Corporate Finance Quiz Test Chapters

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Corporate Finance QUIZ TEST Chapters
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CORPORATE FINANCE QUIZ TEST
CHAPTER 1
1. Which one of the following business types is best suited to raising large amounts of
capital?
a. Sole proprietorship
b. Limited partnership
c. Corporation
d. General partnership
e. Limited liability company
2. Which one of the following actions by a financial manager creates an agency

problem?
a. Refusing to spend current cash on an unprofitable project
b. Lowering selling prices that will result in increased firm value
c. Agreeing to pay management bonuses based on the market value of the firm's stock
d. Borrowing money when doing so creates value for the firm
e. Agreeing to expand the company at the expense of stockholders' value
3. A partnership:
a. allows for easy transfer of interest from one general partner to another.
b. is taxed the same as a corporation.
c. creates an unlimited liability for all general partners for the partnership's debts.
d. terminates at the death of any limited partner.
e. has the same ability as a corporation to raise capital.
4. Which one of the following statements correctly depicts the common chain of
command in a corporation?
a. The controller reports to the chief executive officer.
b. The capital expenditures manager reports to the controller.

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c. The tax manager reports to the treasurer.

d. The credit manager reports to the treasurer.
e. The information systems manager reports to the treasurer.
5. Which one of these characteristics best describes the primary advantage of being a
limited partner rather than a general partner?
a. Profits free of any income taxation
b. Personal financial liability limited to the capital invested
c. Overall control of the partnership
d. Entitlement to a larger portion of the partnership's income
e. Day-to-day management control of the business
6. Closet Keeper is considering a new project. Which one of these estimated project
values has the greatest level of certainty?
a. The initial project cost
b. The risk of a pessimistic scenario occurring
c. The timing of the last cash inflow from the project
d. The amount of the cash inflow in Year 1
e. The amount of the cash inflow in Year 3
7. One intent of the Sarbanes Oxley Act of 2002 is to:

a. prevent minority investors from making demands on corporations.
b. protect corporate directors from frivolous lawsuits.
c. require all public corporations to "go dark" within the next twenty years.
d. protect investors from corporate abuses.
e. guarantee the repayment of all future personal loans to corporate officers and
directors.
8. A firm's capital structure refers to the firm's:

a. combination of cash and cash equivalents.

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b. proportions of financing from current and long-term debt and equity.

c. combination of accounts appearing on the left side of its balance sheet.
d. mixture of various types of production equipment.
e. investment selections for its excess cash reserves.
9. Financial managers primarily create firm value by:

a. maximizing current dividends.
b. maximizing current sales.
c. lowering the earnings per share.
d. investing in assets that generate cash in excess of their cost.
e. increasing the firm's market share.
10. The corporate treasurer oversees which one of these areas?

a. Cost accounting
b. Financial accounting
c. Tax reporting
d. Information systems
e. Financial planning
11. One advantage of a partnership is the:

a. relatively low formation cost. .
b. limited life of the entity.
c. personal liability for all of the firm's debts.
d. limited liability protection for all of the partners.
e. ease of transferring full ownership.
12. Short-term finance deals with:

a. issuing additional shares of common stock.
b. financing long-term projects.

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c. acquiring and selling fixed assets.

d. the timing of cash flows. .
e. capital budgeting.
13. The owners of a limited liability company generally prefer:

a. having liability exposure similar to that of a sole proprietor.
b. being taxed personally on all business income.
c. being taxed like a corporation.
d. being taxed like a corporation with liability like a partnership.
e. having liability exposure similar to that of a general partner.
14. A business entity that provides each owner with limited liability while the firm is
operated and taxed like a partnership is called a:
a. general partnership.
b. limited liability company.
c. limited proprietorship.
d. corporation.
e. limited partnership.
15. Insider trading is:

a. prohibited by the Securities Exchange Act of 1934. .
b. highly discouraged, but still legal.
c. prohibited by the Sarbanes-Oxley Act of 2002.
d. prohibited by the Securities Act of 1933.
e. impossible in today's efficient markets.
16. Which type of business organization has the respective rights and privileges of a
legal person?
a. Limited liability company
b. Limited partnership

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c. Corporation
d. General partnership
e. Sole proprietorship
17. Which one of the following is least apt to help convince managers to work in the
best interest of the stockholders?
a. Threat of a takeover of the firm by unsatisfied stockholders
b. Management compensation tied to the market value of the firm's stock
c. Salary raises based on length of service
d. Threat of a proxy fight
e. Implementation of a stock option plan
18. The process of planning and managing a firm's long-term assets is called:
a. capital budgeting. .
b. cash management.
c. working capital management.
d. cost accounting management.
e. capital structure management.
19. In a limited partnership, each limited partner's liability for the partnership's debts
is:
a. limited to his or her total earnings received from the partnership.
b. limited to the total amount invested by all partners.
c. limited to his or her personal net worth.
d. unlimited.
e. limited to the amount he or she invested into the partnership.
20. Which form of business structure typically has the greatest potential for agency
problems?
a. General partnership

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b. Sole proprietorship
c. Corporation
d. Limited partnership
e. Limited liability company
21. The articles of incorporation:

a. set forth the rights granted to shareholders. .
b. can set forth the conditions under which the firm can avoid double taxation.
c. set forth the rules by which the corporation regulates its existence.
d. are amended annually by the firm's stockholders.
e. can be used to remove the firm's management.
22. Given the corporate form of business organization, ownership:

a. can only be transferred with the approval of the board of directors.
b. transfers are unlimited. .
c. must be held by non-management owners.
d. must be granted with equal rights assigned to each and every shareholder.
e. is controlled by the corporate officers.
23. A stakeholder is any person or entity:

a. owning bonds or other long-term debt issued by a corporation.
b. owning shares of stock of a corporation.
c. other than a stockholder or creditor who potentially has a financial interest in a firm.
d. to whom the firm currently owes money.
e. that initially started a firm and currently has management control over that firm.
24. The decisions made by financial managers should all be ones which increase the:
a. growth rate of the firm.
b. market value of the existing owners' equity. .

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c. marketability of the managers.

d. firm's current sales.
e. size of the firm.
25. Stock options granted to a corporation's managers are primarily designed to:
a. replace promotions.
b. increase current profits.
c. reward long-term employment.
d. replace salary increases.
e. reduce agency costs.
26. Which one of these is most apt to be an agency problem?

a. Forsaking a profitable project because it involves some risk
b. Increasing the dividend payments to shareholders
c. Selling an unprofitable division of the firm
d. Increasing the sales of a profitable division
e. Paying off debt in a timely manner
27. Accounting profits and cash flows are generally:

a. the same due to the requirements of GAAP.
b. different because cash inflows must occur before revenue recognition.
c. the same since they reflect current laws and accounting standards.
d. different because of GAAP rules regarding the recognition of income. .
e. the same since accounting profits reflect the timing of cash flows.
28. The primary goal of financial management is to:

a. minimize operational costs and maximize firm efficiency.
b. maximize the current value per share of the existing stock. .
c. avoid financial distress.

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d. maximize current dividends per share of the existing stock.

e. maintain steady growth in both sales and net earnings.
29. The ultimate control of a corporation lies in the hands of the corporate:
a. board of directors.
b. president.
c. stockholders. .
d. chairman of the board.
e. chief executive officer.
30. The cheapest business entity to form is typically the:

a. joint stock company.
b. limited liability company.
c. sole proprietorship. .
d. limited partnership.
e. general partnership.
31. A firm creates value by:

a. having a greater cash inflow from its stockholders than its outflow to them.
b. generating sales whether or not payment is received for all of those sales.
c. paying more cash to its creditors and stockholders than the amount it received from
them. .
d. purchasing assets that create cash inflows equal to the cost of those assets.
e. borrowing long-term debt.
32. If a firm is currently profitable, then:

a. its reported sales exceed its costs.
b. the timing of the related cash flows is irrelevant. .
c. its cash flows are known with certainty.

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d. its current cash inflows must exceed its current cash outflows.
e. it will always have sufficient cash to pay its bills in a timely manner.
33. Which one of these best fits the description of an agency cost?
a. The payment of corporate income taxes
b. The costs of increasing the dividend payment per share
c. The payment required for an outside audit of the firm
d. The benefits received from reducing production costs per unit
e. The payment of interest on a firm's debts
34. Corporate bylaws:

a. establish the rights granted to its shareholders.
b. set forth the number of members of the initial board of directors.
c. establish the rules by which the corporation regulates its existence. .
d. establish the name of the corporation.
e. set forth the purpose of the firm.
35. Which of these have been cited as results from a corporation "going dark"?
a. Increased access to capital and lower costs associated with that capital
b. Lower audit costs and lower interest rates on bank loans
c. Limited access to capital markets and stock price declines
d. Increased market liquidity and lower costs
e. Increased audit costs and stock price increases
36. Which one of these represents the best means of increasing current shareholder
value?
a. Decreasing the number of employees
b. Increasing the current value of the overall firm
c. Forsaking all new projects

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d. Minimizing the overall size of the firm

e. Maximizing the capital rate of the firm
37. A general partner:

a. is the term applied only to corporations which invest in partnerships.
b. cannot lose more than the amount of his/her equity investment.
c. has less legal liability than a limited partner.
d. can end the partnership by withdrawing. .
e. faces double taxation of profits whereas a limited partner does not.
38. The intent of the registration statement required for all new securities by the
Securities Act of 1933 is to:
a. set the price at which the securities will be offered.
b. prevent any insider trading.
c. provide all necessary information to allow a potential investor to make an informed
decision. .
d. guarantee the profitability of the new securities.
e. provide a governmental evaluation of the risks associated with those new securities.
39. A proxy fight occurs when:

a. the firm is declared insolvent.
b. a competitor offers to sell their ownership interest in the firm.
c. the firm files for bankruptcy.
d. a group solicits voting rights to replace the board of directors. .
e. the board of directors disagree on the members of the management team.
40. Which one of the following statements concerning a sole proprietorship is correct?
a. The ability to raise capital is limited by the owner's personal wealth.
b. The company must pay income taxes separate from the taxes paid by the owner.
c. The ownership of the firm is easy to transfer to another individual.

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d. The proprietorship pays taxes at the corporate tax rate.

e. The legal costs to form a sole proprietorship are quite substantial.
41. Which one of the following is a capital budgeting decision?

a. Deciding when to repay a long-term debt
b. Determining how much inventory to keep on hand
c. Deciding how much credit to grant to a particular customer
d. Deciding whether or not a new production facility should be built
e. Determining how much debt should be borrowed from a particular lender
42. The treasurer and the controller of a corporation generally report to the:
a. chairman of the board.
b. chief executive officer.
c. chief financial officer.
d. president.
e. board of directors.
43. Which one of these is a correct definition?

a. Net working capital equals current assets plus current liabilities.
b. Current liabilities are debts that must be repaid in 18 months or less.
c. Long-term debt is defined as a residual claim on a firm's assets.
d. Tangible assets are fixed assets such as patents.
e. Current assets are assets with short lives, such as accounts receivable.
44. Which one of these statements is correct?

a. The value of an investment depends on the size, timing, and risk of the investment's
cash flows.
b. Accountants record sales and expenses after the related cash flows occur.
c. When selecting one of two projects, managers should select the project with the
higher total expected cash flow.

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d. Individuals tend to prefer later cash flows over current cash flows.
e. Most investors prefer greater risk over less risk.
45. The basic regulatory framework for the public trading of securities in the United
States was provided by the:
a. Federal Reserve Bank.
b. Securities Act of 1933 and the Securities Exchange Act of 1934. .
c. Securities Exchange Act of 1934.
d. Sarbanes-Oxley Act in 2002.
e. New York Stock Exchange when it was founded.
46. Partnership profits:

a. are fully distributed as taxable income to the partners. .
b. are distributed to general partners with interest paid to limited partners.
c. are generally held by the partnership and later distributed as dividend payments.
d. are distributed to the partners on an aftertax basis.
e. are generally reinvested in the firm rather than being distributed.
47. The Securities Act of 1933 focuses on:

a. Federal Deposit Insurance Corporation (FDIC) insurance.
b. the issuance of new securities. .
c. all stock transactions.
d. insider trading.
e. the sales of existing securities.
48. Which one of the following statements is correct?

a. Partnerships are the most complicated type of business to form.
b. Both partnerships and corporations incur double taxation.
c. All types of business formations have limited lives.

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d. Sole proprietorships and partnerships are taxed in a similar fashion. .

e. Both partnerships and corporations have limited liability for general partners and
shareholders.
49. Members of the board of directors are selected by:

a. the largest five shareholders.
b. the firm's Chief Executive Officer.
c. the firm's managers and employees.
d. shareholder voting. .
e. company management.
50. A conflict of interest between the stockholders and managers of a firm is referred
to as the:
a. stockholders' liability.
b. agency problem. .
c. corporate breakdown.
d. corporate activism.
e. legal liability.
51. Any debt that must be repaid within the next year is recorded on the balance sheet
as:
a. a current liability.
b. a current asset.
c. an intangible asset.
d. accounts receivable.
e. long-term debt.
52. A business formed by two or more individuals who each have unlimited personal
liability for all of the firm's debts is called a:
a. general partnership. .

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b. sole proprietorship.
c. limited liability company.
d. corporation.
e. limited partnership.
53. One disadvantage of the corporate form of business ownership is the:

a. firm's ability to raise cash.
b. unlimited life of the firm.
c. difficulties encountered when changing ownership.
d. limited liability protection provided for all owners.
e. double taxation of profits.
54. A business created as a distinct legal entity is called a:

a. corporation. .
b. limited partnership.
c. unlimited liability company.
d. general partnership.
e. sole proprietorship.
55. In a general partnership, the general partners have _____ liability for the firm's
debts and have _____ control over day-to-day operations.
a. limited; total
b. unlimited; total
c. unlimited; limited
d. unlimited; no
e. limited; no
56. Financial managers should primarily strive to:

a. maximize the current profits of the firm.

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b. maximize current dividends even if doing so adds financial distress costs to the
firm.
c. maximize the current value per share of existing stock. .
d. minimize costs while increasing current dividends.
e. maximize current market share in every market in which the firm participates.
57. A financial manager should make decisions based on:

a. the best interests of the current employees.
b. their personal goals and ambitions.
c. the welfare of the current shareholders. .
d. minimizing the firm's tax liability.
e. the effects those decisions will have on current profits.
58. Which statement concerning corporations is correct?

a. Primary shareholders have unlimited liability for corporate debts.
b. The entity can outlive all of its initial owners. .
c. The ability to raise capital is limited to that of a general partnership.
d. There are time limits placed on the transfer of ownership.
e. When the last original owner dies or withdraws, the entity is terminated.
59. The corporate controller is generally responsible for which one of these functions?
a. Financial planning
b. Credit management
c. Tax reporting
d. Cash management
e. Capital expenditures
60. A business owned by a single individual is called a:

a. limited liability company.

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b. limited partnership.
c. corporation.
d. sole proprietorship. .
e. general partnership.
61. The understanding of the work and cash to be contributed to a partnership by each
member of that partnership is formalized in the:
a. statement of purpose.
b. partnership agreement. .
c. indenture contract.
d. group charter.
e. indemnity clause.
62. The Sarbanes-Oxley Act requires public corporations to:

a. assess the company's internal control structure at least quarterly.
b. file annual audit reports if the firm has "gone dark".
c. disclose all personal loans to corporate officers or directors made after 2002.
d. distribute at least 90 percent of their profits in dividends on an annual basis.
e. list any deficiencies in internal controls.
63. Which one of the following statements concerning a sole proprietorship is correct?
a. A sole proprietorship has an unlimited life.
b. The business profits are taxed twice at the federal level.
c. The business profits are taxed separately from the personal income of the owner.
d. The owner may be forced to sell his/her personal assets to pay company debts. .
e. A sole proprietorship is difficult to form.
64. Which one of the following parties is considered a stakeholder of a firm?

a. Preferred stockholder

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b. Customer
c. Long-term creditor
d. Short-term creditor
e. Common stockholder
65. Which one of these accounts is included in net working capital?

a. Long-term debt
b. Manufacturing equipment
c. Common stock
d. Copyright
e. Inventory
66. Which one of these is a cash outflow from a corporation?

a. Issuance of debt
b. Sale of common stock
c. Sale of an asset
d. Profit retained by the firm
e. Tax payment
CHAPTER 2
1. Which one of the following statements concerning liquidity is correct?
a. Liquid assets generally earn higher rates of return than fixed assets.
b. The less liquidity a firm has, the lower the probability the firm will encounter
financial difficulties.
c. If you can sell an asset next year at a price equal to its actual value, the asset is
highly liquid.
d. Liquid assets are defined as those assets obtained within the past year.
e. Balance sheet accounts are listed in order of decreasing liquidity.
2. Which one of these accounts appears on the right-hand side of a balance sheet?

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a. Accumulated retained earnings

b. Cash and equivalents
c. Intangible assets
d. Accumulated depreciation
e. Property, plant, and equipment
3. An increase in which one of the following will cause the operating cash flow to
increase for a profitable firm?
a. Administrative expenses
b. Cash
c. Depreciation
d. Taxes
e. Net working capital
4. Under Generally Accepted Accounting Principles (GAAP), a firm's assets are

reported at:
a. historical cost less accumulated depreciation.
b. market value.
c. liquidation value less accumulated depreciation.
d. market value less accumulated depreciation.
e. liquidation value.
5. Which one of these is related to an increase in the book value of the stockholders'
equity in a profitable, non-dividend paying firm? Assume no shares of stock are
repurchased or sold.
a. A decrease in the book value of inventory
b. An increase in the market value of the firm's long-term debt
c. An increase in earnings per share
d. An increase in non-cash expenses
e. An increase in the market value of the firm's buildings

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6. Given the personal income tax rates as shown, what is the average tax rate for an
individual with taxable income of $118,700?
Taxable Income Tax Rate
$0−9,525 10%
9,526 − 38,700 12
38,701 − 82,500 22
82,501 − 24
157,500
a. 24.00 percent
b. 22.36 percent
c. 19.00 percent
d. 21.94 percent
e. 21.00 percent
7. AC Motors is a sole proprietorship that has taxable income of $94,200. How much
additional tax will be owed if the taxable income increases by $14,300 based on the
following tax rates? Assume this is the sole source of income for the owner.
Taxable Income Tax Rate
$0−9,525 10%
9,526 − 38,700 12
38,701 − 82,500 22
82,501 − 24
157,500
a. $3,039
b. $3,678
c. $3,406
d. $3,862
e. $3,432
8. For a given year, Mfg. Corp. had taxable income of $1,630 and a tax rate of 23
percent. The firm neither issued nor repurchased shares of stock but did decrease its
retained earnings by $310. What is the cash flow to stockholders?
a. $535.50
b. $1,565.10

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c. $1,242.50
d. $1,749.50
e. $959.50
9. At the beginning of the year, a firm had total assets of $51,400, fixed assets of
$32,800, and current liabilities of $13,280. At the end of the year, the current assets
are $14,800, the fixed assets are $34,100, and the current liabilities are $14,210. What
is the change in net working capital for the year?
a. −$4,730
b. −$18,930
c. −$6,950
d. $9,110
e. $11,470
10. Blauser's started the year with $280 in cash, $924 in inventory, $361 in accounts
payable, $1,687 in equipment, and $414 in accounts receivable. At year's end, the firm
had $311 in cash, $1,594 in equipment, $1,003 in inventory, $426 in accounts
receivable, and $398 in accounts payable. What was the change in net working capital
during the year?
a. $191
b. −$206
c. −$860
d. −$94
e. $85
11. For the year, Jensen's has depreciation of $2,058, dividends paid of $125, interest
expense of $382, an addition to retained earnings of $3,408, and an increase in
common stock of $2,500. The total tax rate is 21 percent. What is the operating cash
flow?
a. $6,460
b. $5,325
c. $5,973

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d. $6,408
e. $5,735
12. Earnings per share will increase when:

a. the number of shares outstanding increase. b. the average tax rate increases.
c. operating income decreases.
d. dividends per share decrease.
e. depreciation decreases.
13. An asset that can be quickly converted into cash without significant loss in value is
referred to as being:
a. tangible. b. intangible.
c. marketable.
d. fixed.
e. liquid.
14. Which one of these is a non-cash item?

a. Dividends
b. Selling expenses
c. Current taxes
d. Interest expense
e. Deferred taxes
15. An increase in treasury stock:

a. requires repayment at some point in the future.
b. increases the total equity of the firm.
c. increases the number of shares outstanding.
d. is the result of a firm issuing new shares of stock to the federal government.
e. results from a repurchase of outstanding shares of stock.

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16. Assets are listed on the balance sheet in order of:

a. decreasing liquidity.
b. market value relative to book value.
c. acquisition.
d. book value.
e. increasing size.
17. Foxglove Interiors has net fixed assets of $38,215, long-term debt of $22,400, cash
of $560, accounts payable $4,611, inventory of $11,408, and accounts receivable of
$3,462. How much net working capital does the firm have?
a. $10,819
b. $14,736
c. $11,634
d. $26,634
e. $13,117
18. Mart's Boutique has sales of $820,000 and costs of $540,000. Interest expense is
$36,000 and depreciation is $59,000. The tax rate is 21 percent. What is the net
income?
a. $146,150
b. $139,050
c. $105,000
d. $221,200
e. $179,250
19. Which one of the following is a current liability?

a. Loan payment due in 13 months
b. Amount due from a customer in 30 days
c. Estimated taxes just paid

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d. Amount due to a supplier in 18 months

e. Note payable in nine months
20. A firm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts
receivable, $890 in accounts payable, and $360 in cash. What is the amount of the net
working capital?
a. $2,390
b. $5,590
c. $3,600
d. $4,700
e. $1,500
21. Free cash flow is:

a. another term for operating cash flow.
b. the net income of a firm after taxes have been paid.
c. cash that the firm can distribute to creditors and stockholders.
d. the cash generated by decreasing net working capital.
e. the money generated from the sale of new shares of stock.
22. Thompson's Jet Skis has operating cash flow of $11,618. Depreciation is $2,345
and interest paid is $395. A net total of $485 was paid on long-term debt. The firm
spent $6,180 on fixed assets and decreased net working capital by $420. What is the
cash flow of the firm?
a. $5,858
b. $8,203
c. $7,363
d. $9,228
e. $5,018

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23. The General Store has total revenue of $4,116, depreciation of $319, selling and
administrative expenses of $554, interest expense of $162, dividends of $75, cost of
goods sold of $2,354, and taxes of $186. What is the operating cash flow?
a. $720
b. $1,147
c. $1,022
d. $795
e. $1,118
24. The cash flow to stockholders must be positive when:

a. both the cash flow to assets and the cash flow to creditors are positive.
b. the net sale of common stock exceeds the amount of dividends paid.
c. the cash flow from assets is positive and exceeds the cash flow to creditors.
d. the dividends paid are less than the amount of net new equity raised.
e. no income is distributed but new shares of stock are sold.
25. Awnings Inc. has beginning net fixed assets of $234,100 and ending net fixed
assets of $243,600. Assets valued at $42,500 were sold during the year. Depreciation
was $62,500. What is the amount of net capital spending?
a. $72,000
b. $53,000
c. −$42,500
d. $9,500
e. $29,500
26. Which term defines the tax rate that applies to the next dollar of taxable income
earned?
a. Deductible
b. Residual
c. Marginal

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d. Total
e. Average
27. According to Generally Accepted Accounting Principles (GAAP), the cost of

goods sold expenses are:
a. recorded as incurred.
b. recorded when paid.
c. matched with production levels.
d. expensed as management desires.
e. matched with revenues.
28. Liquidity is:

a. equal to current assets minus current liabilities.
b. generally most associated with intangible assets.
c. valuable to a firm even though liquid assets tend to be less profitable to own.
d. a measure of the use of debt in a firm's capital structure.
e. equal to the market value of a firm's total assets minus its total liabilities.
29. Deep Water Mining added $411 to retained earnings last year on sales of $24,646.
The administrative expenses were $4,370, depreciation was $812, dividends paid were
$285, and the interest expense was $103. What was the cost of goods sold if the total
tax rate was 23 percent?
a. $21,393
b. $14,815
c. $20,225
d. $24,385
e. $18,457
30. Capital spending is equal to:

a. ending total assets minus beginning total assets.

lOMoARcPSD|19685806
b. ending net fixed assets minus beginning net fixed assets.

c. ending net fixed assets minus beginning net fixed assets plus depreciation.
d. ending total assets minus beginning total assets plus depreciation.
e. beginning total assets plus asset purchases minus asset sales.
31. If a firm's financial managers successfully meet their primary goal, then the firm's:
a. market value will exceed its book value.
b. net working capital will exceed its long-term debt.
c. equity will exceed its assets.
d. carrying value will exceed its market value.
e. debts will exceed its equity.
32. Payments to creditors that include interest and the repayment of principal are
referred to as:
a. the change in net working capital.
b. operating cash flow.
c. the reduction in net working capital.
d. the cash flow to stockholders.
e. debt service
33. For a given year, Rogers Express paid $318 in interest, $460 in dividends, and
$368 in taxes. The firm had a net income of $1,220, depreciation of $1,560, an
increase in net working capital of $220, an increase in net fixed assets of $950, and a
decrease in long-term debt of $260. There were no changes in the equity accounts
other than the change in retained earnings. What is the annual cash flow of the firm?
a. $2,780
b. $3,148
c. $50
d. $1,610
e. $1,038

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34. Pete's Boats has beginning long-term debt of $840 and ending long-term debt of
$790. The beginning and ending total debt balances are $1,220 and $1,360,
respectively. The interest paid is $30. What is the amount of the cash flow to
creditors?
a. −$110
b. $110
c. $20
d. −$80
e. $80
35. Cash flow from assets:

a. equals operating cash flow minus net capital spending.
b. equals operating cash flow minus the cash flow to creditors.
c. equals net income plus non-cash items.
d. equals the addition to retained earnings.
e. can be positive, negative, or equal to zero.
36. For a firm with long-term debt, net income must be equal to:
a. Pretax income − Interest expense − Taxes.
b. Dividends + Addition to retained earnings.
c. EBIT − Taxes.
d. Operating income × (1 − Marginal tax rate).
e. Taxes + Addition to retained earnings.
37. Cash flow to stockholders is defined as:

a. cash dividends paid.
b. repurchases of equity less new equity sold minus cash dividends paid.
c. cash dividends paid plus repurchases of equity minus new equity financing.
d. cash flow from assets plus cash flow to creditors.

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e. cash flow from financing less cash flow to creditors.
38. The cash flow of the firm must be equal to the:

a. cash flow to creditors minus the cash flow to stockholders.
b. cash flow to stockholders minus the cash flow to creditors.
c. aftertax operating cash flow.
d. cash flow to stockholders plus the cash flow to creditors.
e. cash flow to governments plus the cash flow to stockholders.
39. According to Generally Accepted Accounting Principles (GAAP), revenue is

recognized as income when:
a. payment is requested.
b. managers decide to recognize it.
c. the transaction is complete and the goods or services are delivered.
d. a contract is signed to perform a service or deliver a good.
e. income taxes are paid on the revenue earned.
40. Which one of these accounts is classified as a fixed asset on the balance sheet?
a. Preferred stock
b. Accounts receivable
c. Inventory
d. Accounts payable
e. Intangible assets
41. Delfinio's has total revenues of $4,315, selling and administrative expenses of
$611, depreciation of $309, cost of goods sold of $2,403, taxes of $178, dividends of
$80, and interest expense of $168. What is the amount of the non-cash items?
a. $477
b. $309
c. $567

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d. $248
e. $481

a. The addition to retained earnings is equal to net income plus dividends.
b. Operating income is equal to operating revenue minus cost of goods sold.
c. Pretax income is equal to net income minus taxes.
d. Only current taxes are included in the tax expense.
e. Earnings per share can be negative but dividends per share cannot.
43. This year, Johnson Mills has annual revenue of $37,800, cost of goods sold of
$23,200, and administrative expenses of $6,300. The firm paid $700 in dividends,
$280 in interest, and has a total tax rate of 21 percent. The firm will add $2,810 to
retained earnings. What is the depreciation expense?
a. $2,300
b. $3,577
c. $2,640
d. $780
e. $3,709
44. Which one of the following accounts is included in stockholders' equity?

a. Deferred taxes
b. Long-term debt
c. Plant and equipment
d. Accumulated retained earnings
e. Dividends paid
45. Which one of these equations is an accurate expression of the balance sheet?
a. Stockholders' equity ≡ Assets − Liabilities
b. Liabilities ≡ Stockholders' equity − Assets

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c. Assets ≡ Stockholders' equity − Liabilities

d. Assets ≡ Liabilities − Stockholders' equity
e. Stockholders' equity ≡ Assets + Liabilities
46. Total equity is $1,620, fixed assets are $1,810, long-term debt is $650, and short-
term debt is $300. What is the amount of current assets?
a. $790
b. $760
c. $480
d. $1,140
e. $360
47. At the beginning of this year, Blauser Industries had net fixed assets of $21,506
and total assets of $32,687. At year's end, net fixed assets are $20,492 and total assets
are $32,915. The annual depreciation expense is $1,520. What is net capital spending
for this year?
a. $1,748
b. −$2,534
c. −$850
d. −$1,292
e. $506
48. Net capital spending is equal to the:

a. net change in total assets plus depreciation.
b. net change in fixed assets plus depreciation.
c. change in total assets.
d. difference between the market and book values of the total assets.
e. net income plus depreciation.

