TEST A:

1) The primary goal of a publicly owned corporation is to

A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) minimize shareholder risk
2) The five basic principles of finance include all of the following EXCEPT
A) cash flow is what matters.
B) money has a time value.
C) risk requires a reward.
D) incremental profits determine value.
3) Investors want a return that satisfies the following expectation(s):
A) A return for delaying consumption
B) An additional return for taking on risk
C) An additional return for accepting dividends rather than capital gains
D) Both A and B.
4) The principle of risk-return trade-off means that
A) higher risk investments must earn higher returns.
B) an investor who takes more risk will earn a higher return.
C) a rational investor will only take on higher risk if he expects a higher return.
D) an investor who bought stock in a small corporation five years ago has more money
than an investor who bought U.S. Treasury bonds five years ago
5) Company A reports sales of $100,000 and net income of $15,000. Company B reports
sales of $100,000 and net income of $10,000. Therefore
A) Company A's cash flow may be higher or lower than Company B's cash flow even
though A's net income is higher.
B) Company A's cash flow is $5,000 more than Company B's cash flow.
C) Company B is creating less value for its shareholders than Company A.
D) Company B's accounts receivable must be higher than Company A's accounts
receivable
6) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky
investment. One year later, Bill's investment is worth $1,030. Which of the following
statements is MOST correct?
A) If John's investment is worth less than $1,030, then John was irrational to invest in the
risky project.
B) John's investment must be worth more than $1,030 because of the risk-return trade-off,
given that John's investment was more risky.
C) If John's investment is worth more than $1,030, then Bill was irrational to invest in the
less risky investment.
D) The worth of John's investment cannot be determined with the information given
7) Which of the following statements is an example of a futures market transaction?
A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit.
B) A company purchases an option to buy 1000 barrels of oil anytime between now and
the end of the year.
C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a price
 of $70 per barrel.
D) An executive has a portion of his current year salary deferred until he retires
8) General Electric (GE) has been a public company for many years with its common stock
traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new
common stock, the transaction will be describe as
A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for years.
C) a seasoned equity offering because GE has sold common stock before.
D) a money-market transaction because GE raises new money to fund its business.
9) A wealthy private investor providing a direct transfer of funds is called
A) a venture capitalist.
B) an investment banker.
C) a financial intermediary.
D) an angel investor.
10) An example of a primary market transaction involving a money-market security is
A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.
11) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of
accountability for which of the following groups?
A) corporate officers
B) public accountants
C) boards of directors
D) all of the above
12) Which of the following statements is false?
A) Brokers purchase securities for their own account.
B) Most corporate bond trading takes place over the counter.
C) Broker-dealers stand ready to buy and sell specific securities at selected prices.
D) none of the above
13) A "normal" yield curve is
A) downward sloping.
B) downward sloping, then upward sloping.
C) upward sloping.
D) upward sloping, then downward sloping.
14) The ________ is the premium to compensate for the price change expected to occur over
the
life of the bond or investment instrument.
A) inflation-risk premium
B) maturity premium
C) real risk-free interest rate premium
D) default-risk premium
15) Rogue Industries reported the following items for the current year: Sales = $3,000,000;
Cost
of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses
= $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes =
 $300,000.
Rogue's operating income is equal to
A) $770,000.
B) $1,070,000.
C) $1,100,000.
D) $1,500,000
16) Use the following information to calculate the company's accounting net income for the
year.
Credit Sales $800,000
Cash Sales $500,000
Operating Expenses on Credit $200,000
Cash Operating Expenses $700,000
Accounts Receivable (Beg. ofYear) $50,000
Accounts Receivable (End of Year)$80,000
Accounts Payable (Beg. of Year) $50,000
Accounts Payable (End of Year) $100,000
Corporate Tax Rate 40%
A) $300,000
B) $240,000
C) $125,000
D) $120,000
17) What information does a firm's balance sheet provide to the viewing public?
A) a report of investments made and their cost for a specific period of time
B) a complete listing of all of a firm's cash receipts and cash expenditures for a defined
period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet
date
18) Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts
receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and
accrued expenses of $75,000. What is the firm's net working capital?
A) $390,000
B) $175,000
C) $700,000
D) $210,000
19) Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes
B) Interest expense, minus dividends paid
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock, plus
increase (or minus decrease) in debt
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus
interest paid, minus dividends paid
20) A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal
outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000.
What was the firm's cash flow from financing activities?
A) +$20,000 ($20,000 flowed into the firm)
B) -$20,000 ($20,000 flowed out of the firm)
C) +$280,000 ($280,000 flowed into the firm)
D) -$280,000 ($280,000 flowed out of the firm)
 I. Problems
1. Prepare an Income Statement and a Balance Sheet from the given information

INFORMATION (in alphabetical order)

Accounts payable $ 100,000
Accounts receivable 151,000
Accrued expenses 7,900
Accumulated Depreciation 268,000
Buildings and Equipment 900,000
Cash 200,000
Common Stock 264,000
Cost of Goods sold 297,000

Depreciation expense 66,000

Interest expense 4,750
Inventory 99,300
Long-Term Debt 334,000
Marketing and general and administrative
expenses 79,000
Net Sales 573,000
Notes payable 75,000
Prepaid expenses 14,500
Retained earnings 262,900
Taxes 50,500
Taxes payable 53,000
 2. Prepare a Statement of Cashflows from the given information

