level.
C. Each security in the market will have an annual rate of return equal to the risk-free rate.
D. The price of each security in that market will frequently fluctuate.
E. The prices of each security will fall to zero because the net present value of the investments will be zero.
5. If the financial markets are efficient then:
A. stock prices should remain constant.
B. stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.
C. an increase in the value of one security should be offset by a decrease in the value of another security.
D. stock prices will change only when an event actually occurs, not at the time the event is anticipated.
E. stock prices should respond only to unexpected news and events.

6. If the financial markets are semistrong form efficient, then:

A. only the most talented analysts can determine the true value of a security.
B. only individuals with private information have a marketplace advantage.
C. technical analysis provides the best tool to use to gain a marketplace advantage.
D. no one individual has an advantage in the marketplace.
E. every security offers the same rate of return.

7. Which one of the following is the positive square root of the variance?
A. Standard deviation
B. Mean
C. Risk-free rate
D. Average return
E. Real return

8. Five years ago, you purchased 800 shares of stock. The annual returns have been 6.4 percent, -28.7 percent, 2.1 percent, 14.4 percent, and
32.6 percent, respectively. What is the variance of these returns?
A. .049888
B. .030021
C. .030068
D. .050133
E. .050284

9. Over the past six years, a stock had annual returns of 18 percent, -6 percent, 2 percent, 27 percent, -11 percent, and 13 percent, respectively.
What is the standard deviation of these returns?
A. 15.27 percent
B. 14.66 percent
C. 13.59 percent
D. 15.08 percent
E. 14.38 percent
10. The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes
old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book
value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be
assigned to the press as an initial cost of the new project?
A. $0
B. $480
C. $3,570
D. $3,090
E. $4,050

11. Which one of the following best describes an arithmetic average return?
A. Total return divided by N - 1, where N equals the number of individual returns
B. Average compound return earned per year over a multiyear period
C. Total compound return divided by the number of individual returns
D. Return earned in an average year over a multiyear period
E. Positive square root of the average compound return

12. Which one of the following statements is correct?

A. The risk-free rate of return has a risk premium of 1.0.
B. The reward for bearing risk is called the standard deviation.
C. Risks and expected return are inversely related.
D. The higher the expected rate of return, the wider the distribution of returns.
E. Risk premiums are inversely related to the standard deviation of returns.

13. The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.
A. lower; lower
B. lower; higher
C. higher; lower
D. higher; higher

14. Cox Footwear pays a constant annual dividend. Last year, the dividend yield was 3.2 percent when the stock was selling for $35a share. What
is the current price of the stock if the current dividend yield is 2.9 percent?
A. .92
B. $38.62
C. $25.20
D. $26.87
E. $27.40
15. One year ago, LaTresa purchased 300 shares of Outland Co. stock for $7,092. The stock does not pay any regular dividends but it did pay a
special dividend of $.43 a share last week. This morning, she sold her shares for $24.05 a share. What was the total percentage return on this
investment?
A. 7.67 percent
B. 4.83 percent
C. 2.50 percent
D. 3.55 percent
E. 8.24 percent

16. Green Woods sells specialty equipment for mountain climbers. Its sales for last year included $387,000 of tents and $718,000 of climbing gear.
For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $411,000
of tents, $806,000 of climbing gear, and $128,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the
new product to its sales offerings?
A. $0
B. $128,000
C. $112,000
D. $251,000
E. $240,000

17. Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36,000 of the new inventory, which will be purchased on
30 days' credit from a supplier. The firm will also invest $13,000 in accounts receivable and $11,000 in equipment. What amount should be included
in the initial project costs for net working capital?
A. -$49,000
B. -$47,000
C. -$3,000
D. -$13,000
E. -$24,000

18. Your local athletic center is planning a $1.08 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a
20-year period. The expanded area is expected to generate $489,000 in additional annual sales. Variable costs are 46 percent of sales, the annual
fixed costs are $129,400, and the tax rate is 34 percent. What is the operating cash flow for the first year of this project?
A. $118,336.82
B. $92,509.15
C. $107,235.60
D. $106,666.67
E. $119,323.33
19. Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by
$50,500 a year for 8 years. What is the payback period?
A. 4.03 years
B. 4.95 years
C. 5.48 years
D. 5.62 years
E. The project never pays back

20. Delta Mu Delta is considering purchasing some new equipment costing $393,000. The equipment will be depreciated on a straight-line basis to
a zero book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is
the average accounting rate of return?
A. 11.23 percent
B. 11.63 percent
C. 12.01 percent
D. 12.49 percent
E. 10.87 percent

21. You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500
in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net
present value of this investment?
A. $7,881.55
B. $4,305.56
C. $1,879.63
D. $633.33
E. $8,534.25

---end of quiz---
READ, READ, READ, PRACTICE, PRACTICE, PRACTICE, AND PRAY, PRAY, PRAY