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49. Upton Industries has revenues of $42,629, interest expense of $1,230, depreciation
of $2,609, cost of goods sold of $23,704, dividends paid of $1,200, and administrative
expenses of $7,040. Assume the tax rate is 22 percent. What is the addition to retained
earnings?
a. $5,075.88
b. $3,766.67
c. $5,230.04
d. $4,630.19
e. $4,903.18
50. Which one of these will cause an increase in the cash flow to creditors for the
current year?
a. Collection of a refund for the overpayment of a loan
b. Payoff of a 36-month loan after the first 15 months
c. Payment of a late charge on an account payable to a supplier
d. Acquiring a new loan that will be repaid in one lump sum 24 months from now
e. Purchasing inventory using credit offered by a supplier
51. The book value of assets:

a. is determined under Generally Accepted Accounting Principles (GAAP) and is
based on the cost of those assets.
b. is always the best measure of the company's value to an investor.
c. is always higher than the replacement cost of the assets.
d. represents the true market value of those assets according to GAAP.
e. is shown on the firm's income statement.
52. In the accounting statement of cash flows, which one of these is calculated by
adding back noncash expenses to net income and adjusting for changes in current
assets and liabilities?
a. Cash flow to investors
b. Net working capital

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c. Cash flow from operations

d. Cash flow from investing activities
e. Cash flow from financing activities
53. During the year, Lasko's repaid $12,500 in long-term debt, borrowed $8,400, paid
$611 in interest and $740 in dividends, and had an operating cash flow of $16,207.
The firm acquired $33,500 in new fixed assets and sold $8,400 of old assets. Net
working capital declined by $1,592 during the year. What is the annual cash flow to
stockholders?
a. $2,800
b. $1,200
c. −$2,590
d. −$8,828
e. −$12,012
54. As of 2018, the U.S. corporate tax rate is:

a. zero with all corporate taxable income passed to shareholders.
b. based on a tiered, multi-rate flat tax.
c. a flat tax of 34 percent.
d. based on a progressive tax rate schedule.
e. a flat rate of 21 percent.
55. Lester's Markets has total revenues of $3,811, costs of $2,902, depreciation of
$315, interest expense of $168, and taxes of $89. At the beginning of the year, the firm
had current assets of $2,150, total assets of $4,908, and total liabilities of $1,964. At
the end of the year, the current assets are $2,202, total assets are $5,103, and total
liabilities are $1,952. What is the amount of net capital spending for the year?
a. $133
b. −$182
c. $285
d. $458

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e. $510
56. Which one of these does not affect the cash flow to creditors?
a. New mortgage on a building
b. Mortgage interest payment
c. Reduction in long-term debt
d. Increase in accounts payable
e. Interest paid on long-term debt
57. In the accounting statement of cash flows, interest expense is:

a. included as an investing activity.
b. included in operations.
c. ignored completely.
d. included as a financing activity.
e. included both as an operating and as a financing activity.
58. Assume Juno’s paid $368,060 in taxes on taxable income of $1,673,000 last year.
This year, the firm paid $401,545 in taxes on taxable income of $1,818,586. Assume
the tax rates were the same for both years. What are the marginal and average tax rates
for this year?
a. 23 percent; 21 percent
b. 22 percent; 22 percent
c. 22 percent; 21 percent
d. 21 percent; 21 percent
e. 23 percent; 22 percent
59. Northern Express paid $85 in dividends and $110 in interest expense during a
given year. During that same year, the firm issued $40 in new equity shares, issued
new debt of $65, and repaid $23 of old debt. What is the cash flow to creditors for that
year?
a. $68

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b. $237
c. $146
d. $46
e. $152
60. The cash flow resulting from a firm's ongoing, normal business activities is
referred to as the:
a. operating cash flow.
b. net capital spending.
c. cash flow to investors.
d. free cash flow.
e. additions to net working capital
61. Assuming the number of shares outstanding and total earnings remains constant,
an increase in dividends per share will:
a. increase total assets.
b. reduce the addition to retained earnings.
c. reduce net income.
d. reduce the earnings per share.
e. increase total equity.
62. Quick Marts increased its cash by $418 this year. The firm's statement of cash
flows shows total cash flow from financing activities of $246 and total cash flow from
investing activities of −$184. What is the total cash flow from operations on this
accounting statement?
a. $367
b. $391
c. $356
d. $427
e. $480

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63. Last year, Webster Farms had annual revenue of $87,200, depreciation of $11,600,
cost of goods sold of $54,700, and administrative expenses of $8,300. The firm paid
$3,200 in dividends and paid taxes of $2,646. What was the operating cash flow?
a. $21,554
b. $23,100
c. $23,700
d. $21,500
e. $18,300
64. The accounting statement of cash flows consists of the cash flows from:
a. operations, investing activities, and financing activities.
b. balance sheet accounts only.
c. internal activities, external activities, and financing activities.
d. operations, investing activities, and divesting activities.
e. income statement accounts only.
65. Depreciation for a profitable firm:

a. decreases both operating and net income.
b. decreases net fixed assets, net income, and operating cash flows.
c. increases the net fixed assets as shown on the balance sheet.
d. is a non-cash expense which increases the net operating income.
e. reduces both the net fixed assets and the costs of a firm.
66. When you are making a financial decision, the most relevant tax rate is the ____
rate when the tax rate schedule is progressive.
a. fixed
b. total
c. variable
d. marginal

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e. average
67. Earnings per share:

a. will increase if net income decreases and the number of shares outstanding
increases.
b. must increase at the same rate as the net income.
c. will increase if net income increases and the number of shares outstanding
decreases.
d. is defined as the addition to retained earnings divided by the number of shares
outstanding.
e. is the total amount of dividends paid per year on a per share basis.
68. JK Meadows has beginning current liabilities of $14,602 and total liabilities of
$35,418. At the end of the year, the current liabilities are $15,311 and the total
liabilities are $37,604. During the year, the firm paid $680 in dividends and $1,320 in
interest. What is the cash flow to creditors?
a. $2,797
b. $3,135
c. −$157
d. $3,230
e. −$267
69. For the year, Peggy Grey's Cookies had net income of $8,110. The firm paid out
30 percent of the net income to its shareholders as dividends and also paid $210 in
interest. During the year, the company repurchased $500 worth of common stock and
borrowed $250. What is the cash flow to stockholders?
a. $2,933
b. $2,433
c. $1,893
d. $1,933
e. $2,893

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70. Which account represents the book value of all of a corporation's net profits less
its dividend payments?
a. Capital surplus
b. Accumulated retained earnings
c. Preferred stock
d. Common stock
e. Treasury stock
71. A firm's dividend payments less any net new equity raised is referred to as the
firm's:
a. net working capital.
b. operating cash flow.
c. capital spending.
d. cash flow to stockholders.
e. cash flow from creditors.
72. All else held constant, the earnings per share will decrease as the:
a. number of shares outstanding increases.
b. total revenue of the firm increases.
c. net income increases.
d. tax rate decreases.
e. costs decrease.
73. At the beginning of the year, long-term debt of a firm is $2,400 and total debt is
$3,150. At the end of the year, long-term debt is $2,800 and total debt is $4,370. The
interest paid is $40. What is the amount of the cash flow to creditors?
a. $440
b. $1,180
c. −$360
d. −$40

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e. $1,260
74. Noncash items refer to:

a. the accounts payable of a firm.
b. the costs incurred for the purchase of intangible fixed assets.
c. all accounts on the balance sheet other than cash on hand.
d. the credit sales of a firm.
e. expenses charged against revenues that do not directly affect cash flow.
75. A firm starts its year with positive net working capital. During the year, the firm
acquires more short-term debt than it does short-term assets. This means that:
a. the beginning current assets were less than the beginning current liabilities.
b. both accounts receivable and inventory decreased during the year.
c. accounts payable increased and inventory decreased during the year.
d. the ending net working capital must be negative.
e. the ending net working capital can be positive, negative, or equal to zero.
76. As seen on the income statement of a tax-paying firm:

a. the tax rate is applied to the earnings before interest and taxes when the firm pays
interest.
b. interest expense is added to earnings before interest and taxes to compute pretax
income.
c. depreciation reduces both the pretax income and the net income.
d. depreciation is shown as an expense but does not affect the tax expense.
e. interest is deducted from income and increases the total taxes incurred.
77. Which one of the following assets is generally the most liquid?
a. Inventory
b. Buildings
c. Accounts receivable

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d. Equipment
e. Patents
78. Ledger Properties has the following financial information:

Current Year Prior Year
Revenues $48,91 $43,61
5 0
Administrative 12,106 11,602
expenses
Interest expense 816 468
Cost of goods sold 29,715 26,309
Depreciation 1,408 1,387
Net fixed assets 32,711 31,984
Current liabilities 14,652 14,625
Common stock 15,000 14,000
Current assets 16,506 14,687
Long-term debt 12,200 ?
Retained earnings 7,365 4,246
Dividends paid 290 275
What is the cash flow of the firm for the current year if the tax rate is 22 percent?
a. $2,297
b. $1,042
c. $1,885
d. $2,096
e. $2,517
79. The income statement:

a. treats dividends paid as a cash expense.
b. ignores any income other than operating revenues.
c. includes noncash expenses.
d. measures performance for one specific day.
e. excludes deferred tax expense.
80. Which one of these is most apt to be a fixed, cash expense in the short run?

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a. Raw materials cost

b. Commissions paid to sales representatives
c. Depreciation
d. Bond interest
e. Manufacturing labor costs
81. A firm has $820 in inventory, $3,200 in fixed assets, $670 in accounts receivable,
$390 in accounts payable, $500 in long-term debt, and $360 in cash. What is the
amount of the net working capital?
a. $3,600
b. $960
c. $890
d. $1,460
e. $3,340
82. Martha's Enterprises spent $4,100 to purchase equipment three years ago. This
equipment is currently valued at $2,700 on today's balance sheet but could actually be
sold for $3,200. Net working capital is $400 and long-term debt is $2,300. Assuming
the equipment is the firm's only fixed asset, what is the book value of shareholders'
equity?
a. $1,600
b. $1,300
c. $2,200
d. $1,900
e. $800
83. If you sell an asset, you are most apt to receive which value for that asset?
a. Original cost minus accumulated depreciation
b. Carrying value
c. Book value
d. Market value

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e. Historical value
84. Right Way Movers has interest expense of $168, total revenues of $38,411, costs
of $28,515, depreciation of $306, and taxes of $1,979. The beginning balance sheet
has total assets of $48,354, net fixed assets of $31,202, current liabilities of $14,207,
and total liabilities of $29,407. The ending balance sheet shows total assets of
$49,305, net fixed assets of $33,406, current liabilities of $17,318, and total liabilities
of $30,404. What is the annual cash flow of the firm?
a. −$2,160
b. $2,857
c. $15,168
d. $8,474
e. $9,771
85. Book value:

a. generally tends to exceed market value when fixed assets are included.
b. is adjusted whenever the market value of an asset changes.
c. is more of a financial than an accounting valuation.
d. is based on historical cost.
e. is equivalent to market value for firms with fixed assets.
86. JJ's has net sales of $48,920, depreciation of $711, cost of goods sold of $31,890,
administrative costs of $11,210, interest expense of $680, dividends paid of $450, and
taxes of $974. What is the cash flow from operations as it will appear on the
accounting statement of cash flows if the firm spent $274 on net working capital?
a. $3,056
b. $3,391
c. $4,066
d. $3,667
e. $3,892

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87. Southwest Co. has equipment with a book value of $3,560 that could be sold today
for $3,900. Its inventory is valued at $1,780 and could be sold immediately to a
competitor at a discount of 25 percent. The firm has $260 in cash and customers owe
the firm $950, of which 98 percent is collectible. What is the current market value of
the firm's assets?
a. $6,316
b. $6,086
c. $6,426
d. $5,536
e. $5,946
88. The financial statement summarizing a firm's accounting performance over a

period of time is the:
a. income statement.
b. statement of cash flows.
c. balance sheet.
d. tax reconciliation statement.
e. statement of equity.
89. The entire book value of the residual ownership of a corporation is known as the:
a. intangible assets.
b. total assets.
c. retained earnings.
d. capital surplus.
e. total equity.
90. One of the reasons why cash flow analysis is popular is because:
a. deferred taxes require future cash payment.
b. it is difficult to manipulate, or spin the cash flows.
c. cash flows are strictly defined by Generally Accepted Accounting Principles
(GAAP).

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d. operating cash flows are found on the income statement.

e. cash flows are more subjective than net income.
91. For a tax-paying firm, an increase in the depreciation expense of $1 will:

a. increase net income by less than $1.
b. increase net income by $1.
c. reduce net income by less than $1.
d. reduce net income by more than $1.
e. reduce net income by $1.
92. Daniels Transport has operating income of $68,200, interest expense of $210,
dividends paid of $320, depreciation of $12,400, other income of $2,100, common
stock of $48,500 with a par value of $1 per share, and retained earnings of $29,700.
What is the earnings per share if the tax rate is 21 percent?
a. $.82
b. $1.14
c. $.96
d. $1.21
e. $1.33
93. A debt-free firm has total sales of $22,980, costs of $14,715, and depreciation of
$6,045. What is the operating cash flow at a tax rate of 23 percent?
a. $2,410.80
b. $7,754.40
c. $8,340.00
d. $1,465.20
e. $9,019.80
94. Last year, Oscar's Dog Treats had a cash flow to creditors of $2,840 and a cash
flow to stockholders of $1,630. The firm spent a net of $1,420 on fixed assets and
reduced net working capital by $330. What was the operating cash flow?

lOMoARcPSD|19685806
a. $3,500
b. $6,190
c. $4,901
d. $1,320
e. $5,560
95. For a growing firm, the change in net working capital is generally:
a. negative.
b. highly erratic.
c. positive.
d. highly negative.
e. equal to zero.
96. An increase in total assets:

a. means that stockholders' equity must also increase.
b. requires an investment in fixed assets.
c. can only occur when a firm has positive net income.
d. must be offset by an equal increase in liabilities and stockholders' equity.
e. means that net working capital is also increasing.
97. On a balance sheet, deferred taxes are classified as:

a. stockholders' equity.
b. a long-term liability.
c. a fixed asset.
d. a current liability.
e. a current asset.
98. Operating cash flow is defined as:

a. Net income − Dividends.

lOMoARcPSD|19685806
b. Cash flow to investors + Taxes.

c. Pretax income + Depreciation.
d. EBIT + Depreciation − Taxes.
e. Pretax income − Taxes.
CHAPTER 3
1. Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are
32,500 shares of stock outstanding at a market price per share of $21.60. What is the
price-earnings ratio?
a. 18.47
b. 19.21
c. 23.40
d. 22.60
e. 21.08
2. Ratios that measure a firm's financial leverage are known as ________ ratios.
a. asset management
b. short-term solvency
c. market value
d. profitability
e. long-term solvency
3. The sustainable growth rate:

a. assumes there is no external financing of any kind.
b. is based on receiving additional external equity financing.
c. assumes the dividend payout ratio is equal to zero.
d. is normally higher than the internal growth rate.
e. assumes the debt-equity ratio is variable.
4. Projected future financial statements are called:

lOMoARcPSD|19685806
a. comparative statements.
b. aggregated statements.
c. pro forma statements.
d. reconciled statements.
e. imaginative statements.
5. The sustainable rate of growth for a firm can be increased by:

a. decreasing the profit margin.
b. decreasing the debt-equity ratio.
c. increasing the capital intensity ratio.
d. increasing the dividend payout ratio.
e. increasing the total asset turnover.
6. Which statement expresses all relative account values as a percentage of total

assets?
a. Pro forma balance sheet
b. Common-size balance sheet
c. Statement of cash flows
d. Common-size income statement
e. Pro forma income statement
7. The measure of net income returned from every dollar invested in total assets is the:
a. return on assets.
b. earnings before interest and taxes.
c. return on equity.
d. asset turnover.
e. profit margin.
8. The inventory turnover ratio is measured as:

lOMoARcPSD|19685806
a. inventory divided by sales.

b. sales divided by inventory.
c. inventory divided by cost of goods sold.
d. inventory times total sales.
e. cost of goods sold divided by inventory.
9. A supplier, who requires payment within ten days, should be most concerned with
which one of the following ratios when granting credit?
a. Debt-equity
b. Total debt
c. Current
d. Cash
e. Quick
10. Financial planning models are most apt to omit:

a. the timing, risk, and size of the cash flows.
b. the changes in net working capital required for additional sales.
c. any change in retained earnings due to changes in the income statement.
d. the increases in costs required to increase sales.
e. any additions that might be needed to fixed assets.
11. A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for
every:
a. $.53 in total assets.
b. $.53 in total equity.
c. $1 in total equity.
d. $1 in fixed assets.
e. $1 in current assets.

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12. Vinnie's Motors has a market-to-book ratio of 3.4. The book value per share is $34
and earnings per share are $1.36. Holding the market-to-book ratio and earnings per
share constant, a $1 increase in the book value per share will:
a. decrease the EV multiple.
b. decrease the market price per share.
c. decrease the price-earnings ratio.
d. increase the return on equity.
e. increase the price-earnings ratio.
13. DL Motors has sales of $22,400, net income of $3,600, net fixed assets of
$18,700, inventory of $2,800, and total current assets of $6,300. What is the common-
size statement value of inventory?
a. 10.07 percent
b. 9.84 percent
c. 12.50 percent
d. 11.20 percent
e. 13.67 percent
14. Which one of the following sets of ratios would generally be of the most interest to
stockholders?
a. Quick ratio and times interest earned
b. Return on equity and price-earnings ratio
c. Cash coverage ratio and equity multiplier
d. Price-earnings ratio and debt-equity ratio
e. Return on assets and profit margin
15. Jones Mfg. has current assets of $26,900, net working capital of $8,200, long-term
debt of $21,500, and total equity of $57,800. What is the equity multiplier?
a. 1.99
b. 1.70
c. 1.66

lOMoARcPSD|19685806
d. 1.59
e. 1.80
16. The market-to-book ratio is measured as the:

a. market price per share divided by the net income per share.
b. market price per share divided by the dividends per share.
c. market value per share divided by the book value per share.
d. net income per share divided by the market price per share.
e. market price per share divided by the par value per share.
17. You would like to compare your firm's cost structure to that of your competitors.
However, your competitors are much larger in size than your firm. Which one of these
would best enable you to compare costs across your industry?
a. Statement of cash flows
b. Common-size balance sheet
c. Pro forma income statement
d. Common-size income statement
e. Pro forma balance sheet
18. New Metals has depreciation of $28,300, interest expense of $11,400, EBIT of
$62,700, a price-earnings ratio of 8.6, a profit margin of 7.2 percent, a tax rate of 21
percent, and 37,500 shares of stock outstanding. What is the market price per share?
a. $10.92
b. $12.48
c. $7.09
d. $9.29
e. $13.48
19. A public firm's market capitalization is equal to the:

a. par value of common equity.

lOMoARcPSD|19685806
b. total book value of assets less the book value of debt.

c. stock price per share multiplied by the number of shares authorized.
d. maximum value an acquirer would pay for the firm in an acquisition.
e. price per share multiplied by number of shares outstanding.
20. A firm has 12,000 shares of stock outstanding, sales of $638,100, a profit margin
of 8.2 percent, a tax rate of 21 percent, a price-earnings ratio of 11.3, and a book value
per share of $7.98. What is the market-to-book ratio?
a. 5.16
b. 6.17
c. 5.42
d. 6.08
e. 6.90
21. Kelso's has a return on equity of 16.2 percent, a debt-equity ratio of 44 percent, a
capital intensity ratio of 1.08, a current ratio of 1.25, and current assets of $138,000.
What is the profit margin?
a. 9.72 percent
b. 13.69 percent
c. 15.19 percent
d. 12.15 percent
e. 7.48 percent
22. A banker considering loaning money to a firm for ten years would most likely
prefer the firm have a debt ratio of _______, and a times interest earned ratio of
_______.
a. .50; .75
b. .45; 1.75
c. .40; .75
d. .40; 1.75
e. .50; 1.00

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23. Which one of the following is most apt to cause a profitable, stable firm to have a
higher price-earnings ratio?
a. Low investor opinion of firm
b. Very low current earnings
c. Slow industry outlook
d. Low market share
e. Low prospect of firm growth
24. Ratios that measure how efficiently a firm uses its assets to generate sales are
known as _______ ratios.
a. profitability
b. market value
c. asset management
d. short-term solvency
e. long-term solvency
25. The least problems encountered when comparing the financial statements of one
firm with those of another firm occur when the firms:
a. use different methods of depreciation.
b. have the same fiscal year-end.
c. have geographically diverse operations.
d. are both classified as conglomerates.
e. are in different lines of business.
26. The Blue Giant has a profit margin of 6.2 percent and a dividend payout ratio of
40 percent. The capital intensity is 1.08 and the debt-equity ratio is .54. What is the
sustainable rate of growth?
a. 5.53 percent
b. 5.60 percent

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c. 6.41 percent
d. 5.89 percent
e. 6.30 percent
27. The DuPont identity can be computed as:

a. Net income × Total asset turnover × Equity multiplier.
b. Profit margin × 1/Capital intensity ratio × (1 + Debt-equity ratio).
c. Return on equity × Profit margin × Total asset turnover.
d. Profit margin × Total asset turnover × Debt-equity ratio.
e. Net income × Profit margin × (1 + Debt-equity ratio).
28. Weston's has sales of $38,900, net income of $2,400, total assets of $43,100, and
total equity of $24,700. Interest expense is $830. What is the common-size statement
value of the interest expense?
a. 3.46 percent
b. 3.08 percent
c. 2.49 percent
d. 2.13 percent
e. 1.93 percent
29. Northern Industries has accounts receivable of $42,300, inventory of $61,200,

sales of $544,200, and cost of goods sold of $393,500. How many days, on average,
does it take the firm to sell its inventory?
a. 80.46
b. 74.92
c. 56.77
d. 93.08
e. 85.14

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30. Last year, Alfred's Automotive had a price-earnings ratio of 15 and earnings per
share of $1.20. This year, the price-earnings ratio is 18 and the earnings per share is
$1.20. Based on this information, it can be stated with certainty that:
a. the investors' outlook for the firm has improved.
b. investors are paying a lower price per share this year as compared to last year.
c. the earnings per share decreased.
d. investors are receiving a higher rate of return this year.
e. the price per share decreased.
31. The quick ratio is measured as:

a. current assets minus inventory, divided by current liabilities.
b. current assets divided by current liabilities.
c. current assets minus inventory minus current liabilities.
d. cash on hand plus current liabilities, divided by current assets.
e. current liabilities divided by current assets, plus inventory.
32. Leo's Markets has sales of $684,000, costs of $437,000, interest paid of $13,800,
total assets of $712,000, and depreciation of $109,400. The tax rate is 21 percent and
the equity multiplier is 1.6. What is the return on equity?
a. 19.48 percent
b. 21.98 percent
c. 20.06 percent
d. 21.30 percent
e. 23.92 percent
33. The maximum rate at which a firm can grow while maintaining a constant debt-
equity ratio is best defined by its:
a. internal rate of growth.
b. sustainable rate of growth.
c. rate of return on equity.

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d. rate of return on assets.

e. average historical rate of growth.
34. The financial ratio measured as net income divided by sales is known as the firm's:
a. asset turnover.
b. profit margin.
d. earnings before interest and taxes.
e. return on assets.
35. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings
ratio of 19. Thus, you can state with certainty that one share of stock in Alfred's:
a. has a higher market price per dollar of earnings than does one share of Turner's.
b. earns a greater profit per share than does one share of Turner's stock.
c. represents a larger percentage of firm ownership than does one share of Turner's
stock.
d. sells at a lower price per share than one share of Turner's.
e. has a higher market price than one share of stock in Turner's.
36. Which one of these values best represents the funds needed to acquire a firm and
payoff all of that firm's debt?
a. Return on assets
b. Enterprise value
c. Market value of total assets
d. Market value of equity
e. Book value of equity
37. Narrow Falls Lumber has total assets of $913,600, total debt of $424,500, net sales
of $848,600, and net income of $94,000. The tax rate is 21 percent and the dividend
payout ratio is 30 percent. What is the firm's sustainable growth rate?

lOMoARcPSD|19685806
a. 12.63 percent
b. 13.97 percent
c. 14.91 percent
d. 15.54 percent
e. 14.46 percent
38. A firm with a high level of growth opportunities is most apt to have a:
a. low PE ratio and a high EV multiple.
b. high cash ratio and a low EV multiple.
c. high PE ratio and a high EV multiple.
d. low cash ratio and a low PE ratio.
e. high PE ratio and a low EV multiple.
39. Black Stone Mills has an enterprise value ratio of 9.8, a profit margin of 6.5
percent, sales of $946,200, costs of $631,400, depreciation of $17,900, interest
expense of $4,500, and a total tax rate of 23 percent. What is the value of the
enterprise?
a. $2,748,300
b. $2,918,640
c. $3,085,040
d. $3,102,900
e. $3,206,780
40. Deep Falls Timber has net sales of $642,100, net income of $50,800, dividends
paid of $12,700, total assets of $658,000, and total equity of $444,400. What is the
internal growth rate?
a. 5.18 percent
b. 6.24 percent
c. 5.83 percent
d. 7.70 percent

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e. 6.15 percent
41. The value of the variable “b" as used in the internal growth rate formula can be
computed as:
a. Total dividends/Net income.
b. 1 − Dividend payout ratio.
c. 1 − PE ratio.
d. 1 + Growth rate.
e. Net income/Total sales.
42. Home Systems has sales of $312,800, cost of goods sold of $218,400, inventory of
$46,300, and accounts receivable of $62,700. How many days, on average, does it
take the firm to both sell its inventory and collect payment on the sale?
a. 124.03
b. 142.10
c. 150.54
d. 178.21
e. 96.37
43. Sun Shade's has sales of $363,000, total assets of $323,500, and a profit margin of
14.6 percent. The firm has a total debt ratio of 54 percent. What is the return on
equity?
a. 28.45 percent
b. 31.74 percent
c. 35.61 percent
d. 7.88 percent
e. 23.29 percent
44. It is easier to evaluate a firm using its financial statements when the firm:
a. is a conglomerate.

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b. tends to have one-time events such as asset sales and property acquisitions.
c. is global in nature.
d. has a different fiscal year than other firms in its industry.
e. uses the same accounting procedures as other firms in its industry.
45. The financial ratio that measures the accounting profit per dollar of book equity is
referred to as the:
a. price-earnings ratio.
b. equity turnover.
c. profit margin.
d. return on equity.
e. market profit-to-book ratio.
46. The amount that investors are willing to pay for each dollar of annual earnings is
reflected in the:
a. DuPont identity.
b. return on assets.
d. price-earnings ratio.
e. debt-equity ratio.
47. The debt-equity ratio is measured as:

a. total debt divided by total equity.
b. total equity divided by long-term debt.
c. total equity divided by total debt.
d. long-term debt divided by total equity.
e. total assets minus total debt, divided by total equity
48. The higher the inventory turnover, the:

a. less time inventory items remain on the shelf.

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b. longer it takes a firm to sell its inventory.

c. higher the inventory as a percentage of total assets.
d. greater the selection of goods available for sale.
e. greater the amount of inventory held by a firm.
49. Southern Foods has net income of $39,900, net sales of $318,600, total assets of
$663,000, common stock of $106,800 with a par value of $1 per share, and retained
earnings of $224,400. The stock has a market value of $5.45 per share. What is the
price-earnings ratio?
a. 17.12
b. 12.82
c. 14.59
d. 19.94
e. 16.64
50. The equity multiplier measures:

a. operating efficiency.
b. financial leverage.
c. asset use efficiency.
d. management efficiency.
e. returns to stockholders.
51. The receivables turnover ratio is measured as:

a. sales divided by accounts receivable.
b. sales plus accounts receivable.
c. accounts receivable divided by sales.
d. sales minus accounts receivable, divided by sales.
e. accounts receivable times sales.

lOMoARcPSD|19685806
52. From a cash flow position, which one of the following ratios best measures a
firm's ability to pay the interest on its debts?
a. Cash coverage ratio
b. Quick ratio
c. Cash ratio
d. Interval measure
e. Times interest earned ratio
53. Enterprise value is based on the:

a. market value of interest-bearing debt plus the market value of equity minus cash.
b. market value of equity plus the book value of total debt minus cash.
c. book value of debt plus the market value of equity.
d. book values of debt and assets, other than cash.
e. book values of debt and equity less cash.
54. Mountain Top Markets has total assets of $48,700, net working capital of $1,100,
and retained earnings of $21,200. The firm has 12,500 shares of stock outstanding
with a par value of $1 per share and a market value of $7.10 per share. The stock was
originally issued to the firm's founders at par value. What is the market-to-book ratio?
a. 2.78
b. 2.22
c. 3.19
d. 3.03
e. 2.63
55. In the financial planning model, the external financing needed (EFN) as shown on
a pro forma balance sheet is equal to the changes in assets:
a. minus the changes in liabilities only.
b. minus the changes in both liabilities and equity.
c. minus the change in retained earnings.

lOMoARcPSD|19685806
d. plus the changes in liabilities minus the changes in equity.

e. plus the changes in both liabilities and equity.
56. Which one of these terms is most synonymous with the term "income from
operations"?
a. EBITDA
b. TTM
c. EPS
d. EBIT
e. LTM
57. Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold
of $43,100, and depreciation of $6,800. What is the common-size statement value of
EBIT?
a. 36.35 percent
b. 38.08 percent
c. 41.93 percent
d. 35.46 percent
e. 32.49 percent
58. Puffy's Pastries generates five cents of net income for every $1 in equity. Thus,
Puffy's has _______ of 5 percent.
a. an EV multiple
b. a profit margin
c. a return on assets
d. a return on equity
e. a price-earnings ratio
59. Browning's has a debt-equity ratio of .47. What is the equity multiplier?
a. .53

lOMoARcPSD|19685806
b. 1.47
c. 1.53
d. 2.13
e. 1.13
60. If stockholders want to know how much profit the firm is making on their entire
investment in that firm, the stockholders should refer to the:
a. return on equity.
b. return on assets.
c. profit margin.
d. equity multiplier.
e. earnings per share.
61. Which one of the following statements is correct concerning ratio analysis?
a. A single ratio is often computed differently by different individuals.
b. Only a very limited number of ratios can be used for analytical purposes.
c. No ratio can address the problem of size differences among firms.
d. Ratios cannot be used for comparison purposes over periods of time.
e. Every ratio is an income statement entry divided by a balance sheet item.
62. If a firm bases its growth projection on the rate of sustainable growth, shows
positive net income, and has a dividend payout ratio of 30 percent, then the:
a. debt-equity ratio will remain constant while retained earnings increase.
b. fixed assets, the debt-equity ratio, and number of common shares outstanding will
all increase.
c. number of common shares outstanding will increase at the same rate of growth.
d. fixed assets will have to increase at the sustainable growth rate, even if the firm is
currently operating at only 78 percent of capacity.
e. debt-equity ratio will have to increase.

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63. Flo's Restaurant has sales of $418,000, total equity of $224,400, a tax rate of 23
percent, a debt-equity ratio of .37, and a profit margin of 5.1 percent. What is the
return on assets?
a. 9.50 percent
b. 11.08 percent
c. 6.93 percent
d. 13.13 percent
e. 7.13 percent
64. Rosita's Resources paid $11,310 in interest and $16,500 in dividends last year. The
times interest earned ratio is 2.9, the depreciation expense is $7,900, and the tax rate is
21 percent. What is the value of the cash coverage ratio?
a. 3.10
b. 2.78
c. 2.58
d. 3.71
e. 3.60
65. Green Lumber has total sales of $387,200 on total assets of $429,600, current
liabilities of $45,000, and $24,000 of dividends paid on net income of $57,700.
Assume that all costs, assets, and current liabilities change spontaneously with sales.
The tax rate and dividend payout ratios remain constant. If the firm's managers project
a firm growth rate of 12 percent for next year, what will be the amount of external
financing needed to support this level of growth? Assume the firm is currently
operating at full capacity.
a. $5,667
b. $11,706
c. $8,408
d. $14,350
e. $9,911

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66. If a firm produces a return on assets of 15 percent and also a return on equity of 15
percent, then the firm:
a. also has a current ratio of 15.
b. is using its assets as efficiently as possible.
c. pays all its earnings out in dividends.
d. has an equity multiplier of 2.
e. has no debt of any kind
67. The current ratio is measured as:

a. current liabilities divided by current assets.
b. current assets minus current liabilities.
c. cash on hand divided by current liabilities.
d. current liabilities minus inventory, divided by current assets.
e. current assets divided by current liabilities
68. Cado Industries has total debt of $6,800 and a debt-equity ratio of .36. What is the
value of the total assets?
a. $25,689
b. $24,480
c. $23,520
d. $25,360
e. $18,889
69. The projected addition to retained earnings can be calculated as:

a. PM×Projected sales × (1 −Dividend payout ratio).
b. Projected sales × (1 − Dividend payout ratio).
c. PM×Δ Sales.
d. PM×Δ Sales× (1 − Dividend payout ratio).
e. PM × Projected sales.