INFORMATION (in alphabetical

order)
$2
Beginning cash
0
Depreciation expense 20
Dividends 30
Income taxes 45
Increase in accounts receivable 65
Decrease in inventories 8
Increase in accounts payable 35
Increase in accrued expenses 17
Increase in bank debt 50
Increase in common stock 25
Increase in gross fixed assets 60
Interest expense 50
11
Net income
0
21
Operating income
5
TEST B:
1) A wealthy private investor providing a direct transfer of funds is called
A) a venture capitalist.
B) an investment banker.
C) a financial intermediary.
D) an angel investor.
2) An example of a primary market transaction involving a money-market security is
A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.
3) The principle of risk-return trade-off means that
A) higher risk investments must earn higher returns.
B) an investor who takes more risk will earn a higher return.
C) a rational investor will only take on higher risk if he expects a higher return.
D) an investor who bought stock in a small corporation five years ago has more
money than an investor who bought U.S. Treasury bonds five years ago.
4) Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes.
B) Interest expense, minus dividends paid.
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock,
plus increase (or minus decrease) in debt.
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in
debt, minus interest paid, minus dividends paid.
5) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level
of accountability for which of the following groups?
A) corporate officers.
B) public accountants.
C) boards of directors.
D) all of the above.
6) Use the following information to calculate the company's accounting net income for
the year.
Credit Sales $800,000
Cash Sales $500,000
Operating Expenses on Credit $200,000
Cash Operating Expenses $700,000
Accounts Receivable (Beg. of Year) $50,000
Accounts Receivable (End of Year) $80,000
Accounts Payable (Beg. of Year) $50,000
Accounts Payable (End of Year) $100,000
Corporate Tax Rate 40%.

A) $300,000
B) $240,000
C) $125,000
D) $120,000
7) Company A reports sales of $100,000 and net income of $15,000. Company B reports
sales of $100,000 and net income of $10,000. Therefore
 A) Company A's cash flow may be higher or lower than Company B's cash flow
even though A's net income is higher.
B) Company A's cash flow is $5,000 more than Company B's cash flow.
C) Company B is creating less value for its shareholders than Company A.
D) Company B's accounts receivable must be higher than Company A's accounts
receivable.
8) Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts
receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and
accrued expenses of $75,000. What is the firm's net working capital?
A) $390,000
B) $175,000
C) $700,000
D) $210,000
9) Investors want a return that satisfies the following expectation(s):
A) A return for delaying consumption.
B) An additional return for taking on risk.
C) An additional return for accepting dividends rather than capital gains.
D) Both A and B.
10) General Electric (GE) has been a public company for many years with its common
stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares
of new common stock, the transaction will be described as
A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for
years.
C) a seasoned equity offering because GE has sold common stock before.
D) a money-market transaction because GE raises new money to fund its business.

11) Which of the following statements is an example of a futures market transaction?

A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit.
B) A company purchases an option to buy 1000 barrels of oil anytime between now
and the end of the year.
C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a
price of $70 per barrel.
D) An executive has a portion of his current year salary deferred until he retires.

12) The ________ is the premium to compensate for the price change expected to occur over
the life of the bond or investment instrument.
A) inflation-risk premium.
B) maturity premium.
C) real risk-free interest rate premium.
D) default-risk premium.

13) Rogue Industries reported the following items for the current year: Sales = $3,000,000;
Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative
Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and
Taxes = $300,000.
Rogue's operating income is equal to
A) $770,000.
B) $1,070,000.
C) $1,100,000.
 D) $1,500,000.
14) A "normal" yield curve is
A) downward sloping.
B) downward sloping, then upward sloping.
C) upward sloping.
D) upward sloping, then downward sloping.
15) The primary goal of a publicly owned corporation is to
A) maximize dividends per share.
B) maximize shareholder wealth.
C) maximize earnings per share after taxes.
D) minimize shareholder risk.
16) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky
investment. One year later, Bill's investment is worth $1,030. Which of the following statements
is MOST correct?
A) If John's investment is worth less than $1,030, then John was irrational to invest in the
risky project.
B) John's investment must be worth more than $1,030 because of the risk-return trade-off,
given that John's investment was more risky.
C) If John's investment is worth more than $1,030, then Bill was irrational to invest in the
less risky investment.
D) The worth of John's investment cannot be determined with the information given.

17) Which of the following statements is false?

A) Brokers purchase securities for their own account.
B) Most corporate bond trading takes place over the counter.
C) Broker-dealers stand ready to buy and sell specific securities at selected prices.
D) None of the above.
18) What information does a firm's balance sheet provide to the viewing public?
A) a report of investments made and their cost for a specific period of time.
B) a complete listing of all of a firm's cash receipts and cash expenditures for a defined
period of time.
C) a report of revenues and expenses for a defined period of time.
D) an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet
date.
19) A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal
outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What
was the firm's cash flow from financing activities?
A) +$20,000 ($20,000 flowed into the firm).
B) -$20,000 ($20,000 flowed out of the firm).
C) +$280,000 ($280,000 flowed into the firm).
D) -$280,000 ($280,000 flowed out of the firm)
20) The five basic principles of finance include all of the following EXCEPT
A) cash flow is what matters.
B) money has a time value.
C) risk requires a reward.
D) incremental profits determine value.