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70. Riverton Stores is all-equity financed and has net sales of $217,800, taxable
income of $32,600, a return on assets of 11.5 percent, a tax rate of 21 percent, and
total debt of $63,700. What are the values for the three components of the DuPont
identity?
a. 10.24 percent; 1.0282; .7156
b. 11.82 percent; .9725; .7156
c. 11.82 percent; 1.0282; 1.3975
d. 11.82 percent; .9725; 1.3975
e. 10.24 percent; 1.0282; 1.3975
71. Highland Lumber has net sales of $642,100, depreciation of $138,400, interest
expense of $15,600, cost of goods sold of $409,800, and taxes of $16,400. What is the
cash coverage ratio?
a. 11.06
b. 14.89
c. 6.02
d. 8.78
e. 13.79
72. Which one of these ratios measures the efficiency at which a firm employs its
assets?
a. Return on equity
b. Profit margin
c. P/E ratio
d. Total asset turnover
e. Equity multiplier
73. If a firm decreases its operating costs, all else constant, then the:
a. total asset turnover rate will increase.
b. profit margin will decrease.
c. cash coverage ratio will decrease.

lOMoARcPSD|19685806
d. return on assets will decrease.

e. price-earnings ratio will decrease
74. Marcie's Mercantile wants to maintain its current dividend policy, which is a
payout ratio of 35 percent. The firm does not want to increase its equity financing but
is willing to maintain its current debt-equity ratio. Given these requirements, the
maximum rate at which Marcie's can grow is equal to:
a. 35 percent of the internal rate of growth.
b. 65 percent of the internal rate of growth.
c. the internal rate of growth.
d. the sustainable rate of growth.
e. 65 percent of the sustainable rate of growth.
75. Samuelson's has sales of $317,000, a profit margin of 8.6 percent, an equity
multiplier of 1.8, and total debt of $144,400. What is the return on equity?
a. 14.46 percent
b. 7.05 percent
c. 15.48 percent
d. 15.10 percent
e. 11.25 percent
76. Joe's has old, fully depreciated equipment. Moe's just purchased all new
equipment which will be depreciated over eight years. If Joe's and Moe's have the
same sales, costs, tax rate, and enterprise value, then:
a. Moe's will have a higher net income.
b. Moe's will have a lower EV multiple.
c. Joe's will have a lower profit margin.
d. Joe's will have a lower return on equity.
e. Moe's and Joe’s will have the same EV multiple
77. Which account is least apt to vary directly with sales?

lOMoARcPSD|19685806
a. Accounts receivable
b. Cost of goods sold
c. Notes payable
d. Accounts payable
e. Inventory
78. JB Markets has sales of $848,600, net income of $94,000, dividends paid of
$28,200, total assets of $913,600, and current liabilities of $78,900. Assume that all
costs, assets, and current liabilities change spontaneously with sales. The tax rate and
dividend payout ratios remain constant. If the firm's managers project a firm growth
rate of 15 percent for next year, what will be the amount of external financing needed
to support this level of growth? Assume the firm is currently operating at full capacity.
a. −$10,406
b. $13,909
c. $68,211
d. $32,408
e. $49,535
79. Ratios that measure how efficiently a firm's management uses its assets and equity
to generate bottom line net income are known as _______ ratios.
a. profitability
b. short-term solvency
c. long-term solvency
d. asset management
e. market value
80. Catherine's Consulting paid dividends of $3,300 and total equity of $39,450. The
debt-equity ratio is 1 and the plowback ratio is 40 percent. What is the return on
assets?
a. 5.72 percent
b. 6.97 percent

lOMoARcPSD|19685806
c. 6.09 percent
d. 6.24 percent
e. 7.23 percent
81. The total asset turnover ratio measures the amount of:
a. total assets needed for every $1 of sales.
b. fixed assets required for every $1 of sales.
c. sales generated by every $1 in total assets.
d. net income generated by every $1 in total assets.
e. net income that can be generated by every $1 of fixed assets.
82. The return on equity can be calculated as:

a. Profit margin × ROA × Total asset turnover.
b. ROA × Debt-equity ratio.
c. Profit margin × ROA. d. ROA × Net income/Total assets.
e. ROA × Equity multiplier
83. Days' sales in inventory is measured as:

a. inventory turnover times 365 days.
b. 365 days divided by the inventory.
c. 365 days divided by the inventory turnover.
d. inventory turnover plus 365 days.
e. inventory divided by cost of goods sold, times 365 days.
84. The sustainable growth rate will be equivalent to the internal growth rate when,
and only when:
a. the growth rate is positive. b. a firm has no debt.
c. the retention ratio is equal to 1.
d. the plowback ratio is positive but less than 1.

lOMoARcPSD|19685806
e. a firm has a debt-equity ratio equal to 1.
85. Which one of the following statements is correct if a firm has a receivables
turnover of 10?
a. It takes the firm 10 days to collect payment from its customers.
b. It takes the firm 36.5 days to sell its inventory and collect the payment from the
sale.
c. The firm collects its credit sales in an average of 36.5 days.
d. The firm has ten times more in accounts receivable than it does in cash.
e. It takes the firm an average of 36.5 days to sell its items.
86. Upriver Tours has balance sheet values of: Inventory $70,500; accounts receivable
$50,700; accounts payable $58,900; cash $32,300, notes payable $20,000, long-term
debt $134,700, and net fixed assets $504,500. What is the current ratio?
a. 1.95
b. .95
c. 2.11
d. .98
e. 1.98
87. Two Sisters Dresses has net working capital of $43,800, net fixed assets of
$232,400, net income of $43,900, and current liabilities of $51,300. The tax rate is 21
percent and the profit margin is 9.3 percent. How many dollars of sales are generated
from every $1 in total assets?
a. $.97
b. $1.32
c. $1.06
d. $1.73
e. $1.44

lOMoARcPSD|19685806
88. Georgetown Supply has sales of $318,200, net income of $41,400, current assets
of $118,400, net fixed assets of $238,300, net working capital of $18,900, and long-
term debt of $175,000. What is the equity multiplier?
a. 1.71
b. 2.92
c. 4.34
d. 1.44
e. 3.82
89. Which one of the following is a liquidity ratio?

a. EV multiple
b. Times interest earned ratio
c. Cash coverage ratio
d. Total debt ratio
e. Quick ratio
90. The most effective method of directly evaluating the financial performance of a
firm is to compare the financial ratios of the firm to:
a. the average ratios of the firm's international peer group.
b. the firm's ratios from prior time periods and to the ratios of firms with similar
operations.
c. those of other firms located in the same geographic area that are similarly sized.
d. those of the largest conglomerate that has operations in the same industry as the
firm.
e. the average ratios of all firms within the same country over a period of time.
91. Assume BGL Enterprises increases its operating efficiency by lowering its costs
while holding its sales constant. As a result, given all else constant, the:
a. return on assets will decrease.
b. return on equity will increase.
c. price-earnings ratio will increase.

lOMoARcPSD|19685806
d. total debt ratio will decrease.

e. profit margin will decline.
92. Western Wear has total sales of $642,100, EBIT of $93,900, net income of
$50,800, current assets of $153,500, total assets of $658,000, current liabilities of
$78,900, and total liabilities of $213,600. What are the values of the three components
of the DuPont identity?
a. 7.91 percent; .98; 1.48
b. 11.43 percent; .98; .68
c. 7.91 percent; 1.02; 1.48
d. 8.57 percent; 1.02; .68
e. 11.43 percent; 1.02; 1.48
93. The equity multiplier is measured as total:

a. equity divided by total assets.
b. assets divided by total equity.
c. assets plus total equity, divided by total debt.
d. assets minus total equity, divided by total assets.
e. equity plus total debt.
94. Jessica's Boutique has cash of $218, accounts receivable of $457, accounts
payable of $398, and inventory of $647. What is the value of the quick ratio?
a. 1.70
b. 1.32
c. 1.05
d. 1.52
e. .55
95. Ratios that measure a firm's ability to pay its bills over the short run without undue
stress are known as:

lOMoARcPSD|19685806
a. long-term solvency measures.

b. market value ratios.
c. asset management ratios.
d. profitability ratios.
e. liquidity measures
96. Preston Woods has 17,500 shares of stock outstanding along with $408,000 of
interest-bearing debt. The market and book values of the debt are the same. The firm
has sales of $697,000 and a profit margin of 6.8 percent. The tax rate is 21 percent, the
debt-equity ratio is 40 percent, and the price-earnings ratio is 11.8. The firm has
$130,000 of current assets of which $41,200 is cash. What is the enterprise value?
a. $1,106,308
b. $926,073
c. $830,479
d. $1,018,097
e. $994,520
97. Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500,
net income of $11,520, and average inventory of $91,600. What is the days' sales in
inventory?
a. 69.84 days
b. 70.76 days
c. 4.08 days
d. 71.51 days
e. 5.16 days
98. The long-term debt ratio is probably of most interest to a firm's:

a. credit customers.
b. stockholders.
c. employees.
d. suppliers.

lOMoARcPSD|19685806
e. mortgage holder
99. An increase in which one of the following accounts increases a firm's current ratio
without affecting its quick ratio?
a. Accounts receivable
b. Fixed assets
c. Accounts payable
d. Cash
e. Inventory
100. The Lumber Mill has total assets of $591,600, current liabilities of $49,700,
dividends paid of $12,000, net sales of $68,400, and net income of $55,400. Assume
that all costs, assets, and current liabilities change spontaneously with sales. The tax
rate and dividend payout ratios remain constant. If the firm's managers project a firm
growth rate of 6 percent for next year, what will be the amount of external financing
needed to support this level of growth? Assume the firm is currently operating at full
capacity.
a. $3,200
b. −$13,490
c. −$17,520
d. $15,640
e. $16,380
101. Frederico's has a net income of $29,600, a total asset turnover of 1.4, total assets
of $318,600, and a debt-equity ratio of .35. What is the return on equity?
a. 16.72 percent
b. 14.67 percent
c. 17.56 percent
d. 12.54 percent
e. 8.40 percent

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102. A capital intensity ratio of 1.03 means a firm has $1.03 in:
a. equity for every $1 in total debt.
b. long-term assets for every $1 in short-term assets.
c. total assets for every $1 in sales.
d. sales for every $1 in total assets.
e. total debt for every $1 in equity.
CHAPTER 4
1. You want to purchase an annuity that will pay you $1,200 a quarter for 15 years and
earn a return of 5.5 percent, compounded quarterly. What is the most you should pay
to purchase this annuity?
a. $48,811.20
b. $52,806.30
c. $48,450.67
d. $52,988.16
e. $47,455.33
2. You have $2,500 to deposit into a savings account. The five banks in your area offer
the following rates. In which bank should you deposit your savings?
a. Bank E: 3.65% compounded quarterly
b. Bank A: 3.75%, compounded annually
c. Bank B: 3.69%, compounded monthly
d. Bank D: 3.67% compounded continuously
e. Bank C: 3.70% compounded semiannually
3. What is the present value of $6,811 to be received in one year if the discount rate is
6.5 percent?
a. $6,023.58
b. $7,253.72
c. $6,395.31

lOMoARcPSD|19685806
d. $6,671.13
e. $6,643.29
4. You plan to save $2,400 a year and earn an average rate of interest of 5.6 percent.
How much more will your savings be worth at the end of 40 years if you save at the
beginning of each year rather than at the end of each year?
a. $17,822.73
b. $19,103.04
c. $18,821.10
d. $18,911.21
e. $18,115.31
5. Theo is depositing $1,300 today in an account with an expected rate of return of 8.1
percent. If he deposits an additional $3,200 two years from today, and $4,000 three
years from today, what will his account balance be ten years from today?
a. $14,044.89
b. $15,182.53
c. $15,699.54
d. $17,741.71
e. $16,412.31
6. Taylor's Hardware offers credit at an APR of 14.9 percent and compounds interest
monthly. What actual rate of interest are they charging?
a. 13.97 percent
b. 15.96 percent
c. 14.90 percent
d. 15.48 percent
e. 16.10 percent
7. A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over
the next three years, respectively. After three years, the project will be worthless. What

lOMoARcPSD|19685806
is the net present value of this project if the applicable discount rate is 15.25 percent
and the initial cost is $78,500?
a. −$3,457.96
b. $2,309.09
c. $3,132.48
d. $1,808.17
e. −$1,201.76
8. What is the future value of $845 a year for seven years at an interest rate of 11.3
percent?
a. $8,343.51
b. $6,683.95
c. $8,801.91
d. $6,075.69
e. $8,001.38
9. What rate of return should be used to compute the NPV of a proposed purchase of
Smiley's, an operating business?
a. A discount rate that makes the NPV of the proposed purchase positive
b. The rate of interest charged by a bank for a loan similar in size to the cost of the
purchase
c. The discount rate applicable to other investments with similar risks
d. A discount rate equal to Smiley's current return on equity
e. A discount rate equal to Smiley's net profit percentage
10. A preferred stock pays an annual dividend of $6.50 a share and has an annual rate
of return of 7.35 percent. What is the stock price?
a. $92.09
b. $88.44
c. $71.78

lOMoARcPSD|19685806
d. $77.78
e. $74.50
11. Assume you graduate with $31,300 in student loans at an interest rate of 5.25
percent, compounded monthly. If you want to have this debt paid in full within three
years, how much must you pay each month?
a. $871.30
b. $876.79
c. $941.61
d. $980.40
e. $873.65
12. Sara is the recipient of a trust that will pay her $500 on the first day of each
month, starting immediately and continuing for 40 years. What is the value of this
inheritance today if the applicable discount rate is 7.3 percent, compounded monthly?
a. $78,192.28
b. $67,557.52
c. $89,204.04
d. $80,006.09
e. $76,811.30
13. What is the future value of investing $5,650 for 14 years at a continuously
compounded rate of 8.6 percent?
a. $19,369.83
b. $16,685.44
c. $18,833.85
d. $17,933.54
e. $13,183.85

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14. Several years ago, Sara invested $4,208. Today, that investment is worth $28,406
and has earned an average annual rate of return of 7.38 percent. How long ago did
Sara make her investment?
a. 26.82 years
b. 31.09 years
c. 23.03 years
d. 18.98 years
e. 14.97 years
15. Your parents plan to give you $200 a month for four years while you are in
college. At a discount rate of 6 percent, compounded monthly, what are these
payments worth to you when you first start college?
a. $8,279.32
b. $8,797.40
c. $8,409.56
d. $8,198.79
e. $8,516.06
16. You are borrowing $5,200 at 7.8 percent, compounded monthly. The monthly loan
payment is $141.88. How many loan payments must you make before the loan is paid
in full?
a. 48
b. 30
c. 42
d. 40
e. 36
17. Anna has $38,654 in a savings account that pays 2.3 percent interest. Assume she
withdraws $10,000 today and another $10,000 one year from today. If she waits and
withdraws the remaining entire balance four years from today, what will be the
amount of that withdrawal?
a. $20,916.78

lOMoARcPSD|19685806
b. $20,676.53
c. $19,608.07
d. $19,341.02
e. $20,109.08
18. You need some money today and the only friend you have that has any is your
‘miserly' friend. He agrees to loan you the money you need, if you make payments of
$20 a month for the next six months. In keeping with his reputation, he requires that
the first payment be paid today. He also charges you 1.5 percent interest per month.
How much total interest does he expect to earn?
a. $3.63
b. $4.35
c. $5.96
d. $1.34
e. $3.94
19. Scott has been offered an employment contract for ten years at a starting salary of
$65,000 with guaranteed annual raises of 5 percent. What is the current value of this
offer at a discount rate of 7 percent?
a. $525,000.00
b. $638,724.17
c. $602,409.91
d. $558,845.85
e. $630,500.00
20. A trust has been established to fund scholarships in perpetuity. The next annual
distribution will be $1,200 and future payments will increase by 3 percent per year.
What is the value of this trust at a discount rate of 7.4 percent?
a. $24,609.11
b. $30,388.18
c. $19,960.00

lOMoARcPSD|19685806
d. $17,189.19
e. $27,272.73
21. Anna's grandmother established a trust and deposited $250,000 into it. The trust
pays a guaranteed 4.25 percent rate of return. Anna will receive all the interest
earnings on an annual basis and a charity will receive the principal amount at Anna's
passing. How much income will Anna receive each year?
a. $12,750
b. $10,000
c. $12,400
d. $8,500
e. $10,625
22. Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four
years from today. If she invests these funds immediately and earns 9.6 percent
annually, how much will she have in savings 30 years from today?
a. $591,414.14
b. $641,547.39
c. $646,072.91
d. $620,008.77
e. $586,124.93
23. Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four
years from today. If she invests these funds immediately and earns 9.6 percent
annually, how much will she have in savings 30 years from today?
a. $591,414.14
b. $641,547.39
c. $646,072.91
d. $620,008.77
e. $586,124.93

lOMoARcPSD|19685806
24. For a proposed purchase to be acceptable, the PV of the future cash flows must:
a. be positive at the relevant discount rate.
b. equal the purchase price.
c. be positive at all discount rates.
d. be less than the cost of the purchase.
e. equal or exceed the cost of the purchase
25. Starting today, Alicia is going to contribute $100 a month to her retirement
account. Her employer matches her contribution by 50 percent. If these contributions
remain constant, and she earns a monthly rate of .55 percent, how much will her
savings be worth 40 years from now?
a. $300,456.74
b. $354,087.88
c. $299,189.16
d. $399,459.44
e. $349,981.21
26. Nu-Tools plans to set aside an equal amount of money each year, starting today, so
that it will have $25,000 saved at the end of three years. If the firm can earn 4.7
percent, how much does it have to save annually?
a. $7,596.61
b. $8,414.14
c. $8,333.33
d. $7,689.16
e. $8,004.67
27. Nu-Tools plans to set aside an equal amount of money each year, starting today, so
that it will have $25,000 saved at the end of three years. If the firm can earn 4.7
percent, how much does it have to save annually?
a. $7,596.61
b. $8,414.14

lOMoARcPSD|19685806
c. $8,333.33
d. $7,689.16
e. $8,004.67
28. Janet saves $3,000 a year at an interest rate of 4.2 percent. What will her savings
be worth at the end of 35 years?
a. $230,702.57
b. $234,868.92
c. $236,063.66
d. $229,317.82
e. $230,040.06
29. An interest rate that is compounded monthly, but is expressed as if the rate were
compounded annually, is called the _____ rate.
a. daily interest
b. effective annual
c. stated interest
d. periodic interest
e. compound interest
30. U Do It Centers deposited $3,200 in an account two years ago and is depositing
another $5,000 today. A final deposit of $3,500 will be made one year from now. What
will the account balance be three years from now if the account pays 4.85 percent
interest, compounded annually?
a. $12,431.05
b. $13,033.95
c. $13,666.10
d. $14,328.90
e. $13,430.84

lOMoARcPSD|19685806
31. Seven years ago, Carlos took out a mortgage for $185,000 at 5.6 percent,
compounded monthly, for 30 years. He has made all of the monthly payments as
agreed. What is his current loan balance?
a. $141,833.33
b. $ 157,308.74
c. $148,211.09
d. $142,779.47
e. $164,621.06
32. Christina will receive annuity payments of $1,200 a year for five years, with the
first payment occurring at Year 4. What is the value of this annuity to her today at a
discount rate of 7.25 percent?
a. $4,887.48
b. $4,774.04
c. $3,961.80
d. $4,209.19
e. $4,111.08
33. Leo received $7,500 today and will receive another $5,000 two years from today.
If he invests these funds immediately at 11.5 percent, what will his investments be
worth five years from now?
a. $18,806.39
b. $20,314.00
c. $19,904.36
d. $19,856.13
e. $18,758.04
34. Annuities where the payments occur at the end of each time period are called
_____, whereas _____ refer to annuity streams with payments occurring at the
beginning of each time period.
a. late annuities; straight annuities

lOMoARcPSD|19685806
b. ordinary annuities; early annuities

c. annuities due; ordinary annuities
d. straight annuities; late annuities
e. ordinary annuities; annuities due
35. Benson's established a trust fund that provides $125,000 in college scholarships
each year. The trust fund earns 6.15 percent and distributes only its annual income.
How much money did Benson's contribute to establish this fund?
a. $1,987,408
b. $2,150,000
c. $2,032,520
d. $2,291,613
e. $2,018,970
36. Your credit card company charges you 1.35 percent per month. What is the annual
percentage rate on your account?
a. 16.30 percent
b. 16.56 percent
c. 16.45 percent
d. 16.39 percent
e. 16.20 percent
37. You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent,
compounded monthly. The loan period is 30 years, and payments are made monthly. If
you pay for the house according to the loan agreement, how much total interest will
you pay?
a. $198,161
b. $211,086
c. $218,086
d. $207,764
e. $185,059

lOMoARcPSD|19685806
38. You borrow $199,000 to buy a house. The mortgage rate is 5.5 percent,
compounded monthly. The loan period is 30 years, and payments are made monthly. If
you pay for the house according to the loan agreement, how much total interest will
you pay?
a. $198,161
b. $211,086
c. $218,086
d. $207,764
e. $185,059
39. What effect will an increase in the discount rate have on the present value of a
project that has an initial cash outflow followed by five years of cash inflows?
a. The PV will change but the direction of the change is unknown.
b. The PV will increase.
c. The PV will decrease.
d. The PV will remain the same as the timing of the cash flows must change also.
e. There will be no effect on the PV.
40. You have been awarded an insurance settlement of $250,000 that is payable one
year from today. What is the minimum amount you should accept today in exchange
for this settlement if you can earn 6.7 percent on your investments?
a. $232,866.67
b. $238,079.19
c. $250,000.00
d. $234,301.78
e. $242,408.19
41. Assume you could invest $25,000 at a continuously compounded rate of 10

percent. What would your investment be worth at the end of 50 years?
a. $3,710,329

lOMoARcPSD|19685806
b. $3,648,029
c. $3,500,824
d. $2,933,054
e. $3,911,215
42. If you invest $2,500 today, an investment guarantees you will have $3,600 four
years from today. What rate of interest will you earn?
a. 8.68 percent
b. 9.54 percent
c. 9.39 percent
d. 9.03 percent
e. 8.72 percent
43. You are buying a car for $7,500, paying $900 down in cash, and financing the
balance for 24 months at 6.5 percent, compounded monthly. What is the amount of
each monthly loan payment?
a. $318.64
b. $302.02
c. $294.01
d. $264.78
e. $245.09
44. At a discount rate of 5 percent, which one of the following is the correct formula
for computing the PV of $1 to be received one year from today?
a. $1 × 1.052
b. $1 × 1.05
c. $1/1.05
d. $1/1.052
e. $1

lOMoARcPSD|19685806
45. Donaldson's purchased some property for $1.2 million, paid 25 percent down in
cash, and financed the balance for 12 years at 7.2 percent, compounded monthly. What
is the amount of each monthly mortgage payment?
a. $8,440.01
b. $9,351.66
c. $8,978.26
d. $9,399.18
e. $9,513.67
46. TH Manufacturers expects to generate cash flows of $129,600 for the next two
years. At the end of the two years the business will be sold for an estimated $3.2
million. What is the value of this business at a discount rate of 14 percent?
a. $2,704,655
b. $2,675,703
c. $2,900,411
d. $2,848,392
e. $2,284,644
47. The government imposed a fine on a firm that requires a payment of $100,000
today, $150,000 one year from today, and $200,000 two years from today. The
government will hold the funds until the final payment is collected and then donate the
entire amount to charity. How much will be donated if the government pays 3 percent
interest on the held funds?
a. $474,407
b. $475,000
c. $447,174
d. $451,050
e. $460,590
48. You would like to have $50,000 saved at the end of Year 5. At the end of Year 2,
you can deposit $7,500 for this purpose. If you earn 4.5 percent, how much must you
deposit today to reach your goal assuming no other deposits are made?

lOMoARcPSD|19685806
a. $33,108.09
b. $34,912.63
c. $33,254.58
d. $34,642.28
e. $34,276.34
49. An annuity costs $70,000 today, pays $3,500 a year, and earns a return of 4.5
percent. What is the length of the annuity time period?
a. 49.48 years
b. 52.31 years
c. 48.00 years
d. 54.96 years
e. 43.08 years
50. Assume you borrow $6,600 for three years. How much will you still owe after the
three years if you pay all of the payments as set forth in the loan's amortization
schedule?
a. $6,500
b. $2,200
c. $3,150
d. $2,650
e. $0
51. Beatrice invests $1,000 in an account that pays 5 percent simple interest. How
much more could she have earned over a period of 10 years if the interest had
compounded annually?
a. $121.67
b. $117.09
c. $135.97
d. $132.45

lOMoARcPSD|19685806
e. $128.89
52. Stu can purchase a house today for $110,000, including the cost of some minor
repairs. He expects to be able to resell it in one year for $129,000 after cleaning up the
property. At a discount rate of 5.5 percent, what is the expected net present value of
this purchase opportunity?
a. $13,001.61
b. $11,311.02
c. $12,487.43
d. $12,274.88
e. $9,208.18
53. A flow of unending annual payments that increase by a set percentage each year
and occur at regular intervals of time is called aKhông:
a. annuity due.
b. growing perpetuity.
c. growing annuity.
d. variable perpetuity.
e. variable annuity
54. You are considering a project with projected annual cash flows of $32,200,
$41,800, and $22,900 for the next three years, respectively. What is the present value
of these cash flows at a discount rate of 14 percent?
a. $77,103.18
b. $86,487.47
c. $81,292.25
d. $66,549.30
e. $75,866.20
55. You are comparing two investment options, each of which will provide $15,000 of
total income. Option A pays five annual payments starting with $5,000 the first year

lOMoARcPSD|19685806
followed by four annual payments of $2,500 each. Option B pays five annual
payments of $3,000 each. Which one of the following statements is correct given these
two investment options?
a. Given a positive rate of return, Option A is worth more today than Option B.
b. Option A is preferable because it is an annuity due.
c. Option B has a higher present value than Option A given a positive rate of return.
d. Both options are of equal value today.
e. Option B has a lower present value than Option A given a zero rate of return.
56. You want to have $20,000 saved in five years. If you can earn 4.5 percent on your
savings, what amount must you save each year if the amount you save each year is the
same?
a. $3,655.83
b. $3,801.03
c. $3,775.04
d. $4,038.01
e. $3,798.34
57. A perpetuity differs from an annuity because:

a. perpetuity cash flows never cease.
b. perpetuity cash flows are variable while annuity payments are constant.
c. perpetuity cash flows vary with the market rate of interest.
d. perpetuity cash flows vary with the rate of inflation.
e. annuity cash flows occur at irregular intervals of time
58. You are retired, have $264,500 in your savings, withdraw $2,000 each month, and
earn 4.5 percent, compounded monthly. How long will it be until you run out of
money?
a. 18.78 years
b. 13.67 years
c. 13.02 years

lOMoARcPSD|19685806
d. 15.25 years
e. 22.08 years
59. Marcos will receive an annuity payment of $2,500, payable every two years, for
the next ten years. The next payment is due two years from today. What is the present
value of this annuity at a discount rate of 5 percent?
a. $9,416.75
b. $10,466.67
c. $10,052.48
d. $11,221.08
e. $8,949.60
60. Assume you borrow $12,000 for 5 years with equal annual repayments. If the
interest rate on the actual loan turns out to be higher than you anticipated, then the:
a. anticipated amortization schedule will still apply as the loan is still a 5-year loan.
b. total principal repaid will be less than anticipated.
c. loan will still have a balance due at the end of the 5-year amortization period.
d. first annual payment will repay more of the principal than anticipated.
e. annual payments will be higher than you anticipated.
61. Martha left an inheritance to her grandson that will pay him $1,500 on the first day
of every other year. When computing the PV of this inheritance, the grandson should
use:
a. a semiannual discount rate.
b. a 2-year discount rate.
c. an effective annual rate.
d. a semiannually compounded discount rate.
e. simple interest.
62. Over the next three years, Marti plans to save $2,000, $2,500, and $3,000,
respectively, starting one year from today. You want to have as much money as Marti

lOMoARcPSD|19685806
does three years from now but you plan to make one lump sum investment today.
What amount must you save today if you both earn 4.65 annually?
a. $6,607.23
b. $7,500.00
c. $6,791.42
d. $7,128.23
e. $6,811.50
63. An insurance settlement offer includes annual payments of $36,000, $42,000, and
$50,000 over the next three years, respectively, with the first payment being made one
year from today. What is the minimum amount you should accept today as a lump sum
settlement if your discount rate is 7 percent?
a. $111,144.18
b. $114,556.88
c. $105,000.10
d. $118,924.27
e. $119,877.67
64. Jenni's Diner has expected net annual cash flows of $16,200, $18,600, $19,100,
and $19,500 for the next four years, respectively. At the end of the fourth year, the
diner is expected to be worth $57,900 cash. What is the present value of the diner at a
a. $87,492.16
b. $93,090.25
c. $104,998.02
d. $101,016.38
e. $98,411.20
65. Denise will receive annual payments of $10,000 for the next 25 years. The
discount rate is 6.8 percent. What is the difference in the present value of these
payments if they are paid at the beginning of each year rather than at the end of each
year?

lOMoARcPSD|19685806
a. $8,850.00
b. $8,382.04
c. $9,706.67
d. $8,069.29
e. $9,216.67
66. What is the future value of $3,100 a year for six years at interest rate of 8.9
percent?
a. $26,847.26
b. $27,134.16
c. $24,414.67
d. $23,263.57
e. $20,255.40
67. Assume a cash flow of $82,400 in the first year and $148,600 in the second year.
Also assume a present value of $303,764.34 at a discount rate of 12.75 percent. What
is the cash flow in the third year if that is the only other cash flow?
a. $163,800
b. $164,400
c. $163,100
d. $163,700
e. $164,900
68. Eleven years ago, a guitar cost $1,800. Today, that same guitar costs $3,650. What
has been the inflation rate on this instrument?
a. 6.64 percent
b. 6.32 percent
c. 6.57 percent
d. 6.49 percent
e. 6.81 percent

lOMoARcPSD|19685806
69. You are comparing two annuities with equal present values. The applicable
discount rate is 6.5 percent. One annuity will pay $2,000 annually, starting today, for
20 years. The second annuity will pay annually, starting one year from today, for 20
years. What is the annual payment for the second annuity?
a. $2,075
b. $2,130
c. $2,225
d. $2,405
e. $2,000
70. Tracie will receive payments of $550 a month for ten years. What are these
payments worth today at a discount rate of 6 percent, compounded monthly?a.
$53,737.08
b. $49,757.69
c. $48,808.17
d. $49,540.40
e. $51,523.74
71. You want to save an equal amount each year for the next 38 years, at which time
you will retire. What amount of annual savings are needed if you desire a retirement
income of $55,000 a year for 25 years and earn 7.5 percent, compounded annually?
a. $2,640.85
b. $2,889.04
c. $3,146.32
d. $3,333.33
e. $3,406.16
72. Given a stated interest rate, which form of compounding will yield the highest
effective rate of interest?
a. Continuous compounding

lOMoARcPSD|19685806
b. Annual compounding
c. Semiannual compounding
d. Daily compounding
e. Monthly compounding
73. Angela borrowed $5,000 for five years at an APR of 6.2 percent. The loan calls for
equal, annual principal payments. Interest will also be paid annually. What will be her
loan payment in Year 2?
a. $1,310
b. $1,248
c. $1,274
d. $1,016
e. $1,157
74. Kay owns two annuities that will each pay $500 a month for the next 12 years.
One payment is received at the beginning of each month while the other is received at
the end of each month. At a discount rate of 7.25 percent, compounded monthly, what
is the difference in the present values of these annuities?
a. $299.01
b. $265.42
c. $289.98
d. $312.50
e. $308.00
75. Ted purchased an annuity today that will pay $1,000 a month for five years. He
received his first monthly payment today. Allison purchased an annuity today that will
pay $1,000 a month for five years. She will receive her first payment one month from
today. Which one of the following statements is correct concerning these two
annuities?
a. Ted's annuity is an ordinary annuity.
b. Allison's annuity is an annuity due.
c. Ted's annuity has a higher present value than Allison's.

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d. Both annuities are of equal value today.

e. Allison's annuity has a higher present value than Ted's
76. The pawn shop adds 2 percent to loan balances for every two weeks a loan is
outstanding. What is the effective annual rate of interest?
a. 79.97 percent
b. 51.21 percent
c. 83.43 percent
d. 67.34 percent
e. 73.08 percent
77. Assume your employer will contribute $50 a week for twenty years to your
retirement plan. At a discount rate of 5 percent, compounded weekly, what is this
employee benefit worth to you today?
a. $32,861.08
b. $26,446.34
c. $36,519.02
d. $29,144.43
e. $35,920.55
78. The interest rate charged per period multiplied by the number of periods per year
is called the _____ rate.
a. daily interest
b. compound interest
c. periodic interest
d. annual percentage
e. effective annual
79. The net present value of a project is equal to the:

a. present value of the future cash flows.

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b. future value of the future cash flows minus the present value of the initial cost.
c. future value of the future cash flows minus the initial cost.
d. sum of the project's anticipated cash inflows.
e. present value of the future cash flows minus the initial cost
80. An annuity stream of cash flow payments is a set of:

a. increasing cash flows occurring at set intervals of time that go on forever.
b. equal cash flows occurring each time period forever.
c. either equal or varying cash flows occurring at set intervals of time for a fixed
period.
d. equal cash flows occurring at equal periods of time over a fixed length of time.
e. arbitrary cash flows occurring each time period for no more than 10 years.
81. You are considering two projects. Project A has projected cash flows of $6,500,
$4,500, and $2,500 for the next three years, respectively. Project B has projected cash
flows of $2,500, $4,500, and $6,500 for the next three years, respectively. Assuming
both projects have the same initial cost, you know that:
a. there are no conditions under which the projects can have equal values.
b. both projects have equal net present values at any discount rate.
c. both projects offer the same rate of return.
d. Project B has a higher net present value than Project A.
e. Project A is more valuable than Project B given a positive discount rate
82. You want to establish a trust fund that will provide $50,000 a year forever for your
heirs. If the fund can earn a guaranteed rate of return of 4.5 percent, how much must
you deposit in a solitary lump sum to establish this trust?
a. $2,250,000
b. $1,111,111
c. $1,333,333
d. $1,250,000
e. $1,666,667

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83. What is the effective annual rate of 10.25 percent compounded continuously?
a. 11.04 percent
b. 10.98 percent
c. 11.11 percent
d. 10.79 percent
e. 10.86 percent
84. You expect an investment to return $11,300, $14,600, $21,900, and $38,400
annually over the next four years, respectively. What is this investment worth to you
today if you desire a rate of return of 16.5 percent?
a. $58,700.89
b. $63,732.41
c. $59,928.16
d. $55,153.57
e. $64,253.91
85. The Smart Bank wants to be competitive based on quoted loan rates and thus must
offer loans at an annual percentage rate of 7.9 percent. What is the maximum rate the
bank can actually earn based on this quoted rate?
a. 7.90 percent
b. 8.22 percent EAR = e.079− 1
EAR = .0822, or 8.22%
c. 8.39 percent
d. 8.20 percent
e. 8.18 percent
86. The annual percentage rate:

a. is higher than the effective annual rate when interest is compounded quarterly.

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b. is the interest rate charged per period divided by (1 + n), when n is the number of
periods per year.
c. equals the effective annual rate when the interest on an account is designated as
simple interest.
d. considers interest on interest.
e. is the actual cost of a loan with monthly payments.
87. Binder and Sons borrowed $138,000 for three years from their local bank and now
they are paying monthly payments that include both principal and interest. Paying off
debt by making instalment payments, such as this firm is doing, is referred to as:
a. foreclosing on the debt.
b. funding the debt.
c. refunding the debt.
d. calling the debt.
e. amortizing the debt
88. Uptown Industries just decided to save $3,000 a quarter for the next three years.
The money will earn 2.75 percent, compounded quarterly, and the first deposit will be
made today. If the company had wanted to deposit one lump sum today, rather than
make quarterly deposits, how much would it have had to deposit to have the same
amount saved at the end of the three years?
a. $33,428.87
b. $34,441.56
c. $34,998.01
d. $33,687.23
e. $34,678.35
89. Lois is purchasing an annuity that will pay $5,000 annually for 20 years, with the
first annuity payment made on the date of purchase. What is the value of the annuity
on the purchase date given a discount rate of 7 percent?
a. $66,916.21
b. $56,677.98

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c. $52,970.07
d. $54,282.98
e. $56,191.91
90. You just won the lottery! As your prize you will receive $1,500 a month for 150
months. If you can earn 7 percent, compounded monthly, on your money, what is this
prize worth to you today?
a. $149,676.91
b. $137,003.69
c. $137,962.77
d. $150,723.76
e. $148,104.26
91. You borrow $12,600 to buy a car. The terms of the loan call for monthly payments
for five years at an interest rate of 4.65 percent, compounded monthly. What is the
amount of each payment?
a. $230.62
b. $253.22
c. $243.73
d. $233.04
e. $235.76
92. Olivia is willing to pay $185 a month for four years for a car payment. If the
interest rate is 4.9 percent, compounded monthly, and she has a cash down payment of
$2,500, what price car can she afford to purchase?
a. $8,342.05
b. $8,533.84
c. $10,961.36
d. $10,549.07
e. $8,686.82

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93. Assume an annuity will pay $1,000 a year for five years with the first payment
occurring in Year 4, that is, four years from today. When you compute the present
value of that annuity using the PV formula, the PV will be as of which point in time?
a. Year 2
b. Year 4
c. Today, Year 0
d. Year 3
e. Year 1
94. Wilt has a consulting contract that calls for annual payments of $50,000 a year for
five years with the first payment due today. What is the current value of this contract if
the discount rate is 8.4 percent?
a. $201,867.47
b. $195,618.19
c. $197,548.43
d. $214,142.50
e. $224,267.10
95. Assume mortgage rates increase to 7.5 percent and you borrow $329,000 for 30
years to purchase a house. What will your loan balance be at the end of the first 15
years of monthly payments?
a. $194,311.64
b. $238,854.07
c. $192,938.72
d. $207,308.09
e. $248,153.73
96. You plan to invest $6,500 for three years at 4 percent simple interest. What will
your investment be worth at the end of the three years?
a. $7,280.00
b. $6,760.00

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c. $7,311.62
d. $6,924.32
e. $7,250.00
97. The highest effective annual rate that can be derived from an annual percentage
rate of 9 percent is computed as:
a. 1.09e.
b. (1 + .09/365)365− 1.
c. e.09− 1.
d. e.09q.
e. (1 + .09/365)(365).
98. What is the effective annual rate if your credit card charges you 10.64 percent
compounded daily? (Assume a 365-day year.)
a. 11.22 percent
b. 12.01 percent
c. 11.95 percent
d. 11.48 percent
e. 10.79 percent
99. Thirty-five years ago, your father invested $2,000. Today that investment is worth
$98,407. What annual rate of return has been earned on this investment?
a. 10.50 percent
b. 10.94 percent
c. 9.99 percent
d. 11.77 percent
e. 11.33 percent
100. A car dealer is willing to lease you a car for $319 a month for 60 months.
Payments are due on the first day of each month starting with the day you sign the

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lease contract. If your cost of money is 4.9 percent, compounded monthly, what is the
current value of the lease?
a. $17,882.75
b. $16,689.54
c. $16,235.42
d. $17,014.34
e. $17,906.14
101. A growing perpetuity is currently valued $6,225.81. The next annuity payment
will be $386 and the discount rate is 9 percent. What is the annuity's rate of growth?
a. 2.45 percent
b. 3.10 percent
c. 2.80 percent
d. 2.50 percent
e. 2.95 percent
102. Jeanette expects to live 30 years after she retires. At the end of the first year of
her retirement, she wants to withdraw $35,000 from her savings. Each year thereafter,
she wants to increase her annual withdrawal by 3.5 percent. If she can earn 5.5 percent
on her savings, how much does she need to have in retirement savings on the day she
retires?
a. $919,028.56
b. $764,458.87
c. $648,909.18
d. $832,004.01
e. $862,001.34
103. You just paid $525,000 for a security that will pay you and your heirs $25,000 a
year forever. What rate of return will you earn?
a. 4.76 percent
b. 4.50 percent

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c. 4.39 percent
d. 5.00 percent
e. 4.95 percent
104. On the day she retired, Kate had $101,900 in retirement savings. She expects to
earn 4.5 percent, compounded monthly, and live 24 more years. How much can she
withdraw from her savings each month during her retirement if she plans to die on the
day she spends her last penny?
a. $592.07
b. $539.87
c. $579.22
d. $604.86
e. $609.21
105. A credit card compounds interest monthly and has an effective annual rate of
12.67 percent. What is the annual percentage rate?
a. 12.00 percent
b. 11.87 percent
c. 12.35 percent
d. 11.99 percent
e. 11.93 percent
106. You would be making a wise decision if you chose to:

a. assume all loans and investments are based on simple interest.
b. base decisions regarding investments on effective rates and base decisions
regarding loans on annual percentage rates.
c. ignore the effective rates and concentrate on the annual percentage rates for all
transactions.
d. invest in an account paying 6 percent, compounded quarterly, rather than an account
paying 6 percent, compounded monthly.

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e. accept the loan with the lower effective annual rate rather than the loan with the
lower annual percentage rate
107. Fred purchased a city lot for $39,900. That lot has appreciated at 6.5 percent
annually and is now valued at $287,400. How long has Fred owned this lot?
a. 37.97 years
b. 29.11 years
c. 31.35 years
d. 26.87 years
e. 33.09 years
108. Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded
annually. What will his investment be worth after five years?
a. $3,093.16
b. $3,288.00
c. $3,321.32
d. $2,997.04
e. $2,857.59
109. What is the annual percentage rate on a loan that charges interest of 1.65 percent
per quarter?
a. 6.50 percent
b. 6.60 percent
c. 6.72 percent
d. 6.45 percent
e. 6.54 percent
110. You have been offered a job that pays an annual salary of $48,000, $51,000, and
$55,000 over the next three years, respectively. The offer also includes a starting
bonus of $2,500 payable immediately. What is this offer worth to you today at a

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a. $130,983.56
b. $129,640.14
c. $132,283.56
d. $138,066.75
e. $134,383.56
111. Lucas invested $4,500 at 6.2 percent, compounded continuously. What will his
investment be worth after 15 years?
a. $9,240.03
b. $8,685.00
c. $12,308.84
d. $11,405.29
e. $15,557.78
CHAPTER 5
1. The payback method of analysis:
a. considers all project cash flows.
b. applies an industry-standard recoupment period.
c. ignores the initial cost.
d. has a timing bias.
e. discounts cash flows
2. The payback method:

a. is a more sophisticated method of analysis than the profitability index.
b. applies mainly to projects where the actual results will be known relatively soon.
c. considers the time value of money.
d. is the most frequently used method of capital budgeting analysis.
e. generally results in decisions that conflict with the decision suggested by NPV
analysis.

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3. The possibility that more than one discount rate will make the NPV of an
investment equal to zero presents the problem referred to as:
a. the mutually exclusive investment decision.
b. multiple rates of return.
c. net present value profiling.
d. operational ambiguity.
e. issues of scale.
4. Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows
of $8,500, $15,600, and $22,700 for Years 1 to 3, respectively. Based on the
profitability index rule, should the project be accepted if the discount rate is 9.5
percent? Why or why not?
a. No; because the PI is 1.03
b. Yes; because the PI is .95
c. No; because the PI is .95
d. Yes; because the PI is 1.03
e. Yes; because the PI is negative
5. The discounted payback rule may cause:

a. projects with discounted payback periods in excess of the project's life to be
accepted.
b. projects to be incorrectly accepted due to ignoring the time value of money.
c. some projects with negative net present values to be accepted.
d. the most liquid projects to be rejected in favor of less liquid projects.
e. some positive net present value projects to be rejected.
6. The discounted payback method:

a. considers the time value of money.
b. ignores project risks.
c. is preferred to the NPV method.

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d. discounts the cutoff point.

e. discounts the initial cost
7. Roy's Welding projects cash flows of $13,500, $20,400, and $32,900 for Years 1 to
3 for a project with an initial cost of $45,000. What is the profitability index given an
assigned discount rate of 15 percent?
a. .97
b. 1.14
c. 1.08
d. .92
e. 1.03
8. A financing project is acceptable if its internal rate of return is:

a. exactly equal to zero.
b. less than the discount rate.
c. exactly equal to its net present value.
d. greater than the discount rate.
e. negative
9. Anne is considering two independent projects with 2-year lives. Both projects have
been assigned a discount rate of 13 percent. She has sufficient funds to finance one or
both projects. Project A costs $38,500 and has cash flows of $19,400 and $28,700 for
Years 1 and 2, respectively. Project B costs $41,000, and has cash flows of $25,000
and $22,000 for Years 1 and 2, respectively. Which project, or projects, if either,
should you accept based on the profitability index method and what is the correct
reason for that decision?
a. Neither project is acceptable.
b. You should accept both projects since both of their PIs are greater than 1.
c. You should accept Project A since it has the higher PI and you can only select one
project.
d. You should only accept Project A since it is the only project with a PI greater than 1.
e. You should accept both projects since both of their PIs are positive

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10. The elements that cause problems with the use of the IRR in projects that are
mutually exclusive are referred to as the:
a. timing and scale problems.
b. timing and reversing flow problems.
c. discount rate and scale problems.
d. discount rate and timing problems.
e. scale and reversing flow problems
11. One characteristic of the payback method of project analysis is the:

a. standardized cutoff point for cash flow consideration.
b. consideration of the risk level of each project.
c. use of variable discount rates.
d. discounting of all cash flows.
e. bias towards liquidity
12. Comparing the NPV profile of an investment project to that of a financing project
demonstrates why the:
a. profitability index and the net present value are related.
b. incremental IRR is computed differently for financing projects than for investment
projects.
c. life span of a project affects the decision as to which project to accept.
d. NPV rule for financing projects is the opposite of the rule for investment projects.
e. IRR decision rule for investment projects is the opposite of the rule for financing
projects
13. If a firm is more concerned about the quick return of its initial investment than it is
about the amount of value created, then the firm is most apt to evaluate a capital
project using the _____ method of analysis.
a. internal rate of return
b. net present value

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c. profitability index
d. payback
e. modified internal rate of return
14. The modified internal rate of return:

a. is computed by combining cash flows until only one change in sign remains.
b. is used to make accept/reject decisions when no discount rate can be assigned.
c. assumes all projects are financing projects.
d. applies only to profitability calculations.
e. is used as the discount rate for all NPV calculations
15. A project will have more than one IRR if, and only if, the:
a. cash flow pattern exhibits more than one sign change.
b. NPV is zero.
c. primary IRR is negative.
d. primary IRR is positive.
e. cash flow pattern exhibits exactly one sign change
16. Juan is considering two independent projects. Project A costs $74,600 and has
projected cash flows of $18,700, $46,300, and $12,200 for Years 1 to 3, respectively.
Project B costs $70,000 and has cash flows of $10,600, $15,800, and $67,900 for
Years 1 to 3, respectively. Juan assigns a discount rate of 10 percent to Project A and
12 percent to Project B. Which project or projects, if either, should he accept based on
the profitability index rule?
a. Reject both projects.
b. Accept either A or B, but not both.
c. Accept both projects.
d. Accept Project A and reject Project B.
e. Accept Project B and reject Project A

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17. A food cart costs $4,500 and is expected to return $1,750 a year for three years and
then be worthless. What is the payback period for this cart?
a. 1.57 years
b. 2.83 years
c. 2.57 years
d. 2.78 years
e. 3.14 years
18. Two mutually exclusive projects have 3-year lives and a required rate of return of
10.5 percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and
$28,600 for Years 1 to 3, respectively. Project B costs $72,000 and has cash flows of
$22,000, $38,000, and $26,500 for Years 1 to 3, respectively. Using the IRR, which
project, or projects, if either, should be accepted?
a. Accept Project A and reject Project B.
b. Accept both projects
c. Accept Project B and reject Project A.
d. Reject both projects
e. Select either project as there is no significant difference between them
19. Project A costs $84,500 and has cash flows of $32,300, $36,400, and $30,000 for
Years 1 to 3, respectively. Project B has an initial cost of $79,000 and has cash flows
of $30,000, $36,000, and $29,000 for Years 1 to 3, respectively. What is the
incremental IRR of these two mutually exclusive projects?
a. 16.75 percent
b. −13.01 percent
c. 18.11 percent
d. −20.37 percent
e. 14.91 percent
20. Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3.
Project Y costs $40,700 and has cash flows of $12,000, $25,000, and $10,000 in Years
1 to 3, respectively. The discount rate is 6 percent and the projects are mutually

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exclusive. Based on the individual project's IRRs you should accept Project _____;
based on NPV you should accept Project ____; the final decision should be to accept
Project ____.
a. Y; X: Y
b. Y; Y; Y
c. X; X; X
d. X; Y; Y
e. Y; X; X
21. You are considering an investment project with an internal rate of return of 8.7
percent, a net present value of $393, and a payback period of 2.44 years. Which one of
the following is correct given this information?
a. The discount rate used in computing the net present value was less than 8.7 percent.
b. This project should be rejected based on the net present value.
c. The discount rate used to compute the net present value is equal to the internal rate
of return.
d. The required payback period must be greater than 2.44 years.
e. The discounted payback period will be less than 2.44 years.
22. A situation in which accepting one investment prevents the acceptance of another
investment is called the:
a. mutually exclusive investment decision.
b. multiple rates of return decision.
c. operational ambiguity decision.
d. issues of scale problem.
e. net present value profile.
23. Blue Bird Café is considering a project with an initial cost of $46,800, and cash
flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How
many internal rates of return do you expect this project to have?
a. 3

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b. 0
c. 2
d. 4
e. 1
24. Ted, a project manager, wants to invest in a project with an initial cost of $58,500
and cash flows of $32,400 and $38,500 in Years 1 and 2. Rosita, his boss, requires a
discount rate of 10 percent and also a return of $1.10 in today's dollars for every $1
invested. Will Ted get his project approved? Why or why not?
a. No; while the project returns more than 10 percent it does meet $1.10 per $1
requirement.
b. Yes; because both criteria are met
c. No; because the project does not meet either requirement
d. Yes; because the NPV is positive
e. Yes; because the PI is greater than 1
25. You are trying to determine whether to accept Project A or Project B. These
projects are mutually exclusive. As part of your analysis, you should compute the
incremental IRR by determining the:
a. internal rate of return for the cash flows of each project.
b. discount rate that equates the discounted payback periods for each project.
c. net present value of each project using the internal rate of return as the discount
rate.
d. discount rate that makes the net present value of each project equal to 1.0.
e. internal rate of return for the differences in the cash flows of the two projects
26. Which statement concerning the net present value (NPV) of an investment or a
financing project is correct?
a. Any type of project with greater total cash inflows than total cash outflows, should
always be accepted.
b. An investment project should be accepted only if the NPV is equal to the initial cash
flow.

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c. Any type of project should be accepted if the NPV is positive and rejected if it is
negative.
d. A financing project should be accepted if, and only if, the NPV is exactly equal to
zero.
e. An investment project that has positive cash flows for every time period after the
initial investment should be accepted
27. Which of the following methods of project analysis are biased towards short-term
projects?
a. Profitability index and discounted payback
b. Payback and profitability index
c. Profitability index and internal rate of return
d. Discounted payback and payback
e. Net present value and payback
28. Graham and Harvey (2001) found that _____ were the two most popular capital
budgeting methods.
a. IRR and NPV
b. IRR and modified IRR
c. discounted payback and NPV
d. NPV and PI
e. IRR and payback
29. Down Under Stores is considering an investment with an initial cost of $236,000.
In Year 4, the project will require an additional investment and finally, the project will
be shut down in Year 7. The annual cash flows for Years 1 to 7, respectively, are
projected as $64,000, $87,000, $91,000, −$48,000, $122,000, $154,000, and −
$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13
percent, what is the project's modified IRR?
a. 15.44 percent
b. 22.08 percent
c. 14.91 percent

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d. 18.54 percent
e. 17.67 percent
30. For investment projects, the internal rate of return (IRR):

a. is used primarily to rank projects of varying sizes.
b. is the rate that causes the net present value of a project to equal the project's initial
cost.
c. can effectively be used to compare all types and sizes of mutually exclusive
projects.
d. is the rate generated solely by the cash flows of the investment.
e. rule indicates acceptance of an investment when the IRR is less than the discount
rate
31. A project has an initial cost of $10,600 and produces cash inflows of $3,700,
$4,900, and $2,500 for Years 1 to 3, respectively. What is the discounted payback
period if the required rate of return is 7.5 percent?
a. 2.88 years
b. 2.78 years
c. Never
d. 2.94 years
e. 2.65 years
32. Jack is considering adding toys to his general store. He estimates the cost of toy
inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500.
Toy sales are expected to produce net annual cash inflows of $1,200, $1,500, $1,600,
and $1,750 over the next four years, respectively. Should Jack add toys to his
merchandise if he requires a three-year payback period? Why or why not?
a. Yes; because the payback period is 3.80 years
b. No; because the payback period is 3.80 years
c. Yes; because the payback period is 2.02 years
d. Yes; because the payback period is 2.94 years
e. No; because the payback period is 2.02 years

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33. Payback is frequently used to analyze independent projects because:

a. it is the most desirable of all the available analytical methods from a financial
perspective.
b. it produces better decisions than those made using either NPV or IRR.
c. it is easy and quick to calculate.
d. all relevant cash flows are included in the analysis.
e. it considers the time value of money
34. Which one of the following is the best example of two mutually exclusive
projects?
a. Buying sufficient equipment to manufacture both desks and chairs simultaneously
b. Planning to build a warehouse and a retail outlet side by side
c. Renting out a company warehouse or selling it outright
d. Using the company's sales force to promote sales of both shoes and socks
e. Buying both inventory and fixed assets using funds from the same bank loan
35. If you want to review a project from a benefit-cost perspective, you should use the
_____ method of analysis.
a. discounted payback
b. internal rate of return
c. net present value
d. payback
e. profitability index
36. Consider an investment with an initial cost of $20,000 that expected to last for 5
years. The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are
$5,500 each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is
spread evenly over its respective year. What is the payback period?
a. 4.00 years
b. None of these

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c. 4.55 years
d. 3.18 years
e. 3.82 years
37. Bernstein's proposed project has an initial cost of $128,600 and cash flows of
$64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash
flows are moved to Time 0 at a discount rate of 10 percent, what is the modified
internal rate of return?
a. 10.04 percent
b. 9.69 percent
c. 10.00 percent
d. 9.82 percent
e. 9.97 percent
38. Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three
years. Project B costs $60,000 and has cash flows of $25,000, $30,000, and $25,000
for Years 1 to 3, respectively. Projects A and B are mutually exclusive. The
incremental IRR is _______ and if the required rate is higher than the crossover rate
then Project _______ should be accepted.
a. 15.86 percent; A
b. 13.94 percent; A
c. 13.94 percent; B
d. 12.89 percent; B
e. 12.89 percent; A
39. Ginny is considering an investment costing $55,000 that has cash flows of $35,000
in Year 2, $36,000 in Year 3, and −$5,000 in Year 4. She requires a rate of return of 8
percent and has a required discounted payback period of three years. Should this
project be accepted? Why?
a. No; Although the project earns more than 8 percent, there is no situation where the
project can pay back on a discounted basis within three years.
b. Yes; The discounted payback requirement is met and other methods of analysis are
less desirable.

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c. No; The NPV indicates rejection as does DPB when all cash flows are considered.
d. Yes; The project pays back on a discounted basis within the assigned time period
and also produces a positive NPV.
e. No; The discounted payback period is too short.
40. The internal rate of return tends to be:

a. utilized in project analysis only when multiple net present values apply.
b. used primarily to differentiate between mutually exclusive projects.
c. easier for managers to comprehend than the net present value.
d. ignored by most financial managers.
e. extremely accurate even when cash flow estimates are faulty
41. An independent investment is acceptable if the profitability index (PI) of the

investment is:
a. greater than a pre-specified rate of return.
b. greater than 1.0.
c. greater than the internal rate of return.
d. less than the internal rate of return.
e. less than 1.0
42. A mutually exclusive project is a project whose:

a. IRR is always negative.
b. acceptance or rejection affects the acceptance of other projects.
c. cash flow pattern exhibits more than one sign change.
d. NPV is always negative.
e. acceptance or rejection has no effect on the acceptance of other projects
43. The internal rate of return for an investment project is best defined as the:
a. maximum rate that can be earned for a project to be accepted.
b. minimum project acceptance rate set by management.

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c. difference between the market rate of interest and the discount rate.
d. discount rate that causes the net present value to equal zero.
e. market rate of interest less the risk-free rate
44. The difference between the present value of an investment's future cash flows and
its initial cost is the:
a. discounted payback period.
b. payback period.
c. net present value.
d. profitability index.
e. internal rate of return
45. A financing project has an initial cash inflow of $42,000 and cash flows of −
$15,600, −$22,200, and −$18,000 for Years 1 to 3, respectively. The required rate of
return is 13 percent. What is the internal rate of return? Should the project be
accepted?
a. 13.44 percent; reject
b. 15.26 percent; accept
c. 10.33 percent; accept
d. 15.26 percent; reject
e. 13.44 percent; accept
46. An investment is acceptable if the payback period:

a. is equal to, and only if it is equal to, the investment's life.
b. is negative.
c. exceeds the life of the investment.
d. is equal to or greater than some pre-specified period of time.
e. is less than some pre-specified period of time
47. The profitability index:

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a. method is most commonly used when deciding between mutually exclusive projects
of varying size.
b. rule often results in decisions that conflict with the decisions based on the net
present value rule.
c. is useful as a decision tool when investment funds are limited and all available
funds are allocated.
d. rule states that the project with the lower index value should be accepted.
e. produces results which typically are difficult to comprehend
48. Proposed projects should be accepted when those projects:

a. create value for the owners of the firm.
b. have a positive rate of return.
c. have required cash inflows that exceed the actual cash inflows.
d. have an initial cost that exceeds the present value of the future cash flows.
e. return the initial cash outlay within the life of the project
49. The profitability index of an investment project is the ratio of the:

a. average net income from the project to the average investment cost.
b. net present value of every cash flow related to the project compared to the initial
cost.
c. internal rate of return to the current market rate of interest.
d. present value of the cash flows subsequent to the initial cost compared to the initial
cost.
e. net present value of the project's cash outflows divided by the net present value of
its inflows
50. An investment with an initial cost of $4,000 produces cash flows of $3,400, −
$500, $2,800, −$100, and $6,000 for Years 1 to 5, respectively. How many IRRs does
this project have?
a. 2
b. 5

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c. 3
d. 4
e. 6
51. Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,
respectively. The project has a required discount rate of 11 percent and an initial cost
of $2,100. What is the discounted payback period?
a. 3.05 years
b. 3.39 years
c. 2.21 years
d. Never
e. 2.68 years
52. A project costing $6,200 initially should produce cash inflows of $2,860 a year for
three years. After the three years, the project will be shut down and will be sold at the
end of Year 4 for an estimated net cash amount of $3,300. What is the net present
value of this project if the required rate of return is 11.3 percent?
a. $1,980.02
b. $935.56
c. $3,011.40
d. $2,903.19
e. $2,474.76
53. Why do managers suggest that ignoring all cash flows following the required
payback period is not a major flaw of the payback method of capital budgeting
analysis?
a. All projected cash flows after the required period are highly inaccurate so including
them lessens the reliability of the resulting decision.
b. All cash flows after the required period are relatively worthless in today's dollars so
ignoring them has no consequence.
c. Payback is never used in real practice so it makes no difference how academics
apply the method in their studies.

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d. If the cash flows after the required period are significant, managers will use their
discretion to override the payback rule.
e. Any consideration of the cash flows after the required period rarely has any effect
on the accept/reject decision
54. You are considering two independent projects that have differing requirements.
Project A has a required return of 12 percent compared to Project B’s required return
of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and
$12,000 for Years 1 to 3, respectively. Project B has an initial cost of $70,000 and cash
flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively. Based on the
NPV, you should:
a. accept Project B and reject Project A.
b. accept whichever one you want but not both.
c. accept both Project A and Project B.
d. accept Project A and reject Project B.
e. reject both Project A and Project B
55. No matter how many forms of investment analysis you employ:

a. the actual results from a project may vary significantly from the expected results.
b. only the first three years of a project ever affect its final outcome.
c. the initial costs will generally vary considerably from the estimated costs.
d. a project will never be accepted unless the payback period is met.
e. the internal rate of return will always produce the most reliable results
56. The length of time required for a project's discounted cash flows to equal the
initial cost of the project is called the:
a. discounted profitability index.
b. net present value.
c. discounted net present value.
d. discounted payback period.
e. payback period

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57. Which method(s) of project analysis is(are) best suited for use by a department
manager who has no knowledge of time value of money but can estimate the cash
flows of small projects with short lives fairly accurately?
a. Net present value
b. Discounted payback
c. Either payback or profitability index
d. Payback
e. Profitability index
58. A project has an initial cost of $26,000, a discount rate of 11.7 percent, a life of 5
years, and an NPV of $11,216. Given this, you know that the project is expected to
earn a return:
a. of $26,000 minus $11,216.
b. equal to 11.7 percent of $26,000 plus an additional $11,216.
c. equal to 11.7 percent of $37,216 (= $26,000 + 11,216).
d. of 11.7 percent of $11,216.
e. of $11,216 in total
59. A proposed new venture will cost $175,000 and should produce annual cash flows
of $48,500, $85,000, $40,000, and $40,000 for Years 1 to 4, respectively. The required
payback period is 3 years and the discounted payback period is 3.5 years. The required
rate of return is 9 percent. Which methods indicate project acceptance and which
indicate project rejection?
a. Accept: NPV, IRR; Reject: PI, payback, discounted payback
b. Accept: payback, discounted payback; Reject: NPV, IRR, PI
c. Accept: NPV, IRR, PI; Reject: payback, discounted payback
d. Accept: payback, PI; Reject: NPV, IRR, discounted payback
e. Accept: NPV, IRR, PI, payback; Reject: discounted payback

lOMoARcPSD|19685806
60. An investment with an initial cost of $15,000 produces cash flows of $5,000
annually for 5 years. At a discount rate of 10 percent, what is the discounted payback
period?
a. 3.21 years
b. 3.00 years
c. 3.75 years
d. Never
e. 3.89 years
61. Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of
$9,800, $16,400, and $21,700 for Years 1 to 3, respectively. Should the project be
accepted if it has been assigned a required return of 9.75 percent? Why or why not?
a. Yes; because the IRR exceeds the required return by .34 percent
b. Yes; because the IRR exceeds the required return by .28 percent
c. No; because the IRR exceeds the required return by .34 percent
d. No; because the IRR is only 9.69 percent
e. Yes; because the IRR is less than the required return by .28 percent
62. An investment project has an initial cost of $260 and cash flows $75, $105, $100,
and $50 for Years 1 to 4, respectively. The cost of capital is 12 percent. What is the
discounted payback period?
a. 3.68 years
b. Never
c. 3.92 years
d. 3.76 years
e. 3.42 years
63. eslie is charged with determining which small projects should be funded. Along
with this assignment, she has been granted the use of $15,000 for a maximum of two
years on a discounted basis. She is considering three projects. Project A costs $7,500
and has cash flows of $4,000 a year for Years 1 to 3. Project B costs $8,000 and has
cash flows of $3,000, $4,000, and $3,000 for Years 1 to 3, respectively. Project C costs

lOMoARcPSD|19685806
$2,000 and has a cash inflow of $2,500 in Year 2. What decisions should she make
regarding these projects if she assigns them a mandatory discount rate of 8.5 percent?
Explain why.
a. Accept Projects B and C and reject Project A as this combination uses the most
initial capital
b. Accept either Projects A and C or Projects B and C, but not all three as there is
insufficient financing
c. Accept Projects A and C and reject Project B as they have the shortest discounted
payback periods that fit within the $15,000 allocation
d. Accept Projects A and C and reject Project B as A and B payback within two years
e. Accept Project C and reject Projects A and B because only Project C has a
discounted payback that is less than two years
64. The discount rate that makes the net present value of an investment exactly equal
to zero is called the:
a. equalizer.
b. external rate of return.
c. internal rate of return.
d. profitability index.
e. average accounting return
65. The internal rate of return is:

a. a better methodology than net present value when dealing with unconventional cash
flows.
b. computed using a project's cash flows as the only source of inputs.
c. dependent on the interest rates offered in the marketplace.
d. more reliable than net present value whenever you are considering mutually
exclusive projects.
e. equivalent to the discount rate that makes the net present value equal to 1.0
66. The internal rate of return for a project will increase if:

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a. each cash inflow is moved such that it occurs one year later than originally
projected.
b. the discount rate is increased.
c. the required rate of return is reduced.
d. the initial cost of the project can be reduced.
e. the total amount of the cash inflows is reduced
67. A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for
Years 1 to 4, respectively. Because of its high risk, the project has been assigned a
discount rate of 16 percent. In dollars, how much will this project return in today's
dollars for every $1 invested?
a. $1.01
b. $.99
c. $1.05
d. $.97
e. $1.03
68. You are considering two independent projects with the same discount rate of 11
percent. Project A costs $284,700 and has cash flows of $75,900, $106,400, and
$159,800 for Years 1 to 3, respectively. Project B costs $115,000, and has a cash flow
of $50,000 a year for Years 1 to 3. You have sufficient funds to finance any decision
you make. Which project or projects, if either, should you accept and why?
a. Neither project; because their NPVs are less than their initial costs
b. Both projects; because their NPVs are both positive
c. Project A; because it is the larger-sized project with a positive IRR
d. Project A; because it has the larger NPV
e. Project B; because its IRR exceeds the discount rate
69. All else constant, the net present value of a typical investment project increases
when:
a. each cash inflow is delayed by one year.
b. the required rate of return decreases.

lOMoARcPSD|19685806
c. the discount rate increases.

d. the initial cost of a project increases.
e. all cash inflows occur during the last year instead of periodically throughout the
project's life
70. How should a profitability index of zero be interpreted?

a. The project also has a net present value of zero.
b. The project has an internal rate of return equal to the discount rate.
c. The present value of the cash flows subsequent to the initial cash flow is equal to
(−1 × Initial cash flow).
d. The project produces a net income of zero for every year of its life.
e. The project's cash flows subsequent to the initial cash flow have a present value of
zero
71. All else equal, the payback period for a project will decrease whenever the:
a. duration of a project is lengthened.
b. initial cost increases.
c. required return for a project increases.
d. cash inflows are moved earlier in time.
e. assigned discount rate decreases
72. An investment costing $25 returns $27.50 at the end of one year with no risk.
Given this, you know that the NPV:
a. equals 1.0 if the required return is 10 percent.
b. is zero if the required rate of return is 10 percent.
c. must be positive at any given discount rate.
d. is negative if the required return is less than 10 percent.
e. is zero at any given discount rate

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73. An investment project has an initial cost of $382 and cash flows $105, $130, $150,
and $150 for Years 1 to 4, respectively. The cost of capital is 9 percent. What is the
discounted payback period?
a. 3.68 years
b. 2.92 years
c. 2.76 years
d. 3.57 years
e. 3.42 years
74. A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and
$700 for Years 1 to 4, respectively. What is the payback period?
a. 2.97 years
b. 3.98 years
c. Never
d. 2.84 years
e. 3.92 years
75. Sun Lee's is considering two mutually exclusive projects that have been assigned
the same discount rate of 10.5 percent. Project A has an initial cost of $54,500, and
should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3,
respectively. Project B has an initial cost of $79,400, and should produce cash inflows
of $0, $48,300, and $42,100, for Years 1 to 3, respectively. What is the incremental
IRR?
a. −15.40 percent
b. 4.08 percent
c. 13.89 percent
d. 7.83 percent
e. −11.23 percent
76. You are considering a project with an initial cost of $4,300. What is the payback
period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for
Years 1 to 4, respectively?

lOMoARcPSD|19685806
a. 2.89 years
b. 3.04 years
c. 3.36 years
d. 2.04 years
e. 2.36 years
77. When a firm commences a positive net present value project, you know:
a. the project will pay back within the required payback period.
b. the present value of the expected cash flows is equal to the project's cost.
c. the inherent risks within the project have been ignored.
d. the stockholders' value in the firm is expected to increase.
e. that all the projected cash flows will occur as expected
78. If a project has a net present value equal to zero, then:

a. the internal rate of return exceeds the discount rate.
b. the discount rate exceeds the internal rate of return.
c. the project produces cash inflows that exceed the minimum required inflows.
d. any delay in receiving the projected cash inflows will cause the project's NPV to be
negative.
e. the initial cost of the project exceeds the present value of the project's subsequent
cash flows
79. Assume you use all available methods to evaluate projects. If there is a conflict in
the indicated accept/reject decision between two mutually exclusive projects due to
the IRR-based indicator, you should:
a. combine both projects into one larger project.
b. base the final decision on the payback method.
c. accept both projects if both are acceptable according to NPV.
d. reject both projects due to ambiguity in the decision-making process.
e. ignore the IRR and rely on the decision indicated by the NPV method

lOMoARcPSD|19685806
80. Project A is opening a bakery at 10 Center Street. Project B is opening a specialty

coffee shop at the same address. Both projects have unconventional cash flows, that is,
both projects have positive and negative cash flows that occur following the initial
investment. When trying to decide which project to accept, given sufficient funding to
accept either project, you should rely most heavily on the _____ method of analysis.
a. payback
b. internal rate of return
c. net present value
d. discounted payback
e. profitability index
81. What is the net present value of a project that has an initial cash outflow of $7,670
and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The
discount rate is 12.5 percent.
a. $249.65
b. $270.16
c. $86.87
d. $371.02
e. $68.20
82. Net present value:

a. rule for project acceptance must be modified when comparing projects of varying
sizes.
b. is less commonly used in business than the profitability index method of analysis.
c. is not as widely used in practice as payback and discounted payback.
d. provides the means for considering the risks associated with a specific project.
e. cannot be relied upon when deciding between two mutually exclusive projects
83. The length of time required for an investment to generate cash flows sufficient to
recover the initial cost of the investment is called the:

lOMoARcPSD|19685806
a. net working capital period.

b. cash period.
c. profitability index.
d. discounted payback period.
e. payback period
84. Which one of the following statements is true?

a. Financing projects are acceptable if the NPV is negative.
b. You must know the discount rate to compute the NPV but not the IRR.
c. You must have a discount rate to compute, NPV, IRR, PI, and discounted payback.
d. Payback uses the same discount rate as that applied in the NPV calculation.
e. Financing projects can only ever have one IRR
85. If a project is assigned a required rate of return of zero, then:

a. the project will always be rejected.
b. the project can never add value for the shareholders.
c. whether the project is accepted or rejected will depend on the timing of the cash
flows.
d. the project will always be accepted.
e. the timing of the project's cash flows has no bearing on the value of the project
86. The net present value method of capital budgeting analysis does all of the
following except:
a. consider the initial cost of the project.
b. discount all future cash flows to their current value.
c. provide a specific anticipated rate of return.
d. consider all relevant cash flow information.
e. incorporate risk into the analysis

lOMoARcPSD|19685806
87. An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years.
At what discount rate will the project's IRR equal its discount rate?
a. 0 percent
b. 16.67 percent
c. 27.22 percent
d. 21.08 percent
e. 15.24 percent
88. A project costing $218,000 has equal annual cash inflows over its 7-year life. If
the discounted payback period is seven years and the discount rate is zero percent,
what is the amount of the cash flow in each of the seven years?
a. $218,000 for Year 1 and $0 for Years 2 through 7.
b. Any amount between $0 and $218,000 for any one year, provided the sum of the
seven cash flows totals $218,000.
c. $31,142.86 per year for each of the seven years
d. $0 for Years 1 to 6 and $218,000 in Year 7
e. $0 for each of the seven years
89. Using the internal rate of return method, a conventional investment project should
be accepted if the internal rate of return is:
a. positive.
b. negative.
c. equal to or greater than the discount rate.
d. less than the discount rate.
e. equal to, and only if it is equal to, the discount rate
90. Wilson's Market is considering two mutually exclusive projects that will not be
repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for
Project B. Project A has an initial cost of $54,500, and should produce cash inflows of
$16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial
cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for

lOMoARcPSD|19685806
Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and

why?
a. Project B; because it has a negative NPV which indicates acceptance
b. Project A; because it has the higher required rate of return
c. Project B; because it has the largest total cash inflow
d. Neither project; because neither has an NPV equal to or greater than its initial cost
e. Project A; because its NPV is positive while Project B's NPV is negative
91. The payback method:

a. varies the cutoff point with the market rate of interest.
b. determines a cutoff point equal to the point where all initial capital investments
have been fully depreciated.
c. determines a cutoff point so that all projects accepted by the NPV rule will be
accepted by the payback period rule.
d. requires an arbitrary choice of a cutoff point.
e. is irrelevant to the accept/reject decision
92. The discounted payback period of a project will decrease whenever the:
a. costs of the fixed assets utilized in the project increase.
b. amount of each cash inflow is increased.
c. time period of the project is increased.
d. initial cash outlay of the project is increased.
e. discount rate applied to the project is increased
93. What is the net present value of a project with an initial cost of $36,900 and cash
inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount
rate is 13 percent.
a. −$287.22
b. $204.36
c. −$1,350.49

lOMoARcPSD|19685806
d. $797.22
e. −$1,195.12
CHAPTER 15
1. Bonds with attached warrants are frequently issued:
a. with an attached share of common stock.
b. with very low coupons.
c. with an attached share of preferred stock.
d. with a share purchase price set equal to the market price at time of share purchase.
e. at a greatly discounted price
2. If a bond has a make-whole call provision, the:

a. call price will increase as interest rates decrease.
b. bondholder will receive the face value amount plus interest if the bond is called.
c. bondholder will receive the face value amount minus any interest paid to date if the
bond is called.
d. call premium can be either positive or negative.
e. bond's market price will always equal its face value
3. There are three directors' seats up for election. If you own 1,000 shares of stock and
have been granted a total of 3,000 votes to cast in a single election, then the firm uses
the voting procedure referred to as:
a. cumulative voting.
b. market share voting.
c. sequential voting.
d. absolute priority voting.
e. straight voting.
4. Ideally, corporations try to create securities that have the tax benefits:
a. of debt but the bankruptcy benefits of equity.

lOMoARcPSD|19685806
b. and bankruptcy benefits of equity.

c. and bankruptcy benefits of debt.
d. of equity but the bankruptcy benefits of debt.
e. of debt and the equity benefits of dividends
5. The written agreement between a corporation and its bondholders is called the:
a. indenture.
b. collateral agreement.
c. legal understanding.
d. conveyance.
e. note
6. Which one of these statements correctly applies to either a leveraged or an

unleveraged syndicated loan?
a. The loan arranger is not involved with the actual lending.
b. The loan will always be rated as investment grade.
c. The loan may not be publicly traded.
d. Each bank that participates negotiates the terms for its portion of the overall loan.
e. Each bank has its own loan agreement with the borrowers
7. A blanket mortgage is securitized by:

a. all the borrower's real property.
b. the sinking fund.
c. the good faith and credit of the borrower.
d. the borrower's inventories and accounts receivables.
e. the borrower's inventory
8. Which type of bond is a city or state most likely to use as a means of offsetting their
cost of damages caused by a hurricane?
a. NoNo bond

lOMoARcPSD|19685806
b. Cat bond
c. CoCo bond
d. Put bond
e. Convertible bond
9. There are seven seats on the board of directors of Furniture Unlimited up for
election. The firm has 246,500 shares of stock outstanding and uses straight voting.
Each share is granted one vote for each open seat. How many shares must you control
if you want to guarantee your election to the board assuming no one else votes for
you?
a. 30,813
b. 35,215
c. 30,814
d. 123,250
e. 123,251
10. If a debt is subordinated, it:

a. has a higher priority status than secured creditors.
b. has been issued because the company is in default.
c. must give preference to the secured creditors in the event of default.
d. is secondary to equity.
e. is treated as an equity security
11. The written agreement between a corporation and its bondholders might contain a
prohibition against paying dividends in excess of current earnings. This prohibition is
an example of a(n):
a. put provision.
b. affirmative indenture.
c. maintenance of security provision.
d. negative covenant.
e. collateral restriction

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12. Historically in the U.S., corporate bonds have generally been issued with a par
value of:
a. $5,000.
b. $10,000.
c. $500.
d. $100.
e. $1,000
13. Different classes of stock usually are issued to:

a. fool investors.
b. reduce the firm's dividend obligation.
c. extract perquisites from one class of shareholders without the other class of
shareholders knowing.
d. distinguish the time periods in which the various shares were issued.
e. allow a certain group to maintain ownership control while reducing that group's
equity position
14. ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive
from this situation?
a. ABC can exclude 30 percent of any XYZ dividends received from its taxable
income.
b. ABC benefits because it is able to treat any XYZ dividends it receives as interest
income.
c. ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income.
d. Fifty percent of the dividends paid by XYZ to ABC is exempt from income taxes.
e. All dividend income ABC receives from XYZ is tax-exempt
15. If a group other than current management solicits the authority to vote shares as
part of their effort to replace the current management team, a _____ is said to occur.
a. proxy fight

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b. seniority turnover
c. tender offer
d. stockholder derivative action
e. vote of confidence
16. The term financial deficit is defined as the:

a. uses of cash flow minus the cash flow available from internal sources.
b. total amount of cash flow required from all sources to meet the needs of the uses of
cash.
c. loss realized on bonds that are sold for less than their purchase price.
d. amount needed to fund all interest payments on currently outstanding debt.
e. amount of cash flow that must be funded internally
17. There are three directors' seats up for election. If you own 1,000 shares of stock
and you can cast 1,000 votes in each of the three elections, then the firm uses the
voting procedure referred to as:
a. sequential voting.
b. absolute priority voting.
c. straight voting.
d. market share voting.
e. cumulative voting
18. There are three seats on the board of directors of MMT, Inc., up for election. The
firm has 175,000 shares of stock outstanding and uses cumulative voting. Each share
is granted one vote per open seat. You currently own 10,000 shares that have a market
value of $23 each. How much must you spend, if anything, to acquire sufficient shares
to guarantee your election to the board? Assume no one else votes for you.
a. $1,111,690
b. $1,006,273
c. $830,814
d. $776,273

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e. $688,230
19. Which group has the ultimate control over a corporation?

a. Chief executive officer
b. Classified board
c. Shareholders
d. Directors
e. Bondholders
20. Which one of these is not a right generally granted to shareholders?

a. Right to vote to approve or reject a merger offer
b. Right to elect individuals to the board of directors
c. Right to receive proportional dividends
d. Right to purchase shares of any new stock issue
e. First right to liquidation proceeds
21. Rembrandt bonds are associated with which country(ies)?

a. Austria and Hungary
b. Germany
c. Switzerland
d. Belgium
e. The Netherlands
22. Sinking fund arrangements are least apt to contain which one of these
requirements?
a. A one-time repayment of the entire principal and interest at maturity
b. Equal payments of principal over the life of the bond
c. A balloon payment
d. Sufficient payments over the bonds' life to retire the entire bond issue

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e. A deferred provision for the first few years
23. What is the predominant source of financing for positive NPV projects by U.S.
nonfinancial corporations?
a. Preferred stock
b. Privately-issued debt
c. Internally-generated funds
d. Publicly-issued debt
e. Common stock
24. Which one of the following statements is true?

a. Debt holders have a residual claim on a firm's assets.
b. Bondholders are generally granted voting rights equal to those of common
shareholders.
c. Unpaid common stock dividends can force a firm into liquidation.
d. Debt increases the possibility of financial distress.
e. Payments of both interest and dividends are tax-deductible as business expenses
25. Bulldog bonds are associated with which country?

a. Great Britain
b. France
c. Spain
d. Germany
e. Morocco
26. Unsecured corporate debt is commonly referred to as:

a. an indenture.
b. protected debt.
c. a debenture.
d. collateralized debt.

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e. deferred debt
27. Which type of bond grants the bond holder the right to force the bond's issuer to
repay the bond at a stated price given that a certain situation(s) occurs?
a. Put bond
b. Cat bond
c. NoNo bond
d. Income bond
e. Warrant bond
28. Financial economists prefer to use market values rather than book values when
measuring debt ratios because market values are:
a. more stable than book values.
b. most commonly required by bond covenants.
c. used by Standard & Poor's to measure credit worthiness.
d. net of taxes.
e. a better reflection of current information
29. Analysts estimate that a bond has an equal probability of being priced at either
$940 or $1,050 one year from today. The bond is also callable at any time at $1,020.
What is the expected value of this bond in one year?
a. $940
b. $1,020
c. $995
d. $1,000
e. $980
30. DLT has cumulative preferred stock outstanding that calls for quarterly dividend
payments of $1.50 each. Due to its financial situation, the firm has not paid these
preferred dividends for the past two quarters. What amount per share must be paid to

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the preferred shareholders this quarter if the firm also wants to pay a dividend on its
common stock?
a. $3.00
b. $6.00
c. $7.50
d. $4.50
e. $1.50
31. Preferred stock dividends:

a. are a tax-deductible business expense.
b. become a debt of the firm if unpaid.
c. are only paid if common stock dividends are also paid.
d. can be deferred indefinitely.
e. have priority over debt interest payments but not common stock dividends
32. Which one of these is a positive covenant?

a. The market debt-equity ratio cannot exceed .60.
b. The firm cannot be acquired in a friendly takeover.
c. The firm will not issue any debt with higher seniority.
d. No dividend increases will be allowed.
e. The firm must maintain a current ratio of 1.2 or better
33. Since 1975 U.S. nonfinancial corporations have tended to have debt-equity ratios
that are:
a. less than 1.0.
b. steadily rising due to the low interest rate environment.
c. relatively unaffected by stock market movements.
d. averaging in the .8 to .9 range.
e. relatively stable over time

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34. Assuming control of a corporation would be hardest to obtain if the firm uses
which type of voting?
a. Cumulative voting with a staggered board
b. Cumulative voting with an annual board
c. Straight voting with annual elections for each seat
d. Cumulative voting with annual elections for each seat
e. Straight voting with a staggered board
35. When shareholders are granted preemptive rights, they obtain the right:
a. to share proportionally in regular and liquidating dividends.
b. of first refusal for their proportionate percentage of new shares offered.
c. to resell their shares to the issuer at any time at a predetermined price.
d. to receive dividends prior to any preferred shareholders.
e. to elect members to the board of directors
36. Which type of bond only pays coupon payments if it can do so from the income
earned by the firm?
a. NoNo bond
b. Income bond
c. Floater bond
d. LIBOR-based bond
e. Readi-cash bond
37. Firms may prefer to issue cumulative preferred stock rather than debt for which
reason?
a. Preferred dividends provide a tax shield but debt does not.
b. Dividend payments are tax deductible, interest on debt is not.
c. Preferred stock has no voting rights but debt does.
d. If there is no current taxable income, preferred stock dividends are automatically
voided.

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e. Corporate investors can receive a tax break on dividends
38. Which set of circumstances would best ensure the price of a bond with attached
warrants will increase given no change in the bond's credit quality or terms?
a. A decrease in the market rate of interest with no change in the underlying stock
price
b. A decrease in the market rate of interest and an increase in the underlying stock
price
c. An increase in both the market rate of interest and the underlying stock price
d. An increase in the market rate of interest and a decrease in the underlying stock
price
e. A decrease in both the market rate of interest and the underlying stock price
39. If a bond issue is callable, the call price generally is:

a. constant over the life of the debt.
b. set so it decreases as the bond approaches maturity.
c. less than par value.
d. variable based on the market rate of interest.
e. equal to par value
40. A classified board is one which has:

a. directors that have been assigned differing numbers of votes per seat.
b. representation from various classes of stock.
c. directors elected solely by one class of shareholders.
d. terms that expire at different times.
e. both employee and non-employee directors
41. A grant of authority allowing someone else to vote shares of stock that you own is
called a:
a. restricted conveyance.

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b. proxy.
c. power-of-share authorization.
d. general right of execution.
e. share authority grant (SAG)
42. There are five seats on the board of directors of Atlas Corp. up for election. The
firm has 120,000 shares of stock outstanding and uses cumulative voting. Each share
is granted one vote per open seat. How many shares must you control if you want to
guarantee your election to the board assuming no one else votes for you?
a. 24,001
b. 20,001
c. 24,000
d. 23,999
e. 20,000
43. Recently, U.S. nonfinancial corporations have been:

a. primarily relying on external debt.
b. net issuers of stock.
c. net repurchasers of stock.
d. paying off external debt at a record pace.
e. issuing new shares of stock in record numbers
44. If an issuer retires a debt issue before maturity, the specific amount paid to do so is
called the:
a. the discount.
b. amortized payoff.
c. sinking fund amount.
d. par or face amount.
e. call price

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45. Which one of these is not included in the indenture?

a. Registered owner
b. Protective covenant
c. Call provision
d. Bond seniority
e. Repayment arrangements
46. Which characteristic does not apply to Eurobonds?

a. Always denominated in a single currency
b. Commonly traded from London
c. Issued in multiple countries
d. Always denominated in euros
e. Generally denominated in the issuer's home currency
47. Which one of the following statements about preferred stock is true?
a. Unlike dividends paid on common stock, dividends paid on preferred stock are a
tax-deductible expense.
b. If preferred dividends are non-cumulative, then preferred dividends not paid in a
particular year will be carried forward to the next year.
c. Dividends on preferred stock payable during the next twelve months are considered
to be a corporate liability.
d. Preferred stock usually has a stated liquidating value of $100 per share.
e. There is no significant difference in the voting rights granted to preferred and
common shareholders
48. Not paying dividends on a cumulative preferred issue may result in:
a. voting rights being granted to preferred shareholders.
b. preferred dividend arrearages that can be eliminated only after all common
dividends are paid.
c. the permanent forfeiture of all unpaid past dividends but the resumption of future
dividends.

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d. the issuer being forced into repaying all preferred shareholders the stated value of
their shares.
e. increased taxes based on the amount of the dividend arrearage
49. Analysts estimate that one year from today, a bond has a probability of 40 percent
of being priced at $950 and a probability of 60 percent of being priced at $1,050. The
bond is also callable at any time at $1,010. What is the expected value of this bond in
one year?
a. $980
b. $995
c. $986
d. $1,000
e. $1,010
50. Which one of these applies to floating-rate bonds?

a. Coupon payments are fixed but the par value is variable.
b. Bondholders frequently are granted a put provision at the current market price.
c. Interest adjustments are accrued and paid on the maturity date.
d. Bondholders can generally redeem their bonds at par at any time.
e. Coupon payments are variable while the par value is fixed
51. A revolving bank line of credit:

a. generally requires the borrower to borrow the entire credit line amount at some
point in time.
b. allows the borrower to determine the amount of credit to be granted.
c. is generally free of charge until money is actually borrowed.
d. generally involves a fee charged to the borrower on the unused portion of the
revolver.
e. may only be offered for periods of one year or less.

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52. Bonds that grant the issuer the right to extinguish the debt prior to maturity are
referred to as which type of bond?
a. Callable bond
b. Put bond
c. Subordinated bond
d. Debenture
e. Covenant bond
CHAPTER 16
1. A manager should attempt to maximize the value of the firm by changing the capital
structure if and only if the value of the firm increases:
a. while also decreasing shareholder value.
b. to the sole benefit of the managers.
c. while holding stockholder value constant.
d. as a result of the change.
e. to the sole benefit of the debtholders
2. You own 25 percent of Unique Vacations, Inc. You have decided to retire and want
to sell your shares in this closely held, all-equity firm. The other shareholders have
agreed to have the firm borrow $1.5 million to purchase your 1,000 shares of stock.
What is the total value of this firm if you ignore taxes?
a. $5.7 million
b. $4.8 million
c. $5.4 million
d. $6.0 million
e. $5.1 million
3. An all-equity firm has a cost of capital of 12.8 percent and a tax rate of 23 percent.
At the firm's target debt-equity ratio, the pretax cost of debt is 7.35 percent and the
cost of equity is 15.07 percent. What is the target debt-equity ratio?
a. .54
b. .67

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c. .61
d. .51
e. .49
4. The increase in risk to shareholders when financial leverage is introduced is best

evidenced by:
a. the increase in taxes.
b. a higher variability of EPS with debt than with all-equity financing.
c. higher EPS as EBIT increases.
d. decreasing earnings as EBIT increases.
e. increased use of homemade leverage
5. The proposition that the value of the firm is independent of its capital structure is
called:
a. the efficient markets hypothesis.
b. the capital asset pricing model.
c. MM Proposition II (no taxes).
d. the law of one price.
e. MM Proposition I (no taxes)
6. A firm should always select the capital structure which:

a. maximizes current dividends.
b. produces the highest cost of capital.
c. minimizes taxes.
d. has no debt.
e. maximizes the value of the firm
7. The Backwoods Lumber Co. has a debt-equity ratio of .68. The firm's required
return on assets is 11.7 percent and its levered cost of equity is 15.54 percent. What is
the pretax cost of debt based on MM Proposition II with no taxes?

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a. 6.76 percent
b. 7.25 percent
c. 7.50 percent
d. 6.05 percent
e. 6.39 percent
8. Salmon Inc. has debt with both a face and a market value of $227,000. This debt
has a coupon rate of 7 percent and pays interest annually. The expected earnings
before interest and taxes is $87,200, the tax rate is 21 percent, and the unlevered cost
of capital is 12 percent. What is the firm's cost of equity?
a. 14.14 percent
b. 13.25 percent
c. 13.92 percent
d. 13.89 percent
e. 14.27 percent
9. Jasmine's Boutique has 2,000 bonds outstanding with a face value of $1,000 each, a
market value of $1,060 each, and a coupon rate of 9 percent. The interest is paid
semiannually. What is the amount of the annual tax shield on debt if the tax rate is 23
percent?
a. $43,884
b. $41,400
c. $487,600
d. $44,872
e. $460,000
10. According to MM Proposition II with no taxes, the:

a. required return on equity is a linear function of the firm's debt-equity ratio.
b. required return on assets exceeds the weighted average cost of capital.
c. cost of equity in inversely related to the firm's debt-equity ratio.
d. cost of debt must equal the cost of equity.

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e. return on assets is determined by financial risk
11. Your firm has a bond issue with a face value of $250,000 outstanding. These
bonds have a coupon rate of 7 percent, pay interest semiannually, and have a current
market price equal to 103 percent of face value. What is the amount of the annual tax
shield on debt given a tax rate of 21 percent?
a. $52,500
b. $6,309
c. $3,675
d. $4,500
e. $47,500
12. The Montana Hills Co. has expected earnings before interest and taxes of $17,100
forever, an unlevered cost of capital of 12.4 percent, and debt with both a book and
face value of $25,000. The debt has an annual 6.2 percent coupon. If the tax rate is 21
percent, what is the value of the firm?
a. $91,016
b. $146,403
c. $137,903
d. $106,667
e. $114,194
13. Bryan invested in Bryco stock when the firm was financed solely with equity. The
firm now has a debt-equity ratio of .3. To maintain the same level of leverage he
originally had, Bryan needs to:
a. maintain his current position in Bryco stock.
b. sell half of his Bryco stock and invest the proceeds in risk-free securities.
c. borrow some money and purchase additional shares of Bryco stock.
d. sell some shares of Bryco stock and hold the proceeds in cash.
e. sell some shares of Bryco stock and loan out the proceeds

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14. MM Proposition I with taxes supports the theory that:

a. a firm's weighted average cost of capital increases as the debt-equity ratio of the
firm rises.
b. there is a positive linear relationship between the amount of debt in a levered firm
and the firm's value.
c. the value of a firm is inversely related to the amount of leverage used by the firm.
d. the value of an unlevered firm is equal to the value of a levered firm plus the value
of the interest tax shield.
e. a firm's cost of capital is the same regardless of the mix of debt and equity used by
the firm
15. A firm has an equity multiplier of 1.57, an unlevered cost of equity of 14 percent,
a levered cost of equity of 15.6 percent, and a tax rate of 21 percent. What is the cost
of debt?
a. 11.00 percent
b. 10.50 percent
c. 11.25 percent
d. 10.33 percent
e. 10.45 percent
16. An unlevered firm has a cost of capital of 13.6 percent and earnings before interest
and taxes of $138,000. A levered firm with the same operations and assets has both a
book value and a face value of debt of $520,000 with an annual coupon of 7 percent.
The applicable tax rate is 21 percent. What is the value of the levered firm?
a. $910,818
b. $907,679
c. $1,184,929
d. $996,421
e. $1,191,506
17. The tax shield on debt is one reason why:

a. firms prefer equity financing over debt financing.

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b. the net cost of debt to a firm is generally less than the cost of equity.
c. the required rate of return on assets rises when debt is added to the capital structure.
d. the value of an unlevered firm is equal to the value of a levered firm.
e. the cost of debt is equal to the cost of equity for a levered firm
18. Boutelle Homes has an all-equity value of $648,200, a cost of equity of 11.7
percent, and a tax rate of 35 percent. Assume the firm's capital structure changes to 30
percent debt followed by a lowering of the tax rate to 21 percent. What will be the
change in the levered value of the firm due to the reduction in the tax rate?
a. $16,020
b. $29,169
c. −$27,224
d. $17,520
e. −$17,520
19. MM Proposition I without taxes proposes that:

a. shareholder wealth is directly affected by the capital structure selected.
b. there is one ideal capital structure for each firm.
c. the value of an unlevered firm exceeds that of a levered firm.
d. leverage does not affect the value of the firm.
e. the value of a levered firm exceeds that of an unlevered firm
20. MM Proposition I with taxes is based on the concept that the:

a. presence of taxes causes debt to be valuable to a firm.
b. cost of equity increases as the debt-equity ratio of a firm increases.
c. firm is better off with debt based on the weighted average cost of capital.
d. optimal capital structure is the one that is totally financed with equity.
e. capital structure of the firm does not matter because investors can use homemade
leverage

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21. A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost
of debt of 8 percent. Assume the corporate tax rate is 25 percent. What would be the
cost of equity if the firm were all-equity financed?
a. 13.33 percent
b. 11.41 percent
c. 11.30 percent
d. 12.42 percent
e. 12.25 percent
22. The concept of homemade leverage is most associated with:

a. no MM Proposition.
b. MM Proposition II with no tax.
c. MM Proposition II with tax.
d. MM Proposition I with tax.
e. MM Proposition I with no tax
23. A firm has debt of $7,000, equity of $12,000, a cost of debt of 7 percent, a cost of
equity of 14 percent, and a tax rate of 21 percent. What is the firm's weighted average
cost of capital?
a. 12.50 percent
b. 8.45 percent
c. 10.88 percent
d. 11.27 percent
e. 9.90 percent
24. The Dance Studio is currently an all-equity firm that has 22,000 shares of stock
outstanding with a market price of $27 a share. The current cost of equity is 12 percent
and the tax rate is 23 percent. The firm is considering adding $225,000 of debt with a
coupon rate of 6.25 percent to its capital structure. The debt will sell at par. What will
be the levered value of the equity?
a. $325,500

lOMoARcPSD|19685806
b. $521,250
c. $472,750
d. $420,750
e. $594,000
25. A firm has a debt-equity ratio of 1, a cost of equity of 16 percent, and a cost of
debt of 8 percent. If there are no taxes or other imperfections, what is its unlevered
cost of equity?
a. 10 percent
b. 8 percent
c. 16 percent
d. 14 percent
e. 12 percent
26. The reason that MM Proposition I without taxes does not hold in the presence of
corporate taxation is because:
a. levered firms pay less taxes compared with identical unlevered firms.
b. earnings per share are no longer relevant with taxes.
c. bondholders require higher rates of return than stockholders do.
d. dividends become a tax shield.
e. debt is more expensive than equity
27. CT Stores has debt with a book value of $325,000 and a market value of $319,000.
The firm's equity has a book value of $526,000 and a market value of $684,000. The
tax rate is 21 percent and the cost of capital is 11.2 percent. What is the market value
of this firm based on MM Proposition I without taxes?
a. $851,000
b. $1,003,000
c. $769,750
d. $923,250
e. $984,300

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28. A firm has a debt-equity ratio of .55 with a cost of debt of 6.7 percent. If it had no
debt, its cost of equity would be 14.5 percent. What is its levered cost of equity
assuming there are no taxes or other imperfections?
a. 18.96 percent
b. 13.67 percent
c. 17.94 percent
d. 18.79 percent
e. 15.82 percent
29. Juanita's Steak House has $12,000 of debt outstanding that is selling at 101.2
percent of par and has a coupon rate of 8 percent and a current yield of 7.91 percent.
The tax rate is 21 percent. What is the present value of the tax shield on debt?
a. $3,188
b. $2,550
c. $2,520
d. $3,887
e. $2,500
30. The Winter Wear Company has expected earnings before interest and taxes of
$3,800, an unlevered cost of capital of 15.4 percent and a tax rate of 22 percent. The
company also has $2,600 of debt with a coupon rate of 5.7 percent. The debt is selling
at par value. What is the value of this firm?
a. $19,819
b. $15,585
c. $17,700
d. $12,055
e. $12,115
31. Wild Flowers Express has a debt-equity ratio of .60. The pretax cost of debt is 9
percent while the unlevered cost of capital is 14 percent. What is the cost of equity if
the tax rate is 23 percent?

lOMoARcPSD|19685806
a. 16.31 percent
b. 7.52 percent
c. 17.30 percent
d. 16.83 percent
e. 8.78 percent
32. A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a
required return on assets of 12.6 percent. What is the cost of equity if you ignore
taxes?
a. 8.06 percent
b. 16.38 percent
c. 11.12 percent
d. 8.55 percent
e. 15.22 percent
33. A general rule for managers to follow is to set the firm's capital structure such that
the firm's:
a. value is maximized.
b. suppliers of raw materials are satisfied.
c. size is maximized.
d. dividend payout is maximized.
e. bondholders are secured
34. The unlevered cost of capital is:

a. the cost of capital for a firm with no equity in its capital structure.
b. the cost of preferred stock for an all-equity firm.
c. equal to the profit margin for a firm with some debt in its capital structure.
d. the cost of capital for a firm with no debt in its capital structure.
e. the interest tax shield times pretax net income

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35. Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock
outstanding. The company has decided to borrow $74,000 to buy out the 2,100 shares
of a deceased stockholder. What is the total value of this firm if you ignore taxes?
a. $3,885,000
b. $2,630,620
c. $2,008,157
d. $1,409,524
e. $1,388,056
36. Alexandria's Dance Studio is currently an all-equity firm with earnings before
interest and taxes of $338,000 and a cost of equity of 14.2 percent. Assume the tax
rate is 22 percent. The firm is considering adding $400,000 of debt with a coupon rate
of 7 percent to its capital structure. The debt will be sold at par value. What is the
levered value of the equity?
a. $2,038,519
b. $1,544,620
c. $1,987,408
d. $1,944,620
e. $986,420
37. A levered firm is a company that has:

a. an all-equity capital structure.
b. taxable income.
c. accounts payable as its only liability.
d. a tax loss carry forward.
e. some debt in its capital structure
38. MM Proposition II is the proposition that:

a. the cost of levered equity depends solely on the return on debt, the debt-equity ratio,
and the tax rate.
b. the cost of debt is inversely related to a firm's debt-equity ratio.

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c. a firm's cost of equity capital is a positive linear function of the firm's capital
structure.
d. the cost of equity is equivalent to the required return on the total assets of a levered
firm.
e. supports the argument that the capital structure of a firm is irrelevant to the value of
the firm
39. In an EPS-EBI graphical relationship, the slope of the debt ray is steeper than the
equity ray. The debt ray has a lower intercept because:
a. the break-even point is higher with debt.
b. the break-even point is lower with debt.
c. the amount of interest per share has only a positive effect on the intercept.
d. a fixed interest charge must be paid even at low earnings.
e. more shares are outstanding for the same level of EBI
40. Anderson's Furniture Outlet has an unlevered cost of capital of 10.3 percent, a tax
rate of 21 percent, and expected earnings before interest and taxes of $1,900. The
company has $4,000 in bonds outstanding that have an annual coupon of 7 percent. If
the bonds are selling at par, what is the cost of equity?
a. 10.72 percent
b. 9.99 percent
c. 11.21 percent
d. 11.33 percent
e. 9.34 percent
41. The effects of financial leverage depend on the operating earnings of the company.
Based on this relationship, assume you graph the EPS and EBI for a firm, while
ignoring taxes. Which one of these statements correctly states a relationship illustrated
by the graph?
a. Below the break-even point unlevered structures have a lower EPS for every dollar
of EBI than levered structures do.
b. Leverage only provides value above the break-even point.

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c. Above the break-even point, the unlevered structure is preferred.

d. Above the break-even point the increase in EPS for unlevered structures is greater
than that of levered structures for every dollar increase in EBI.
e. Financial leverage decreases the slope of the EPS line
42. The use of personal borrowing to change the overall amount of financial leverage
to which an individual is exposed is called:
a. personal offset.
b. dividend recapture.
c. private debt placement.
d. homemade leverage.
e. the weighted average cost of capital.
43. MM Proposition II with no taxes supports the argument that a firm's:

a. cost of equity is unaffected by the firm's unlevered cost of capital.
b. WACC remains constant even if the firm changes its capital structure.
c. cost of equity is inversely related to the firm's debt-equity level.
d. WACC will exceed the unlevered firm's cost of equity.
e. unlevered equity is risk-free
44. Thompson & Thomson is an all-equity firm that has 280,000 shares of stock
outstanding. The company is in the process of borrowing $2.4 million at 5.5 percent
interest to repurchase 75,000 shares of the outstanding stock. What is the value of this
firm if you ignore taxes?
a. $12,500,000
b. $9,240,000
c. $11,360,000
d. $10,710,000
e. $8,960,000

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45. When comparing levered versus unlevered capital structures, leverage works to
increase EPS for high levels of EBIT because interest payments on the debt:
a. vary with EBIT levels.
b. stay fixed, leaving less income to be distributed over more shares.
c. stay fixed, leaving more income to be distributed over fewer shares.
d. stay fixed, leaving less income to be distributed over fewer shares.
e. stay fixed, leaving more income to be distributed over more shares
46. A firm has zero debt in its capital structure and has an overall cost of capital of 10
percent. The firm is considering a new capital structure with 60 percent debt at an
interest rate of 8 percent. Assuming there are no taxes or other imperfections, what
would be the cost of equity with the new capital structure?
a. 10 percent
b. 11 percent
c. 13 percent
d. 9 percent
e. 14 percent
47. A firm has debt of $5,000, equity of $16,000, a cost of debt of 8 percent, a cost of
equity of 12 percent, and a tax rate of 21 percent. What is the firm's weighted average
cost of capital?
a. 9.94 percent
b. 10.20 percent
c. 11.05 percent
d. 10.65 percent
e. 10.90 percent
48. Assume an initial scenario where a levered firm has total assets of $8,000,
earnings before interest and taxes of $600, 400 shares of stock outstanding, a debt-
equity ratio of .25, and a cost of debt of 7 percent. Now assume a second scenario
where the firm changes to an all-equity structure by issuing new shares to pay off debt
while a shareholder holding 10 percent of the stock borrows funds at 7 percent and

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uses homemade leverage to offset the firm's change in capital structure. Ignore taxes.
What are the net earnings for this shareholder under the initial scenario? Under the
second scenario?
a. $90.00; $112.50
b. $45.00; $48.80
c. $48.80; $38.80
d. $90.00; $90.00
e. $48.80; $48.80
49. MM Proposition II with taxes:

a. explains how a firm's WACC increases with the use of financial leverage.
b. supports the argument that business risk is determined by the capital structure
employed by a firm.
c. reaches the final conclusion that the capital structure decision is irrelevant to the
value of a firm.
d. reveals how utilizing the tax shield on debt causes an increase in the value of a firm.
e. supports the argument that the cost of equity decreases as the debt-equity ratio
increases
50. Joe's Leisure Time Sports is an unlevered firm with an aftertax net income of
$78,400. The unlevered cost of capital is 11.4 percent and the tax rate is 23 percent.
What is the value of this firm?
a. $581,818
b. $613,309
c. $537,900
d. $447,017
e. $687,719
51. A firm has a debt-equity ratio of .48. Its cost of debt is 7 percent and its WACC is
10.8 percent. What is its cost of equity if there are no taxes or other imperfections?
a. 12.62 percent

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b. 13.67 percent
c. 13.05 percent
d. 11.46 percent
e. 10.97 percent
52. The firm's capital structure refers to the:

a. mix of current and fixed assets a firm holds.
b. amount of dividends a firm pays.
c. amount of capital invested in the firm.
d. amount of cash versus receivables the firm holds.
e. mix of debt and equity used to finance the firm's assets
53. Aspen's Distributors has a levered cost of equity of 13.84 percent and an unlevered
cost of capital of 12.5 percent. The company has $5,000 in debt that is selling at par.
The levered value of the firm is $14,600 and the tax rate is 25 percent. What is the
pretax cost of debt?
a. 8.84 percent
b. 8.16 percent
c. 9.00 percent
d. 9.07 percent
e. 7.92 percent
54. Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5
percent. The debt-equity ratio is .60 and the tax rate is 21 percent. What is Rosita's
unlevered cost of capital?
a. 13.97 percent
b. 14.60 percent
c. 11.83 percent
d. 14.08 percent
e. 12.07 percent

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55. MM Proposition I with taxes states that:

a. the cost of equity rises as the debt-equity ratio increases.
b. the unlevered cost of equity is equal to RWacc.
c. increasing the debt-equity ratio increases firm value.
d. capital structure does not affect firm value.
e. firm value is maximized when the firm is all-equity financed
56. Lyme Home has 5,000 bonds outstanding with a face value of $1,000 each and a
coupon rate of 7.65 percent. Interest is paid semiannually. What is the amount of the
annual tax shield on debt if the tax rate is 23 percent?
a. $157,650
b. $1,062,500
c. $160,125
d. $1,150,000
e. $87,975
57. MM Proposition I with no tax supports the argument that:

a. financial risk is determined by the debt-equity ratio.
b. business risk determines the return on assets.
c. it is completely irrelevant how a firm arranges its finances.
d. the cost of equity rises as leverage rises.
e. a firm should borrow money to the point where the tax benefit from debt is equal to
the cost of the increased probability of financial distress
58. The proposition that the value of a levered firm is equal to the value of an
unlevered firm is known as:
a. MM Proposition I with tax.
b. MM Proposition II with tax.
c. MM Proposition I with no tax.

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d. both MM I with and without tax.

e. MM Proposition II with no tax
59. Assume an unlevered firm has total assets of $6,000, earnings before interest and
taxes of $600, and 500 shares of stock outstanding. Further assume the firm decides to
change 40 percent of its capital structure to debt with an interest rate of 8 percent.
Ignore taxes. What will be the amount of the change in the earnings per share as a
result of this change in the capital structure?
a. −$.09
b. No change
c. $.09
d. $.16
e. −$.16
60. Bigelow has a levered cost of equity of 14.29 percent and a pretax cost of debt of
7.23 percent. The required return on the assets is 11 percent. What is the firm's debt-
equity ratio based on MM Proposition II with no taxes?
a. .75
b. .87
c. .67
d. .72
e. .81
61. If a firm is unlevered and has a cost of equity capital of 13.7 percent, what would
be the cost of equity if its debt-equity ratio was revised to .4? The expected cost of
debt is 7.4 percent and there are no taxes.
a. 16.36 percent
b. 15.54 percent
c. 15.67 percent
d. 16.22 percent
e. 16.09 percent

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62. The tax shield on debt has no value for a firm when:
a. the firm's debt-equity ratio is exactly equal to 1.
b. the firm's debt-equity ratio is exactly .5.
c. shareholders fully utilize homemade leverage.
d. the firm is unlevered.
e. RS is less than R0.
63. The Spartan Co. has an unlevered cost of capital of 11.6 percent, a cost of debt of
7.9 percent, and a tax rate of 23 percent. What is the target debt-equity ratio if the
targeted levered cost of equity is 12.6 percent?
a. .56
b. .39
c. .53
d. .44
e. .35
64. In the absence of taxes, the capital structure chosen by a firm doesn't really matter
because of:
a. taxes.
b. homemade leverage.
c. the effects of leverage on the cost of equity.
d. the interest tax shield.
e. the relationship between dividends and earnings per share
65. A key underlying assumption of MM Proposition I without taxes is that:

a. individuals and corporations borrow at the same rate.
b. financial leverage increases risk.
c. corporations are all-equity financed.
d. managers always act to maximize the value of the firm.

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e. individuals can borrow at lower rates than corporations
66. A firm has zero debt and an overall cost of capital of 13.8 percent. The firm is
considering a new capital structure with 40 percent debt. The interest rate on the debt
would be 7.2 percent and the corporate tax rate is 21 percent. What would be the cost
of equity with the new capital structure?
a. 17.28 percent
b. 17.59 percent
c. 16.11 percent
d. 17.34 percent
e. 16.90 percent
67. The tax savings of the firm derived from the deductibility of interest expense is
called the:
a. financing umbrella.
b. depreciable basis.
c. current yield.
d. tax-loss carryback.
e. tax shield from debt
68. Reena Industries has $138,000 of debt outstanding that is selling at par and has a
coupon rate of 7 percent. If the tax rate is 21 percent, what is the present value of the
tax shield on debt?
a. $31,010
b. $28,980
c. $28,412
d. $3,284
e. $2,029
CHAPTER 19
1. Which one of these is a con of paying dividends?
a. Paying dividends reduces agency costs when excess cash is available to a firm.

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b. Managers can pay dividends to keep cash from bondholders.

c. Dividends can be used to signal a firm's optimistic outlook.
d. Dividends appeal to income-seeking investors.
e. Dividends are frequently taxed as ordinary income
2. You own 200 shares of Loner stock. The firm announced that it will be issuing a
dividend of $.20 a share one year from today followed by a final liquidating dividend
of $1.60 a share two years from today. If you can earn 7 percent on your funds, what
will be the value of your total investment income in two years if you do not want to
receive any funds until then?
a. $302.30
b. $362.80
c. $348.04
d. $266.67
e. $247.78
3. The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a
share. The company has just announced a 5-for-2 stock split. How many shares of
stock will be outstanding after the split?
a. 50,000
b. 312,500
c. 175,000
d. 156,250
e. 75,000
4. A small stock dividend is generally defined as a stock dividend of less than _____
percent.
a. 10 to 15
b. 25 to 30
c. 20 to 25
d. 15 to 20

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e. 30 to 35
5. Jensen's has a market value equal to its book value, excess cash of $500, other
assets of $9,500, and equity worth $10,000. The firm has 250 shares of stock
outstanding and net income of $1,400. What will be the stock price per share if the
firm pays out its excess cash as a cash dividend?
a. $36
b. $42
c. $38
d. $40
e. $44
6. Robinson's has 15,000 shares of stock outstanding with a market price of $6 a

share. What will be the market price per share if the firm does a 1-for-3 reverse stock
split?
a. $42
b. $54
c. $24
d. $18
e. $48
7. Deep Water Drilling has 160,000 shares of stock outstanding at a market price of
$109 a share. The company has just announced a 7-for-3 stock split. What will be the
market price per share after the split?
a. $48.40
b. $46.18
c. $38.27
d. $46.71
e. $48.80

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8. A payment made by a firm to its owners in the form of new shares of stock is called
a _____ dividend.
a. normal
b. stock
c. liquidating
d. extra
e. special
9. Probably the best argument for a reverse stock split is to:

a. maintain a minimum share price as set by a stock exchange.
b. raise additional capital from current stockholders.
c. decrease the liquidity of a stock.
d. increase the number of stockholders.
e. decrease the market value per share
10. You purchased 200 shares of ABC stock on July 15th. On July 20th, you
purchased another 100 shares and then on July 22st you purchased your final 200
shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to
holders of record on Friday, July 23rd. The dividend is payable on July 31st. How
much dividend income will you receive on July 31st from ABC?
a. $330
b. $440
c. $550
d. $220
e. $0
11. The Saw Mill has shares of stock outstanding with a par value of $1 per share and
a market-to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock
account, $58,000 in the capital in excess of par account, and $32,500 in the retained
earnings account. The firm just announced a stock dividend of 50 percent. What is the
book value of the common stock account after the dividend?
a. $10,000

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b. $8,500
c. $7,500
d. $5,000
e. $9,000
12. Bob's Auto Group has 25,000 shares of stock outstanding at a market price of
$4.50 a share. What will be the market price per share if the company does a 1-for-5
reverse stock split?
a. $.90
b. $27.00
c. $22.50
d. $1.20
e. $29.50
13. Stock splits are often used to:

a. decrease the excess cash held by a firm.
b. increase the total equity of a firm.
c. increase both the number of shares outstanding and the market price per share.
d. adjust the market price of a stock such that it falls within a preferred trading range.
e. adjust the debt-equity ratio such that it falls within a preferred range
14. Davidsons has 15,000 shares of stock outstanding with a par value of $1 per share
and a market value of $45 per share. The balance sheet shows $15,000 in the common
stock account, $158,000 in the capital in excess of par account, and $132,500 in the
retained earnings account. The firm just announced a stock dividend of 50 percent.
What is the value of the retained earnings account after the dividend?
a. $125,000
b. $132,500
c. $147,500
d. $117,500
e. $140,000

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15. A firm announces that it is willing to repurchase a number of shares at various

prices and shareholders have the option to indicate how many shares they are willing
to sell at the various prices. This process is called a:
a. tender offer.
b. Dutch auction.
c. homemade dividend.
d. free market sale.
e. targeted repurchase
16. A firm can repurchase its shares in all the following ways except through:
a. open market purchases.
b. a Dutch auction.
c. a targeted repurchase.
d. a tender offer.
e. a reverse stock split
17. Alpha Co. is paying a $.72 per share dividend today. There are 138,000 shares
outstanding with a par value of $1 per share. As a result of this dividend, the:
a. retained earnings will decrease by $99,360.
b. retained earnings will decrease by $138,000.
c. common stock account will decrease by $99,360.
d. capital in excess of par value account will decrease by $99,360.
e. common stock account will decrease by $138,000.
18. Payments made out of a firm's earnings to its owners in the form of cash or stock
are called:
a. share repurchases.
b. stock splits.
c. distributions.

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d. payments-in-kind.
e. dividends
19. Which one of the following is cited as an argument favoring a high dividend
payout?
a. Restrictive covenant on dividend payouts contained in a bond indenture agreement
b. High personal tax rates relative to corporate rates
c. Flotation costs involved with a new securities issue
d. Agency costs related to excess cash reserves
e. Desire to maintain constant dividends over time
20. Assume personal tax rates are lower than corporate tax rates. From a tax-paying
shareholder point of view, how should a firm spend its excess cash once it has funded
all positive net present value projects?
a. Repurchase shares
b. Acquire another firm
c. Purchase financial assets
d. Increase executive compensation
e. Increase cash dividends
21. A ____ will increase the number of shares outstanding without affecting the book
value of any of the owners' equity account values.
a. special dividend
b. stock split
c. liquidating dividend
d. share repurchase
e. tender offer
22. Samuel's has 42,000 shares of stock outstanding with a par value of $1 per share
and a market price per share of $41. The balance sheet shows $1,358,000 in the capital
in excess of par account and $2,212,500 in the retained earnings account. The firm just

lOMoARcPSD|19685806
announced a stock dividend of 50 percent. What is the value of the capital in excess of
par account after the dividend?
a. $612,500
b. $497,000
c. $1,358,000
d. $221,900
e. $518,000
23. The annual dividend per share stated as a percentage of the annual earnings per
share is called the:
a. dividend payout.
b. dividend per share.
c. dividend yield.
d. dividend rate.
e. annual yield
24. Leslie purchased 100 shares of GT stock on June 7th. Marti purchased 100 shares
of GT stock on Monday, July 9th. GT declared a dividend on June 20th to
shareholders of record on July 13th that is payable on August 1st. Which one of the
following statements concerning the dividend paid on August 1st is correct given this
information?
a. Neither Leslie nor Marti are entitled to the dividend.
b. Marti is entitled to the dividend but Leslie is not.
c. Both Marti and Leslie are entitled to the dividend.
d. Leslie is entitled to the dividend but Marti is not.
e. Both Marti and Leslie are each entitled to one-half of the dividend amount
25. Financial managers:

a. are reluctant to cut dividends.
b. tend to ignore past dividend policies.
c. place little emphasis on dividend policy consistency.

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d. prefer cutting dividends over incurring flotation costs.

e. tend to prefer cutting dividends every time quarterly earnings decline
26. The dividend-irrelevance proposition of Miller and Modigliani depends on which

one of the following relationships between investment policy and dividend policy?
a. Miller and Modigliani were only concerned about capital structure.
b. Once dividend policy is set the investment decision can be made.
c. The investment policy is set ahead of time and not altered by changes in dividend
policy.
d. The level of investment does not influence or matter to the dividend decision.
e. Since dividend policy is irrelevant there is no relationship between investment
policy and dividend policy
27. A firm has a total market value of $89,600 with 6,500 shares of stock outstanding.
What will be the total market value of the firm if it does a 1-for-2 reverse stock split?
a. $122,300
b. $44,800
c. $89,600
d. $148,300
e. $179,200
28. Wydex stock is currently trading at $82 a share. The firm feels that its primary
clientele can afford to spend between $2,000 and $2,500 to purchase a round lot of
100 shares. The firm should consider a:
a. stock dividend.
b. liquidating dividend.
c. stock split.
d. reverse stock split.
e. special dividend
29. Share repurchases:

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a. offer less tax advantages to shareholders than do cash dividends.

b. tend to increase agency costs.
c. reduce a firm's demand for external financing.
d. can be difficult to verify.
e. are always positive net present value investments
30. All else equal, a stock dividend will _____ the number of shares outstanding and
_____ the value per share.
a. decrease; decrease
b. decrease; increase
c. not change; increase
d. increase; decrease
e. increase; increase
31. A cash payment made by a firm to its owners when some of the firm's assets are
sold off is called a:
a. liquidating dividend.
b. special dividend.
c. share repurchase.
d. extra cash dividend.
e. regular cash dividend
32. Assume you own 300 shares of ABC stock and receive a stock dividend of 5
percent. As a result, the number of shares you own will change to _____ shares while
your total wealth will increase by ___ percent.
a. 305; 0
b. 305; 5
c. 300; 5
d. 315; 0
e. 315; 5

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33. Which one of the following is not a reason why firms choose repurchases rather
than dividends?
a. Conserve cash
b. Provide flexibility
c. Provide shareholders with a tax advantage
d. Offset dilution
e. Increase the value of existing stock options
34. The observed empirical fact that stocks attract particular investors based on the
firm's dividend policy and the resulting tax impact on investors is called the:
a. information content effect.
b. MM Proposition I.
c. MM Proposition II.
d. clientele effect.
e. efficient markets hypothesis
35. The date before which a purchaser of stock is entitled to receive a declared
dividend, but on or after that date they cannot, is called the _____ date.
a. declaration
b. ex-rights
c. ex-dividend
d. payment
e. record
36. The date on which the board of directors passes a resolution authorizing payment
of a dividend to the shareholders is the _____ date.
a. declaration
b. ex-dividend
c. ex-rights

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d. payment
e. record
37. The date on which a firm actually distributes its declared dividend is called the:
a. date of record.
b. ex-rights date.
c. date of payment.
d. declaration date.
e. ex-dividend date
38. Ignoring taxes and all else held constant, the market value of a stock should
decrease by the amount of the dividend on the:
a. dividend declaration date.
b. date of record.
c. ex-dividend date.
d. day after the date of payment.
e. date of payment
39. Schaeffer Shippers announced on May 1 that it will pay a dividend of $1.20 per
share on June 15 to all holders of record as of May 31st. The firm's stock price closed
today at $42 a share. Assume all investors are in the 22 percent tax bracket. If
tomorrow is the ex-dividend date, what would you expect the opening price to be
tomorrow morning assuming all else is held constant?
a. $41.66
b. $42.94
c. $41.06
d. $43.20
e. $42.00

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40. The Retail Outlet has 6,000 shares of stock outstanding and the current market
value of the firm is $429,000. The company just announced a 2-for-1 stock split. What
will be the market price per share after the split?
a. $50.25
b. $40.50
c. $35.75
d. $80.50
e. $71.50
41. A one-for-four reverse stock split will:

a. increase a $1 par value to $4.
b. increase the number of shares outstanding by 400 percent.
c. increase the market value but not affect the par value per share.
d. increase the par value by 25 percent.
e. increase a $1 par value by $4.
42. The ability of shareholders to undo the dividend policy of a firm and create an
alternative dividend payment policy via reinvesting dividends or selling shares of
stock is referred to as:
a. homemade dividends.
b. homemade leverage.
c. MM Proposition I.
d. capital structure irrelevancy.
e. the perfect foresight model.
43. The date by which a stockholder must be registered on the firm's roll as having
share ownership in order to receive a declared dividend is called the:
a. declaration date.
b. ex-dividend date.
c. date of record.

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d. ex-rights date.
e. date of payment.
44. The Retail Outlet has 8,000 shares of stock outstanding with a par value of $1 per
share. The current market value of the firm is $620,000. The balance sheet shows a
capital in excess of par account value of $66,000 and retained earnings of $234,000.
The company just announced a 3-for-1 stock split. What will be the retained earnings
account balance after the split?
a. $117,000
b. $410,000
c. $234,000
d. $468,000
e. $351,000
45. The market's reaction to the announcement of a change in the firm's dividend
payout is referred to as the:
a. information content effect.
b. clientele effect.
c. MM Proposition I.
d. efficient markets hypothesis.
e. MM Proposition II.
46. Kelso's balance sheet shows $15,000 in the common stock account, $315,000 in
the capital in excess of par account, and $189,000 in the retained earnings account.
The firm just announced a 3-for-2 stock split. What will be the value of the common
stock account after the split if the par value per share is $1?
a. $12,500
b. $18,500
c. $22,500
d. $10,000
e. $15,000

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47. A scenario exists that supports an argument in favor of a low dividend policy
when:
a. the majority of the stockholders have other investment opportunities that offer
higher rewards with similar risk characteristics.
b. few, if any, positive net present value projects are available to a firm.
c. corporate tax rates exceed personal tax rates.
d. tax laws allow capital gains to be deferred until the gain is realized.
e. a preponderance of stockholders have minimal taxable income
48. Financial executives place the greatest importance on which one of these factors
when setting dividend policy?
a. Reducing dividends anytime future earnings are in doubt
b. Setting a high-dividend payout ratio even when earnings are unstable
c. Attracting institutional investors
d. Increasing current dividends even if those dividends need to be lowered in the near
future
e. Maintaining a consistent dividend policy
49. Which one of these is a characteristic of a sensible payout policy?

a. Over time pay out half of all free cash flows
b. Set the current regular dividend consistent with a 100 percent payout ratio
c. Set the dividends high even if it means acquiring expensive external financing
d. Avoid rejecting positive NPV projects to increase dividends or buyback shares
e. Increase regular dividends to distribute transitory cash flow increases
50. AKhông _____ is an alternative method to cash dividends which is used to pay out
a firm's earnings to shareholders in the form of a cash payment.
a. stock split
b. merger

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c. payment-in-kind
d. stock repurchase
e. acquisition
51. Edie's Health Supply has 125,000 shares of stock outstanding with a par value of
$1 per share and a market value of $5 a share. The company has retained earnings of
$76,500 and capital in excess of par of $340,000. The company just announced a 1-
for-5 reverse stock split. What will be the par value per share after the split?
a. $.25
b. $2.50
c. $5.00
d. $.20
e. $10.00
52. A firm has a market value equal to its book value, excess cash of $1,000, and
equity worth $17,800. The firm has 5,000 shares of stock outstanding and net income
of $31,200. What will be the new earnings per share if the firm uses its excess cash to
complete a stock repurchase?
a. $6.50
b. $7.20
c. $6.23
d. $5.89
e. $6.61
53. Based on the concept of the clientele effect, which one of these combinations
correctly aligns an investor group with its preferred type of stocks?
a. High-tax-bracket individuals; low-to-medium payout stocks
b. Corporations; low-to-medium payout stocks
c. Low-tax-bracket individuals; zero-to-low payout stocks
d. Tax-free institutions; medium-payout stocks
e. High-tax-bracket individuals; high-payout stocks

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54. According to the clientele effect, firms can only boost their stock price:
a. if an unsatisfied clientele group exists.
b. by increasing the dividend payout ratio.
c. by commencing dividend payments if they are a non-dividend-paying firm.
d. by setting their dividend to the level expected by the highest-dividend-receiving
satisfied clientele group.
e. by increasing their regular cash dividends
55. Firms generally:

a. set the dividend growth rate equal to the firm's earnings growth rate.
b. allow their dividend changes to lag their earnings changes.
c. set high target payout ratios when they are relatively young.
d. decrease their dividends as soon as they expect earnings to decline.
e. set short-term target ratios of dividends to earnings
56. The Cameron Co. is paying a dividend of $.82 a share today. There are 120,000
shares outstanding with a par value of $1 per share. As a result of this dividend, the:
a. common stock account will increase by $120,000.
b. common stock account will decrease by $98,400.
c. retained earnings will decrease by $120,000.
d. capital in excess of par value account will decrease by $21,600.
e. retained earnings will decrease by $98,400
57. In a reverse stock split the:

a. shareholders make a cash payment to the firm.
b. firm sells new shares of stock on the open market.
c. number of shares outstanding decreases while the book value of owners' equity is
unchanged.
d. number of shares outstanding increases and the owners' equity decreases.

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e. firm buys back existing shares of stock on the open market
58. Assume a firm has a market value equal to its book value, excess cash of $900,
other assets of $16,500, and equity valued at $17,400. The firm has 1,200 shares of
stock outstanding and net income of $15,400. If the firm spends all of its excess cash
on share repurchases, how many shares will be outstanding after the repurchases are
completed? (Round your answer up to the nearest whole share)
a. 1,138 shares
b. 1,135 shares
c. 1,148 shares
d. 1,164 shares
e. 1,142 shares
59. The last date on which you can purchase shares of stock and still receive the
dividend is the date _____ business day(s) prior to the date of record.
a. one
b. seven
c. five
d. zero
e. three
60. You own 300 shares of Abco stock. The firm plans on issuing a dividend of $2.10
a share one year from today and then issuing a final liquidating dividend of $36.45 a
share two years from today. Your required rate of return is 14.5 percent. Ignoring
taxes, what is the value of one share of this stock to you today?
a. $33.93
b. $26.62
c. $29.64
d. $31.05
e. $27.80

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61. The information content effect implies that stock prices will rise when dividends
are increased provided that the dividend increase:
a. is substantial in both dollar amount and percentage terms.
b. is combined with a stock repurchase.
c. is greater than the average historical dividend increase.
d. is denoted as a one-time event.
e. causes stockholders to increase their expectations of future cash flows
62. A cash payment made by a firm to its owners in the normal course of business is
called a:
a. share repurchase.
b. liquidating dividend.
c. special dividend.
d. regular cash dividend.
e. extra cash dividend
63. Allison's has a market value equal to its book value. Currently, the firm has excess
cash of $1,100 and other assets of $12,400. Equity is worth $13,500. The firm has
2,500 shares of stock outstanding and net income of $10,800. What will be the new
earnings per share if the firm uses its excess cash to complete a stock repurchase?
a. $4.82
b. $4.50
c. $4.70
d. $4.40
e. $4.32
64. The behavioral finance concept of self-control is an argument in favor of:

a. frequent stock splits.
b. stock dividends.
c. high cash dividends.

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d. low cash dividends.

e. reverse stock splits
65. A stock split:

a. does not affect the total book value of any of the equity accounts.
b. decreases the book value of the retained earnings account.
c. increases the book value of the capital in excess of par account.
d. increases the total book value of the common stock account.
e. decreases the total owners' equity on the balance sheet
66. Downtown Deli has 2,000 shares of stock outstanding with a par value of $1 per
share and a market value of $26 per share. The balance sheet shows $2,000 in the
common stock account, $9,500 in the capital in excess of par account, and $14,500 in
the retained earnings account. The firm just announced a stock dividend of 75 percent.
What is the market value per share after the dividend?
a. $14.86
b. $12.00
c. $45.50
d. $13.50
e. $36.00
67. Which one of these statements is true?

a. According to Miller and Modigliani, a firm should alter its investment policy
whenever a change is made in its dividend policy.
b. Shareholders are unable to personally adjust the dividend policy set by a firm.
c. Firms should never give up a positive NPV project to increase a dividend.
d. Dividend policy is relevant.
e. Dividends are irrelevant

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a. Over the last few decades, the percentage of U.S. firms paying dividends has
increased.
b. Much of the dividend income paid in the U.S. is related to a relatively small number
of firms.
c. In the U.S. economy, dividends are quite insignificant.
d. Dividends are more tax-advantaged than capital gains as of 2017.
e. The tax law change in May 2003 is cited as one reason why the percentage of
dividend payers has decreased in the U.S
69. Of the following factors, which one is considered to be the primary factor
affecting a firm's dividend payout decision?
a. Attracting institutional investors
b. Avoiding flotation costs
c. Attracting retail investors
d. Maintaining a consistent dividend policy
e. Considering the personal taxes of company stockholders
70. DD&L has a market value equal to its book value, excess cash of $400, other
assets of $7,600, equity of $8,000, 200 shares of stock outstanding, and net income of
$900. The firm has decided to pay out all its excess cash as a cash dividend. What will
be the earnings per share after the dividend is paid?
a. $4.50
b. $4.59
c. $4.74
d. $4.68
e. $4.80
71. Nu Tech is a technology firm with good growth prospects. The firm wishes to do
something to acknowledge the loyalty of its shareholders but needs all its available
cash to fund its rapid growth. The market price of its stock is currently trading in the
upper end of its preferred trading range. The firm could consider:
a. a cash distribution.

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b. a reverse stock split.

c. an extra cash dividend.
d. a stock dividend.
e. a liquidating dividend
72. The information content of a dividend increase generally signals that:

a. the firm has several net present value projects to pursue.
b. future dividends will be lower.
c. management believes the future earnings of the firm will be strong.
d. the firm has more cash than it needs due to sales declines.
e. the firm has a one-time surplus of cash
73. Assume Downtown Markets latest balance sheet shows $15,000 in the common
stock account, $315,000 in the capital in excess of par account, and $189,000 in the
retained earnings account. What will be the capital in excess of par account value if
the firm does a 5-for-3 stock split?
a. $472,500
b. $315,000
c. $210,000
d. $126,000
e. $283,500
74. On May 18th, you purchased 1,000 shares of Buy Lo stock. On June 5th, you sold
200 shares of this stock for $21 a share. You sold an additional 400 shares on July 8th
at a price of $22.50 a share. The company declared a $.50 per share dividend on June
25th to holders of record as of Thursday, July 10th. This dividend is payable on July
31st. How much dividend income will you receive on July 31st as a result of your
ownership of this firm's stock?
a. $500
b. $300
c. $200

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d. $400
e. $100
75. Robinson's has 15,000 shares of stock outstanding with a par value of $1 per share
and a market price of $36 a share. How many shares of stock will be outstanding of
the firm does a 3-for-2 stock split?
a. 10,000 shares
b. 22,500 shares
c. 20,000 shares
d. 12,500 shares
e. 27,500 shares
76. Murphy's has shares of stock outstanding with a par value of $1 per share and a
market value of $24.60 per share. The balance sheet shows $32,500 in the capital in
excess of par account, $12,000 in the common stock account, and $68,700 in the
retained earnings account. The firm just announced a stock dividend of 10 percent.
What will be the balance in the retained earnings account after the dividend?
a. $48,300
b. $40,380
c. $67,520
d. $59,120
e. $39,180
77. Ignore commissions, taxes, and other imperfections. If a firm substitutes a

repurchase for a cash dividend, the primary difference will be an increase in the:
a. total earnings of the firm.
b. number of shares outstanding.
c. total value received by each investor.
d. earnings per share.
e. excess cash reserves of the firm

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78. Brown's Market has 15,000 shares of stock outstanding with a par value of $1 per
share and a market value per share of $8. The firm just announced a stock dividend of
10 percent. What will be the market price per share after the dividend?
a. $8.00
b. $8.80
c. $7.33
d. $7.27
e. $7.20
79. Priscilla owns 500 shares of Deltona stock. It is January 1, 2018, and the company
recently issued a statement that it will pay a $1 per share dividend on December 31,
2018, a $2.50 per share dividend on December 31, 2019, and then cease all dividend
payments. Priscilla does not want any dividend income this year but does want as
much dividend income as possible next year. Priscilla can earn 8 percent on her
investments. Ignoring taxes, what will Priscilla's homemade dividend per share be in
2019?
a. $1.08
b. $2.50
c. $3.78
d. $3.58
e. $3.50
80. The Rent It Company declared a dividend of $.60 a share on October 20th to
holders of record on Monday, November 1st. The dividend is payable on December
1st. You purchased 100 shares of this stock on Wednesday, October 27th. How much
dividend income will you receive on December 1st as a result of this declaration?
a. $6.00
b. $1.50
c. $0
d. $15.00
e. $60.00

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81. A change in dividend policy does not affect the value of a share of stock as long
as:
a. the dividend payout ratio remains constant.
b. all the distributable cash flow is paid out.
c. all future dividends are changed by the same amount.
d. shareholders are given ample warning.
e. there is an offsetting change in stock repurchases
82. Which one of the following lists dividend events in the correct chronological order
from earliest to latest?
a. Date of record, declaration date, ex-dividend date
b. Ex-dividend date, date of record, declaration date
c. Declaration date, ex-dividend date, date of record
d. Declaration date, date of record, ex-dividend date
e. Date of record, ex-dividend date, declaration date
83. From a tax-paying investor's point of view, a stock repurchase:

a. is more desirable than a cash dividend.
b. is more highly taxed than a cash dividend.
c. creates a tax liability even if the investor does not sell any of the shares he owns.
d. has the same tax effects as a cash dividend.
e. is equivalent to a cash dividend
CHAPTER 26
1. The accounts receivable policy is generally set by the:
a. purchasing manager.
b. payables manager.
c. production manager.
d. controller.
e. credit manager

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2. Brown's Market currently has an operating cycle of 76.8 days. It is planning some
operational changes that are expected to decrease the accounts receivable period by
2.8 days and decrease the inventory period by 3.1 days. The accounts payable turnover
rate is expected to increase from 9 to 11.5 times per year. If all these changes are
adopted, what will be the firm's new operating cycle?
a. 70.9 days
b. 68.4 days
c. 57.9 days
d. 63.3 days
e. 73.4 days
3. If the average accounts receivable that a firm holds decreases without any decrease
in credit sales, the operating cycle will:
a. decrease because the days' sales outstanding will decrease.
b. increase because the accounts receivable turnover will decrease.
c. decrease because the accounts receivable turnover will decrease.
d. remain constant because the change will only affect the cash cycle.
e. remain constant because sales remained constant
4. Baxter Trucking has a net cash inflow for the quarter of $38 including interest, a
beginning cash balance of $22, and a beginning loan balance of $45. Company policy
is to maintain a minimum cash balance of $20. What is the minimum amount the firm
must borrow or can repay to end the month with a zero cumulative surplus?
a. Repay $422
b. Borrow $9
c. Borrow $4
d. Repay $36
e. Repay $40
5. A flexible short-term financial policy:

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a. increases the probability that a firm will earn high returns on all its assets.
b. advocates a smaller investment in net working capital than a restrictive policy does.
c. utilizes short-term financing to fund all the firm's assets.
d. incurs an opportunity cost due to the rate of return that applies to short-term assets.
e. increases the likelihood that a firm will face financial distress
6. New World has a beginning cash balance of $536 on February 1st. The firm has
projected sales of $660 in January, $810 in February, and $890 in March. The cost of
goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the
month of sale. The accounts payable period is 30 days and the accounts receivable
period is 15 days. The firm has monthly cash expenses of $225. What is the projected
ending cash balance at the end of February? Assume 30-day months.
a. $502
b. $423
c. $437
d. $479
e. $486
7. Bilt Rite has sales of $610,000 and cost of goods sold equal to 68 percent of sales.
The beginning accounts receivable balance is $58,900 and the ending accounts
receivable balance is $61,050. How long on average does it take the firm to collect its
receivables?
a. 26.52 days
b. 25.98 days
c. 35.89 days
d. 41.07 days
e. 44.09 days
8. Which one of the following will decrease the net working capital of a firm? Assume
the current ratio is greater than 1.0.
a. Selling a fixed asset for book value
b. Paying an accounts payable

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c. Paying a payment on a long-term debt

d. Selling inventory at a profit
e. Collecting an accounts receivable
9. Which one of the following is a source of cash?

a. An increase in fixed assets
b. The payment of a cash dividend
c. A decrease in long-term debt
d. An increase in accounts receivable
e. An increase in accounts payable
10. All Rite Co. has arranged a line of credit of $225,000 with an interest rate of 8.25
percent and a compensating balance requirement of 1.5 percent, which is based on the
total amount borrowed. Assume the firm uses this source of funding to purchase a
$167,000 piece of equipment and repays the loan in a lump sum at the end of one year.
What is the effective interest rate?
a. 9.27 percent
b. 8.38 percent
c. 8.08 percent
d. 9.75 percent
e. 8.26 percent
11. Jordan and Sons has an inventory period of 48.6 days, an accounts payable period
of 36.2 days, and an accounts receivable period of 29.3 days. Management is
considering offering a discount of 5 percent if its credit customers pay for their
purchases within 10 days. This discount is expected to reduce the receivables period
by 17 days. If the discount is offered, the operating cycle will decrease from ___ days
to ___ days.
a. 54.2; 37.2
b. 77.9; 94.9
c. 77.9; 60.9
d. 28.3; 45.3

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e. 28.3; 11.3
12. Alpha Companies has an operating cycle of 328 days, a receivables period of 64
days, and a payables period of 98 days. If the firm revises its credit policy, it believes
it can reduce its receivables period by 9 days. Given this revision, what will be the
firm's new cash cycle?
a. 218 days
b. 221 days
c. 239 days
d. 230 days
e. 241 days
13. Given a flexible financing policy, a growing firm generally has a permanent
requirement for:
a. current assets and short-term debt.
b. both current and long-term assets.
c. both short- and long-term debt.
d. short-term debt.
e. long-term assets only.
14. Last year, Wilson's had credit sales of $927,000 and cost of goods sold of
$762,000. The beginning of the year inventory was $138,000 and the end of the year
inventory was $154,300. If the accounts receivables average $87,400, what is the
operating cycle?
a. 104.42 days
b. 70.01 days
c. 92.09 days
d. 78.60 days
e. 88.23 days
15. Cash increases when:

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a. long-term debt decreases.

b. equity decreases.
c. fixed assets increase.
d. current liabilities decrease.
e. accounts payable increases
16. Clancy's has a beginning cash balance of $27 and a net cash inflow for the quarter
of −$52. Company policy is to maintain a minimum cash balance of $20 and borrow
only the amount that is necessary to maintain that balance. How much, if any, does the
firm need to borrow this quarter?
a. $0
b. $17
c. $45
d. $52
e. $25
17. Birds Unlimited has an accounts payable period of 60 days. The firm has expected
sales of $17,800, $22,100, $24,400 and $28,800, respectively, by quarter for the next
calendar year. The purchases for a quarter are equal to 65 percent of the following
quarter's sales. What is the amount of the projected cash disbursements for accounts
payable for Quarter 3? Assume a 360-day year.
a. $12,693.33
b. $16,813.33
c. $12,250.33
d. $17,125.50
e. $11,126.67
18. If your accounts receivable period is 30 days, you will collect payment for your
_____ sales during the second quarter of a calendar year.
a. January, February, and March
b. December, January, and February

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c. February and March

d. February, March, and April
e. March, April and May
19. Heritage Farms has sales of $1.62 million with costs of goods sold equal to 78
percent of sales. The average inventory is $369,000, accounts payable average
$438,000, and receivables average $147,000. How long is the cash cycle?
a. 7.54 days
b. 17.29 days
c. 13.30 days
d. 13.19 days
e. 11.77 days
20. Wilson's Dry Goods has a line of credit with a local bank for $250,000. The loan
agreement calls for interest of 7.6 percent with a compensating balance requirement of
5 percent, which is based on the total amount borrowed. What is the effective interest
rate if the firm needed $138,000 for one year to cover its expansion costs?
a. 8.38 percent
b. 8.55 percent
c. 7.60 percent
d. 8.00 percent
e. 8.13 percent
21. The length of time between the sale of inventory and the collection of cash from
receivables is called the:
a. inventory period.
b. operating cycle.
c. accounts receivable period.
d. accounts payable period.
e. cash cycle

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22. Which one of these statements concerning the cash cycle is correct?
a. Granting credit to slower paying customers tends to decrease the cash cycle.
b. The cash cycle plus the accounts receivable period is equal to the operating cycle.
c. The most desirable cash cycle is the one that equals zero days.
d. The cash cycle is equal to the operating cycle minus the inventory period.
e. A negative cash cycle is actually preferable to a positive cash cycle
23. Which one of the following is a use of cash?

a. Selling goods from inventory
b. Obtainment of a long-term loan
c. Collection of a past-due accounts receivable
d. Sale of a marketable security held by the firm
e. Submitting taxes to the government
24. Uptown Bank has granted a line of credit of $80,000 with an interest rate of 7.5
percent and a compensating balance requirement of 2.5 percent to Jones Hardware.
The compensating balance requirement is based on the total amount borrowed. What
is the effective annual interest rate if the firm needs $55,000 for one year to finance its
inventory?
a. 7.69 percent
b. 8.80 percent
c. 9.44 percent
d. 8.12 percent
e. 7.78 percent
25. For 2018, Tree Top Farms had sales of $438,000, cost of goods sold of $286,000,
ending inventory of $154,000, ending accounts receivable of $46,000, and ending
accounts payable of $38,000. For 2019, sales were $413,000, cost of goods sold was
$281,000, ending inventory was $149,000, ending accounts receivables were $48,000,
and ending accounts payable were $36,000. What was the cash cycle for 2019 based
on a 365-day year?
a. 203.17

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b. 202.96
c. 185.87
d. 190.27
e. 186.05
26. A use of cash is associated with:

a. an increase in retained earnings.
b. an increase in an asset.
c. both a decrease in a liability and an increase in an asset.
d. both an increase in an asset and an increase in retained earnings.
e. a decrease in a liability
27. Dixon's has a beginning receivables balance on January 1st of $930. Sales for
January through April are $970, $1,050, $1,330, and $1,460, respectively. The
accounts receivable period is 36 days. How much did the firm collect in the month of
March? Assume a 30-day month.
a. $1,289
b. $1,034
c. $1,180
d. $1,350
e. $1,316
28. A type of short-term loan where the borrower sells its receivables to the lender up-
front, but at a discount to face value, is called:
a. a bond.
b. assigned receivables financing.
c. a compensating balance.
d. a letter of credit.
e. factored receivables financing

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29. Which one of the following will not affect the operating cycle?
a. Decreasing the payables turnover from 7 times to 6 times
b. Increasing the average receivables balance
c. Increasing the days sales in receivables
d. Decreasing the credit repayment times for the firm's customers
e. Decreasing the inventory turnover rate
30. Which one of these statements is true?

a. The cumulative finance surplus requirement is computed prior to adjusting for the
minimum cash balance.
b. Most firms plan on maintaining a zero cash balance.
c. The minimum cash balance generally increases on a quarterly basis.
d. A financially sound firm will always have a positive quarterly net cash flow.
e. A negative cumulative cash surplus indicates a borrowing need
31. A manufacturing firm has a 90-day collection period. The firm produces seasonal
merchandise and thus has the least sales during the first quarter of a year and the
highest level of sales during the third quarter of a year. The firm maintains a relatively
steady level of production which means that its cash disbursements are approximately
equal in all quarters. The firm is most apt to face a cash-out situation in:
a. the second quarter.
b. the first quarter.
c. any quarter, equally.
d. the third quarter.
e. the fourth quarter
32. The inventory turnover for the Lambkin Company was 9.4 times and its days'
sales in receivables was 46. What is the operating cycle given a 365-day year?
a. 84.83 days
b. 74.29 days
c. 63.25 days

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d. 45.63 days
e. 55.40 days
33. Modern Sound has sales of $811,000 and average accounts payable of $87,400.
The cost of goods sold is equivalent to 72 percent of sales. How long does it take the
firm to pay its suppliers?
a. 33.45 days
b. 54.63 days
c. 48.69 days
d. 41.46 days
e. 66.18 days
34. Smith and Johnson have expected sales of $2,380, $2,840, $4,430, and $4,480 for
the months of January through April, respectively. The accounts receivable period is
15 days. How much did the firm collect in the month of March? Assume a 30-day
month.
a. $4,160
b. $2,215
c. $3,635
d. $3,430
e. $1,420
35. Flexible short-term financial policies tend to:

a. support few investments in marketable securities.
b. minimize the investment in inventory.
c. tightly restrict credit sales.
d. maintain low accounts receivable balances.
e. maintain large cash balances
36. A firm currently has a cash cycle of 36 days. Assume the firm changes its
operations such that it decreases its receivables period by 4 days, decreases its

lOMoARcPSD|19685806
inventory period by 1 day, and decreases its payables period by 2 days. What will be
the length of the cash cycle after these changes?
a. 31 days
b. 33 days
c. 37 days
d. 35 days
e. 38 days
37. Net working capital is defined as the:

a. difference between total current assets and cash.
b. difference between current assets and current liabilities.
c. difference between all assets and liabilities.
d. current assets of a business.
e. present value of short-term cash flows
38. Wilco's currently has a cash cycle of 43 days. Assume the firm changes its
operations such that it decreases its receivables period by 2 days, increases its
inventory period by 1 day, and increases its payables period by 3 days. What will be
the length of the cash cycle after these changes?
a. 38 days
b. 39 days
c. 41 days
d. 45 days
e. 43 days
39. A firm has an inventory turnover rate of 15.7, a receivables turnover rate of 20.2,
and a payables turnover rate of 14.6. How long is the cash cycle?
a. 13.08 days
b. 32.87 days
c. 28.46 days

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d. 16.32 days
e. 23.37 days
40. The most common means of financing a temporary cash deficit is a:

a. short-term secured bank loan.
b. short-term issue of corporate bonds.
c. long-term secured bank loan.
d. short-term unsecured bank loan.
e. long-term unsecured bank loan
41. The cash cycle will decrease as a result of increasing the:

a. inventory turnover rate.
b. payables turnover.
c. operating cycle.
d. accounts receivable period.
e. days sales in inventory
42. Orio Inc. has a beginning receivables balance on January 1st of $685. Sales for
January through April are $735, $690, $770, and $850, respectively. The accounts
receivable period is 30 days. How much did the firm collect in the month of April?
Assume a 30-day month.
a. $690
b. $770
c. $735
d. $730
e. $810
43. The length of time between the acquisition of inventory and the collection of cash
from receivables is called the:
a. cash cycle.

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b. inventory period.
c. operating cycle.
e. accounts payable period
44. As of the beginning of the quarter, Lester's Market had a cash balance of $326.
During the quarter the market paid suppliers $310, collected $418 on its accounts
receivables, paid an interest payment of $32, and a tax bill of $184. In addition, the
market borrowed $80. What was the cash balance at the end of the quarter?
a. $267
b. $255
c. $286
d. $298
e. $272
45. One use of cash is represented by:

a. an increase in borrowing.
b. an increase in notes payable.
c. a decrease in accounts payable.
d. an increase in operating cash flow.
e. a decrease in inventory
46. Weisbro and Sons purchases its inventory one quarter prior to the quarter of sale.
The purchase price is 60 percent of the sales price. The accounts payable period is 45
days. The accounts payable balance at the beginning of Quarter 1 is $39,500. The
expected sales are: Quarter 1 = $32,000; Quarter 2 = $34,500; Quarter 3 = $40,600;
Quarter 4 = $50,200. What is the amount of the expected disbursements for Quarter 2?
Assume a 360-day year.
a. $20,470
b. $25,220
c. $19,280

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d. $22,530
e. $19,950
47. If a firm needs to increase its cash holdings it could:

a. increase other current assets.
b. decrease accounts payable.
c. increase current liabilities.
d. increase fixed assets.
e. decrease long-term debt
48. Which one of the following will increase net working capital? Assume the current
ratio is greater than 1.0.
a. Using cash to pay a long-term debt
b. Using cash to pay an accounts payable
c. Using a long-term loan to buy inventory
d. Selling inventory at cost
e. Collecting an accounts receivable
49. Baxter's collects 30 percent of its sales in the month of sale, 55 percent in the
month following the month of sale, and 13 percent in the second month following the
month of sale. Given this, the company will collect _____ sales during the month of
May.
a. 30 percent of May
b. 13 percent of February
c. 55 percent of March
d. 13 percent of April
e. 55 percent of May
50. On April 1st, Morning Coffee had a beginning cash balance of $318. Sales for
March were $460 and April sales were $510. During April the firm had cash expenses

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of $327 and payments on accounts payable of $262. The accounts receivable period is
30 days. What is the firm's beginning cash balance on May 1st?
a. $211
b. $173
c. $239
d. $189
e. $210
51. Costs of the firm that fall with increased levels of investment in its current assets
are called _____ costs.
a. debt
b. equity
c. shortage
d. payables
e. carrying
52. Brook Side reported sales of $738,000 and cost of goods sold of $584,000 for the
year. The firm had a beginning inventory of $51,000 and an ending inventory of
$46,000. What is the length of the inventory period?
a. 15.24 days
b. 15.16 days
c. 29.87 days
d. 30.31 days
e. 31.19 days
53. The cash cycle is defined as the time between:

a. selling a product and collecting the accounts receivable.
b. selling a product and paying the supplier of that product.
c. cash disbursements and cash collection for an item.
d. the sale of inventory and cash collection.

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e. the arrival of inventory and cash collected from receivables.
54. Martinique's has a collection period of 60 days. Sales for the next calendar year
are estimated at $1,550, $1,230, $1,780 and $2,800, respectively, by quarter starting
with the first quarter of the year. Given this information, which one of the following
statements is correct? Assume a 360-day year.
a. The firm will collect a total of $1,033.33 in Quarter 4.
b. The firm will collect $1,133.33 in Quarter 2.
c. The firm will collect $593.33 from Quarter 2 sales in Quarter 3.
d. The firm will have an accounts receivable balance of $1,866.67 at the end of the
year.
e. The accounts receivable balance at the beginning of Quarter 4 will be $1,066.67
55. Wilson's has an inventory turnover rate of 16, an accounts payable period of 47
days, and an accounts receivable period of 37 days. What is the length of the cash
cycle?
a. 2.00 days
b. −6.00 days
c. 6.00 days
d. 32.81 days
e. 12.81 days
56. Given a fixed level of sales and a constant profit margin, an increase in the
accounts payable period can result from:
a. an increase in the cash cycle.
b. a decrease in the operating cycle.
c. an increase in the ending accounts payable balance.
d. an increase in the cost of goods sold account value.
e. a decrease in the average accounts payable balance

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57. ABC Manufacturing historically produced products that were held in inventory
until they could be sold to a customer. The firm is now changing its policy and only
producing a product when it receives an actual order from a customer. All else equal,
this change will:
a. decrease the inventory turnover rate.
b. lengthen the accounts receivable period.
c. decrease the cash cycle.
d. shorten the accounts payable period.
e. increase the operating cycle

a. A drug store is most apt to use trust receipt financing.
b. An auto dealer is most apt to use purchase order financing.
c. A farmer generally uses trust receipt financing to finance operations during the
growing season.
d. Blanket inventory lien financing is another term for purchase order financing.
e. Trust receipt financing is most applicable to large, easily identifiable types of
inventory.
59. The operating cycle will decrease if you decrease the:

a. speed at which inventory is sold.
b. days sales in inventory.
c. accounts receivable turnover rate.
d. cash cycle by increasing the accounts payable period.
e. days in accounts payable
60. A prearranged, short-term bank loan up to a specified limit, made on a formal or

informal basis, is called a:
a. cleanup loan.
b. letter of credit.
c. roll-over.

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d. compensating balance.
e. line of credit
61. For 2018, Blue Moon had sales of $318,000, cost of goods sold of $249,000, and
ending inventory of $138,000. For 2019, sales were $349,000, cost of goods sold were
$256,000, and ending inventory was $151,000. What was the inventory period for
2019?
a. 194.01 days
b. 206.03 days
c. 189.42 days
d. 216.99 days
e. 231.09 days
62. The operating cycle can be decreased by:

a. paying accounts payable faster.
b. decreasing the inventory turnover rate.
c. increasing the accounts payable turnover rate.
d. collecting accounts receivable faster.
e. discontinuing the discount given for early payment of an accounts receivable
63. Cash decreases when:

a. current assets other than cash increase.
b. retained earnings increase.
c. current liabilities increase.
d. long-term debt increases.
e. fixed assets decrease
64. A short-term loan where the lender holds the borrower's receivables as security is
called:
a. a bond.

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b. assigned receivables financing.

c. a compensating balance.
d. a letter of credit.
e. factored receivables financing
65. A cumulative cash deficit indicates a firm:

a. is using its cash wisely.
b. will go out of business within the year.
c. has at least a short-term need for external funding.
d. is capable of funding all its needs internally.
e. is facing long-term financial distress
66. D & F expects credit sales of $980, $1,460, $1,730 and $950 for the months of
April through July, respectively. The firm collects 25 percent of sales in the month of
sale, 65 percent of sales in the month following the month of sale, and 8 percent in the
second month following the month of sale. The remaining sales are never collected.
How much money does the firm expect to collect in the month of July?
a. $1,645.50
b. $1,374.20
c. $1,571.10
d. $1,475.50
e. $1,478.80
67. A short-term loan which is secured by inventory that is held in trust is referred to
as:
a. field warehousing financing.
b. a banker's acceptance.
c. a trust receipt financing arrangement.
d. a blanket inventory lien.
e. a secured line of credit

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68. The manager responsible for applying payments to customer's accounts is the:
a. production manager.
b. credit manager.
c. controller.
d. purchasing manager.
e. payables manager
69. A firm that adopts a flexible short-term financial policy is more apt to have:
a. greater short-term financing needs than if the firm adopted a restrictive policy.
b. lower carrying costs than shortage costs.
c. lower shortage costs than carrying costs.
d. a relatively low level of current assets.
e. stricter limits on credit sales than the average firm
70. You can decrease the cash cycle by:

a. increasing the percentage of customers paying with credit rather than cash.
b. increasing the cash discount offered to customers who pay their accounts early.
c. increasing the amount of raw materials kept in inventory.
d. paying your suppliers earlier to receive a discount on your purchases.
e. increasing your inventory to prevent stock-outs
71. Which one of these statements is correct concerning the cash cycle?
a. A positive cash cycle is preferable to a negative cash cycle.
b. The longer the cash cycle, the more likely a firm will need external financing.
c. Adopting a more liberal accounts receivable policy will tend to decrease the cash
cycle.
d. The cash cycle can exceed the operating cycle if the payables period is equal to
zero.
e. Increasing the accounts payable period increases the cash cycle

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72. Gonzalez Mercantile has an inventory turnover of 8.3, days' sales in receivables of
57, and an average payables turnover of 7.2. What is the cash cycle given a 365-day
year?
a. 55.00 days
b. 49.29 days
c. 50.28 days
d. 58.04 days
e. 61.37 days
73. A compensating balance:

a. decreases the cost of short-term bank financing.
b. requirement generally applies to inventory-type loans.
c. is a means of paying for banking services received.
d. requirement is generally set equal to one percent of the amount borrowed.
e. refunds a portion of the borrower's interest if a loan is repaid early
74. Amanda's Interior Design has credit sales of $783,000, costs of goods sold of
$418,000, and average accounts receivable of $107,900. How long does it take its
credit customers to pay for their purchases?
a. 35.20 days
b. 50.30 days
c. 31.23 days
d. 27.95 days
e. 36.09 days
75. If The Deli delays paying its suppliers by an additional ten days, then:
a. its operating cycle will increase by ten days.
b. its payables turnover rate will increase.
c. it should require less bank financing of its daily operations.

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d. its cash cycle will increase by ten days.

e. its stock-out costs will rise
76. Young's had a beginning accounts payable balance of $42,900 and an ending
accounts payable balance of $44,800. Sales for the period were $770,000 and costs of
goods sold were $598,000. If the operating cycle is 129 days, how long is the firm's
cash cycle?
a. 97.13 days
b. 81.19 days
c. 107.78 days
d. 102.24 days
e. 79.35 days
77. The short-term financial policy a firm adopts will be reflected in:
a. the size of the firm's investment in current assets.
b. the financing of current assets.
c. both the size and the financing of current assets.
d. both the size and the financing of fixed assets.
e. the financing of fixed assets
78. Which party(ies) is(are) ultimately responsible for an invoice from a supplier that
is subject to a bankers' acceptance?
a. The investors who purchased the banker's acceptance
b. The bank which issued the acceptance
c. Both the bank and the purchasing firm jointly
d. The vendor who issued the invoice
e. The purchasing firm
79. On average, D & M sells its inventory in 37 days, collects on its receivables in 3.4
days, and takes 35 days to pay for its purchases. What is the length of the firm's
operating cycle?

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a. 5.4 days
b. −1.4 days
c. 33.6 days
d. 40.4 days
e. 41.6 days
80. Salem Inc. has an inventory turnover of 15 and an accounts receivable turnover of
9. The accounts payable period is 51 days. What is the length of the cash cycle?
a. 14.23 days
b. 18.79 days
c. 23.00 days
d. 14.07 days
e. 13.89 days
81. A restrictive short-term financial policy tends to:

a. grant credit to more customers.
b. reduce order costs as compared to a more flexible policy.
c. incur more carrying costs than a flexible policy does.
d. encourage credit sales over cash sales.
e. reduce future sales more so than a flexible policy
82. A financially solid firm is most apt to have a quarterly cash shortfall when it
encounters a:
a. period of relatively constant sales.
b. period of declining interest rates.
c. major fixed asset expenditure.
d. period of rising interest rates.
e. period of increased cash collections

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83. Quiet Press has an accounts receivable period of 38 days. The estimated quarterly
sales for this year, starting with the first quarter, are $1,200, $1,400, $1,900, and
$1,200, respectively. How much does the firm expect to collect in the fourth quarter?
Assume a 360-day year.
a. $1,660.02
b. $1,592.08
c. $1,509.11
d. $1,495.56
e. $1,604.44
84. Commercial paper is generally issued:

a. at the prime rate offered by the firm's bank.
b. for 90 to 180 days.
c. for 190 days or less.
d. by commercial banks.
e. by large firms
85. The length of time between the acquisition of inventory by a firm and the payment
by the firm for that inventory is called the:
b. accounts payable period.
c. operating cycle.
e. cash cycle
86. The length of time between the payment for inventory and the collection of cash
from receivables is called the:
a. cash cycle.
b. operating cycle.
c. accounts receivable period.

lOMoARcPSD|19685806

e. inventory period
87. The length of time between the acquisition of inventory and its sale is called the:
b. accounts receivable period.
c. cash cycle.
e. operating cycle
88. Costs of the firm that rise with increased levels of investment in its current assets
are called _____ costs.
a. order
b. trading
c. safety
d. shortage
e. carrying
89. The cash cycle equals the:

a. operating cycle minus the accounts payable period.
b. operating cycle minus the inventory period.
c. change in net working capital divided by daily sales.
d. operating cycle plus the accounts payable period.
e. inventory period plus the accounts receivable period
90. A fraction of the available credit on a loan agreement deposited by the borrower
with the bank in a low or non-interest-bearing account is called a:
a. compensating balance.
b. line of credit.
c. cleanup loan.

lOMoARcPSD|19685806
d. roll-over.
e. letter of credit
91. Miller's Hardware has a flexible short-term financing policy. Over the course of
one year, the firm should expect to have some months that allow it to:
a. invest in marketable securities.
b. finance all its assets with short-term loans.
c. earn high returns on all its current assets.
d. repay all its debts.
e. reduce its total costs below the firm's normal minimum total cost point
92. Shortage costs include all the following except the:

a. production setup costs.
b. opportunity costs related to a low return on assets.
c. lost sales.
d. order costs.
e. disruption of production schedules
CHAPTER 28
1. Which one of the following statements is false as it relates to considerations firms
use when establishing a credit policy?
a. Lengthening the credit period effectively reduces the price paid by the customer.
b. A firm that supplies a perishable product will tend to offer restrictive credit terms.
c. A firm whose customers are in a high-risk business will tend to offer restrictive
credit terms.
d. Small accounts, associated with firms that find it difficult to acquire a line of credit,
tend to receive longer credit periods.
e. Larger accounts tend to receive more favorable credit terms
2. The EOQ model assumes inventory:

lOMoARcPSD|19685806
a. has seasonal fluctuations.

b. will be available just as it is needed for production.
c. is sold at a steady rate until it is depleted.
d. is held at a constant level.
e. can be delivered immediately upon order
3. The decision to grant credit should consider all the following except the:
a. cost of short-term borrowing.
b. delay in revenues from granting credit.
c. fixed costs incurred during the credit period.
d. immediate costs of granting credit.
e. probability of nonpayment
4. Delta Distributors has accounts receivable of $2,750,000 and average daily credit
sales of $118,280. The firm offers credit terms of 2/10, net 30. On average, what is the
firm's accounts receivable period?
a. 23.25 days
b. 18.64 days
c. 19.47 days
d. 37.14 days
e. 20.00 days
5. The EOQ model assumes inventory:

a. has seasonal fluctuations.
b. is held at a constant level.
c. will be available just as it is needed for production.
d. can be delivered immediately upon order.
e. is sold at a steady rate until it is depleted

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6. Edgeworth Co. has an all-cash policy and sells 50 units per month at $920 a unit.
The variable cost is $700 a unit. Should the firm grant 30 days of credit, it expects its
sales would rise to 60 units without changes to price or costs per unit. The monthly
required return is .75 percent. What is the NPV of switching to a credit policy?
a. $258,778
b. $346,333
c. $266,667
d. $240,333
e. $366,667
7. When analyzing the NPV of a decision to switch from a cash-only sales policy to a
credit policy with an early payment discount, the firm is least apt to consider the:
a. length of the credit period.
b. fixed salaries of the sales force.
c. firm's variable costs.
d. size of the discount.
e. expected change in sales
8. At the optimal inventory level, the:

a. shortage costs are eliminated.
b. carrying costs equal the restocking costs.
c. inventory opportunity costs are zero.
d. inventory is maintained at a level equal to one week's production needs.
e. inventory is held to its daily minimum level
9. Since the credit decision usually includes riskier customers, the decision should
adjust for this by:
a. increasing the variable cost per unit.
b. determining the probability of nonpayment and reducing the expected cash flows
accordingly.
c. discounting the cash inflows at a higher discount rate.

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d. discounting the net cash flows at a lower discount rate.

e. decreasing the variable cost per unit
10. The upper limit to the credit period is best expressed as the length of the:
a. seller's cash cycle.
b. buyer's cash cycle.
c. buyer's operating cycle.
d. seller's payables period.
e. seller's operating cycle
11. When analyzing the decision to change the cash discount policy, the firm should
select the policy that has the:
a. highest order size.
b. highest NPV.
c. lowest variable cost per unit.
d. lowest cash discount.
e. lowest NPV
12. The total restocking cost is calculated as:

a. Carrying costs + Fixed costs.
b. Order size × Variable cost per unit.
c. Fixed cost per order × Number of orders.
d. Fixed cost per unit × Average inventory.
e. Number of orders × Variable cost per unit
13. Sisler's sells 382,000 units a year and orders 10,000 units at a time. The cost of
placing an order is $24.90. What is the firm's annual total restocking cost?
a. $909.09
b. $811.19
c. $951.18

lOMoARcPSD|19685806
d. $1,023.02
e. $984.23
14. The net credit period for a company with terms of 2/10, net 45 is:
a. 10 days.
b. 35 days.
c. 45 days.
d. 55 days.
e. 40 days.
15. The decision to grant credit should consider all the following except the:
a. probability of nonpayment.
b. immediate costs of granting credit.
c. cost of short-term borrowing.
d. fixed costs incurred during the credit period.
e. delay in revenues from granting credit.
16. Jensen's Boat Works total costs of holding inventory is $8,400 when its order sizes
are optimized. If the firm places 46 orders a year, what is the fixed cost per order?
a. $79.08
b. $106.87
c. $91.30
d. $87.62
e. $101.15
17. Seasonal dating of accounts receivable:

a. refers to firms that invoice every quarter for sales made in the prior three months.
b. sets the first date of the relevant season as the final due date for an invoice for
seasonal goods.

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c. requires all purchasers of seasonal goods to have their purchases paid by the end of
the prior season.
d. is used by all firms that grant credit.
e. sets a relevant seasonal date as the invoice date for an earlier order
18. Credit analysis is best described as the process of:

a. determining the optimal credit terms.
b. collecting an accounts receivable.
c. determining the probability that a customer will not pay.
d. setting the amount of discount to be granted.
e. establishing the length of the credit period
19. One characteristic of a conditional sales contract is that the:

a. buyer is compensated for its opportunity costs.
b. seller retains legal ownership until the buyer completes payment for the goods.
c. invoice is paid in one lump sum at the end of the credit period.
d. ownership of the goods changes to the buyer immediately upon delivery.
e. seller receives a prepayment in full
20. Seasonal dating is used to promote sales during the off-season. This process
involves:
a. dating an invoice at a later date than when the goods are shipped.
b. extending both the discount period and the credit period by two months.
c. accepting orders early but dating the invoice when the goods are actually shipped.
d. extending the credit period until after the season ends.
e. accepting orders early but withholding shipment until the peak season
21. For a JIT inventory system to be efficient, the:

a. managers must limit production each day to a set quantity.
b. firm must be a reseller of goods, not a manufacturer.

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c. inventory must have an independent demand.

d. supplying firm must be a subsidiary of the ordering firm.
e. firm's suppliers need to be able to deliver goods quickly upon order
22. Alexander Moore & Co. is willing to offer credit on a one-time purchase provided
the NPV of the transaction is at least $50 at a required monthly return of 2 percent.
Assume a potential sale has a sales price of $248 and a variable cost of $164. What is
the maximum probability of default that will result in an acceptable offer?
a. 10.02 percent
b. 11.98 percent
c. 18.50 percent
d. 32.55 percent
e. 29.62 percent
23. With an open account the formal instrument of credit is the:

a. purchase order.
b. secured loan document.
c. invoice.
d. banker’s acceptance.
e. promissory note
24. Neilson's is a new firm that sells a product with a variable cost of $62 a unit. The
firm has a monthly required return of 1.8 percent. The firm wants to offer all new
customers 30 days of credit and expects that if it does so, that 12 percent will default
on payment while the others become repeat customers. What is the minimum price the
firm could charge to break-even on an NPV basis?
a. $74.09
b. $78.40
c. $82.15
d. $98.14
e. $63.27

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25. Underwood United has been approached by a new customer who has asked the
firm to extend credit for 30 days on a one-time purchase of $499. The firm's required
return on receivables is 1.8 percent per month and the variable cost of the desired item
is $327. What is the NPV of granting credit if the firm estimates the probability of
default is 15 percent?
a. $62.93
b. $108.40
c. $89.65
d. $76.67
e. $94.15
26. Which one of the following statements is false?

a. Commercial drafts represent a way to obtain a credit commitment from a customer
before the goods are delivered.
b. Banker's acceptances arise when a bank guarantees payment on a commercial draft.
c. When a banker's acceptance is discounted in the secondary market it becomes a
commercial note.
d. Sight drafts require immediate payment.
e. A commercial draft becomes a trade acceptance once the buyer accepts the draft and
promises to pay
27. Assume you graph the costs of granting credit against the amount of credit
extended. The optimal credit amount is then determined by the point which:
a. minimizes the opportunity costs of granting credit.
b. minimizes the total cost curve.
c. maximizes the carrying costs associated with granting credit.
d. minimizes the carrying costs of granting credit.
e. maximizes the opportunity costs associated with granting credit
28. Lewis Companies sells 2,600 units a month for cash at a price of $299 a unit and a
variable cost of $187 a unit. The firm estimates it can increase its sales by 200 units a

lOMoARcPSD|19685806
month if it switches to a net 30 credit policy while keeping its price and costs at their
current levels. If the monthly cost of capital is .85 percent, what is the NPV of
switching?
a. $1,590,005
b. $1,211,036
c. $1,394,008
d. $1,820,494
e. $2,006,413
29. When analyzing the NPV of a decision to switch from a cash-only sales policy to a
credit policy with an early payment discount, the firm is least apt to consider the:
a. firm's variable costs.
b. expected change in sales.
c. fixed salaries of the sales force.
d. size of the discount.
e. length of the credit period

a. An aging schedule includes only overdue accounts.
b. Investments in accounts receivable equal average daily sales times average
collection period.
c. Aging schedules are used to monitor accounts receivable.
d. If sales are seasonal, the percentages shown on an aging schedule will vary during
the year.
e. Collection efforts may involve legal action
31. Determining the optimal credit policy is based on a trade-off between the carrying
costs of granting credit and the:
a. present value of uncollected sales.
b. cash flows delayed from granting credit.
c. variable costs associated with the delayed payments.

lOMoARcPSD|19685806
d. opportunity cost of the delayed payments.

e. lost profits from refusing credit
32. Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a
pound. The variable cost per pound is $2.22. Currently, the firm has a cash-only sales
policy. The firm is considering changing to a net 30 credit policy. The monthly
required return is 1.2 percent. What does the new level of sales need to be to break
even on the switch?
a. 119.40 pounds
b. 3,489.67 pounds
c. 3,219.40 pounds
d. 3,370.44 pounds
e. 170.44 pounds
33. Alexander Moore & Co. is willing to offer credit on a one-time purchase provided
the NPV of the transaction is at least $50 at a required monthly return of 2 percent.
Assume a potential sale has a sales price of $248 and a variable cost of $164. What is
the maximum probability of default that will result in an acceptable offer?
a. 10.02 percent
b. 18.50 percent
c. 11.98 percent
d. 32.55 percent
e. 29.62 percent
34. Which one of the following statements is false as it relates to considerations firms
use when establishing a credit policy?
a. Lengthening the credit period effectively reduces the price paid by the customer.
b. Larger accounts tend to receive more favorable credit terms.
c. A firm that supplies a perishable product will tend to offer restrictive credit terms.
d. A firm whose customers are in a high-risk business will tend to offer restrictive
credit terms.

lOMoARcPSD|19685806
e. Small accounts, associated with firms that find it difficult to acquire a line of credit,
tend to receive longer credit periods
35. Cash discounts:

a. increase profit margins on sales.
b. increase the amount of credit offered.
c. are a cost-free means of increasing sales.
d. were first offered in the early 1900s.
e. speed up the collection of receivables
36. A&M Hardware assumes new customers will default 8 percent of the time but if
they don't default, they will become repeat customers who always pay their bills.
Assume the average sale is $383 with a variable cost of $260, and a monthly required
return of 1.65 percent. What is the NPV of extending credit for one month to a new
customer?
a. $5,748.09
b. $6,598.18
c. $6,103.47
d. $5,589.09
e. $6,858.18
37. Baked Potatoes has total annual sales of 846,000 units, a carrying cost per unit of
$1.64 per year, and restocking costs of $31 per order. Each inventory item has an
average cost of $2.39. What is the average dollar value of the firm's inventory if it
always orders the most economical quantity?
a. $6,758
b. $7,008
c. $7,409
d. $6,411
e. $6,218

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38. A commercial draft typically:

a. involves a lien on the purchasers' current assets.
b. requires payment prior to the delivery of the goods.
c. is signed upon delivery of the goods.
d. specifies that the purchaser use the seller's bank as the guarantor.
e. specifies the payment amount and payment due date
39. Neilson's is a new firm that sells a product with a variable cost of $62 a unit. The
firm has a monthly required return of 1.8 percent. The firm wants to offer all new
customers 30 days of credit and expects that if it does so, that 12 percent will default
on payment while the others become repeat customers. What is the minimum price the
firm could charge to break-even on an NPV basis?
a. $82.15
b. $98.14
c. $63.27
d. $78.40
e. $74.09

a. Raw materials that are considered to be a commodity are generally illiquid.
b. Raw materials consist of only those goods that are found in nature.
c. Finished goods are highly liquid because they are completed.
d. Finished goods are classified as a commodity.
e. Work-in-progress may have less resell value than the individual component parts
did
41. Underwood United has been approached by a new customer who has asked the
firm to extend credit for 30 days on a one-time purchase of $499. The firm's required
return on receivables is 1.8 percent per month and the variable cost of the desired item
is $327. What is the NPV of granting credit if the firm estimates the probability of
default is 15 percent?
a. $76.67

lOMoARcPSD|19685806
b. $108.40
c. $89.65
d. $94.15
e. $62.93
42. Selling goods and services on credit is:

a. a decision independent of customers.
b. never necessary unless customers cannot pay for the goods.
c. never a wise decision.
d. an investment in a customer.
e. permissible only if your bank lends the money.
43. Since the credit decision usually includes riskier customers, the decision should
adjust for this by:
a. decreasing the variable cost per unit.
b. increasing the variable cost per unit.
c. discounting the net cash flows at a lower discount rate.
d. determining the probability of nonpayment and reducing the expected cash flows
accordingly.
e. discounting the cash inflows at a higher discount rate
44. Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net
30. What is the cost of credit to the customer if they pay on the last day of the credit
period? Assume a 365-day year.
a. 39.40 percent
b. 41.02 percent
c. 37.56 percent
d. 39.62 percent
e. 37.80 percent

lOMoARcPSD|19685806
45. All of these are carrying costs of inventory except:

a. restocking costs.
b. storage costs.
c. theft.
d. insurance.
e. the opportunity cost of capital
46. The three components of credit policy are:

a. credit analysis, repayment analysis, and terms of the sale.
b. collection policy, credit analysis, and interest rate determination.
c. collection policy, interest rate determination, and repayment analysis.
d. interest rate determination, repayment analysis, and terms of sale.
e. collection policy, credit analysis, and terms of the sale
47. If 34 percent of customers pay on Day 10 and the remainder pay in an average of
28 days, what is the average collection period?
a. 19.72 days
b. 20.08 days
c. 22.09 days
d. 21.88 days
e. 18.47 days
48. The upper limit to the credit period is best expressed as the length of the:
a. buyer's operating cycle.
b. seller's payables period.
c. seller's cash cycle.
d. buyer's cash cycle.
e. seller's operating cycle

lOMoARcPSD|19685806
49. Cash discounts:

a. were first offered in the early 1900s.
b. increase profit margins on sales.
c. increase the amount of credit offered.
d. are a cost-free means of increasing sales.
e. speed up the collection of receivables
50. Fried Onions has total annual sales of 438,000 units, a carrying cost per unit of
$2.67 per year, and restocking costs of $48 per order. What is the EOQ?
a. 4,126 units
b. 3,824 units
c. 3,968 units
d. 4,203 units
e. 4,511 units
51. Seasonal dating of accounts receivable:

a. refers to firms that invoice every quarter for sales made in the prior three months.
b. requires all purchasers of seasonal goods to have their purchases paid by the end of
the prior season.
c. sets a relevant seasonal date as the invoice date for an earlier order.
d. sets the first date of the relevant season as the final due date for an invoice for
seasonal goods.
e. is used by all firms that grant credit
52. Assume you graph the costs of granting credit against the amount of credit
extended. The optimal credit amount is then determined by the point which:
a. minimizes the carrying costs of granting credit.
b. minimizes the total cost curve.
c. maximizes the carrying costs associated with granting credit.
d. minimizes the opportunity costs of granting credit.

lOMoARcPSD|19685806
e. maximizes the opportunity costs associated with granting credit
53. Lewis Companies sells 2,600 units a month for cash at a price of $299 a unit and a
variable cost of $187 a unit. The firm estimates it can increase its sales by 200 units a
month if it switches to a net 30 credit policy while keeping its price and costs at their
current levels. If the monthly cost of capital is .85 percent, what is the NPV of
switching?
a. $1,211,036
b. $1,820,494
c. $1,394,008
d. $1,590,005
e. $2,006,413
54. The credit period begins on the:

a. purchase order date.
b. order process date.
c. shipping date.
d. invoice date.
e. shipping arrival date
55. All the following are one of the "Five C's of Credit" except:
a. capital.
b. character.
c. capability.
d. capacity.
e. conditions
56. To collect on the accounts receivable due to the firm, a firm can do all the
following except:
a. take legal action against the customer as necessary.

lOMoARcPSD|19685806
b. make personal contact by telephone.

c. send a delinquency letter of past due status to the customer.
d. forcibly remove property from the buyer's premises.
e. employ a collection agency.
57. When credit is granted by one firm to another firm this gives rise to aKhông:
a. trade receivable and is called an installment note.
b. accounts receivable and is called consumer credit.
c. credit due and is called an installment note.
d. accounts receivable and is called trade credit.
e. trade receivable and is called a secured loan

a. Investments in accounts receivable equal average daily sales times average
collection period.
b. Aging schedules are used to monitor accounts receivable.
c. An aging schedule includes only overdue accounts.
d. Collection efforts may involve legal action.
e. If sales are seasonal, the percentages shown on an aging schedule will vary during
the year
59. Crocket Motors has an account receivable balance of $682,400 and the average
collection period is 38 days. What are the firm's credit sales per day?
a. $17,957.89
b. $236,408.11
c. $23,333.33
d. $71,044.38
e. $259,312.00

lOMoARcPSD|19685806
60. A&M Hardware assumes new customers will default 8 percent of the time but if
they don't default, they will become repeat customers who always pay their bills.
Assume the average sale is $383 with a variable cost of $260, and a monthly required
return of 1.65 percent. What is the NPV of extending credit for one month to a new
customer?
a. $6,103.47
b. $5,748.09
c. $6,598.18
d. $6,858.18
e. $5,589.09
61. Sisler's sells 382,000 units a year and orders 10,000 units at a time. The cost of
placing an order is $24.90. What is the firm's annual total restocking cost?
a. $951.18
b. $984.23
c. $1,023.02
d. $811.19
e. $909.09
62. One key reason for establishing a captive finance company is the:
a. reduction of legal restrictions on the amount of debt that can be incurred.
b. increased opportunities for internal sales.
c. lower level of required financial insurance.
d. anticipated decrease in accounts receivable.
e. expected decrease in the cost of the debt required to finance receivables
63. Assume Atlantic Fish sells 3,200 pounds of fish per month at a price of $2.90 a
pound. The variable cost per pound is $2.22. Currently, the firm has a cash-only sales
policy. The firm is considering changing to a net 30 credit policy. The monthly
required return is 1.2 percent. What does the new level of sales need to be to break
even on the switch?
a. 3,219.40 pounds

lOMoARcPSD|19685806
b. 170.44 pounds
c. 3,489.67 pounds
d. 119.40 pounds
e. 3,370.44 pounds
64. On September 1, a firm grants credit with terms of 2/10 net 30. The creditor:
a. receives a discount of 2 percent when payment is made at least 10 days prior to
October 1.
b. receives a discount of 2 percent when payment is made on September 1 and pays a
penalty of 10 percent if payment is made after October 1.
c. must pay a penalty of 2/10 of one percent when payment is made later than October
1.
d. receives a discount of 2 percent when payment is made within 10 days.
e. must pay a penalty of 10 percent when payment is made later than 2 days after
October 1.
65. Credit analysis is best described as the process of:

a. collecting an accounts receivable.
b. determining the optimal credit terms.
c. establishing the length of the credit period.
d. determining the probability that a customer will not pay.
e. setting the amount of discount to be granted
66. Credit terms of 1/5, net 15 should be interpreted as granting:

a. a total credit period of 20 days.
b. a credit period of 10 days.
c. a 1/5 percent discount for payments within 15 days.
d. a one percent discount for payments received within five days.
e. a five percent discount for next day payments

lOMoARcPSD|19685806
67. To collect on the accounts receivable due to the firm, a firm can do all the
following except:
a. make personal contact by telephone.
b. take legal action against the customer as necessary.
c. employ a collection agency.
d. forcibly remove property from the buyer's premises.
e. send a delinquency letter of past due status to the customer.
68. The basic assumption of the ABC approach to inventory management is that:
a. a small portion of inventory represents a large portion of inventory costs.
b. firms should Always Be Consistent in the amount of inventory ordered.
c. most items are ordered, stocked, and sold in a relatively short period of time.
d. inventory should be divided dependent on the type of cash or credit sale anticipated.
e. firms should receive A customer's order Before incurring inventory Costs.
69. When credit is granted by one firm to another firm this gives rise to aKhông:
a. credit due and is called an installment note.
b. accounts receivable and is called trade credit.
c. accounts receivable and is called consumer credit.
d. trade receivable and is called an installment note.
e. trade receivable and is called a secured loan.
70. Windshield glass purchased by an automaker and sitting on a shelf ready for use is
classified as:
a. partial-goods inventory.
b. work-in-progress.
c. finished goods inventory.
d. assembly materials.
e. raw materials

lOMoARcPSD|19685806
71. The average collection period measures the average:

a. number of customers per day who charge their purchases.
b. time for a credit customer to return to make a second purchase.
c. number of times a credit customer charges a purchase during a year.
d. number of items purchased in each credit transaction.
e. time necessary to collect a credit sale
72. All the following are one of the "Five C's of Credit" except:
a. capability.
b. capacity.
c. character.
d. conditions.
e. capital.
73. Delta Distributors has accounts receivable of $2,750,000 and average daily credit
sales of $118,280. The firm offers credit terms of 2/10, net 30. On average, what is the
firm's accounts receivable period?
a. 19.47 days
b. 18.64 days
c. 37.14 days
d. 20.00 days
e. 23.25 days
74. When analyzing the decision to change the cash discount policy, the firm should
select the policy that has the:
a. lowest NPV.
b. lowest cash discount.
c. highest NPV.
d. lowest variable cost per unit.
e. highest order size

lOMoARcPSD|19685806
75. All of these are carrying costs of inventory except:

a. restocking costs.
b. the opportunity cost of capital.
c. theft.
d. storage costs.
e. insurance
76. Fried Onions has total annual sales of 438,000 units, a carrying cost per unit of
$2.67 per year, and restocking costs of $48 per order. What is the EOQ?
a. 4,203 units
b. 3,968 units
c. 4,126 units
d. 3,824 units
e. 4,511 units
77. All the following can provide credit information about a customer except:
a. banks.
b. the customer's financial statements.
c. credit reports.
d. the customer's current payment history with the seller.
e. the amount of goods the customer desires to purchase
78. The minimum level of inventory that a firm wants to keep on hand at all times is
referred to as:
a. keiretsu.
b. the base level.
c. safety stock.
d. the reorder point.
e. the opportunity cost.

lOMoARcPSD|19685806
79. One key reason for establishing a captive finance company is the:
a. reduction of legal restrictions on the amount of debt that can be incurred.
b. anticipated decrease in accounts receivable.
c. increased opportunities for internal sales.
d. expected decrease in the cost of the debt required to finance receivables.
e. lower level of required financial insurance
80. Yesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice
was sent today with the terms, 3/10 net 40. This customer normally pays on the net
date. What is the effective rate of interest the customer is paying by not taking the
discount? Assume a 365-day year.
a. 39.27 percent
b. 42.31 percent
c. 40.54 percent
d. 45.38 percent
e. 44.86 percent
81. Which one of these statements is true regarding promissory notes?

a. Promissory notes are used when firms do not anticipate a problem with collections.
b. Promissory notes usually involve no cash discount.
c. Promissory notes are used for small orders only.
d. A promissory note must be signed and delivered prior to goods being shipped.
e. Most trade credit arrangements use promissory notes
82. The first step in materials requirements planning is establishing the:

a. desired minimum raw materials inventory level.
b. finished goods inventory level.
c. delivery time required for each type of raw material.
d. cost of each order.

lOMoARcPSD|19685806
e. value of each inventory item as a percent of total inventory
83. Windshield glass purchased by an automaker and sitting on a shelf ready for use is
classified as:
a. assembly materials.
b. finished goods inventory.
c. raw materials.
d. partial-goods inventory.
e. work-in-progress
84. The three components of credit policy are:

a. collection policy, credit analysis, and interest rate determination.
b. credit analysis, repayment analysis, and terms of the sale.
c. collection policy, interest rate determination, and repayment analysis.
d. collection policy, credit analysis, and terms of the sale.
e. interest rate determination, repayment analysis, and terms of sale
85. Baked Potatoes has total annual sales of 846,000 units, a carrying cost per unit of
$1.64 per year, and restocking costs of $31 per order. Each inventory item has an
average cost of $2.39. What is the average dollar value of the firm's inventory if it
always orders the most economical quantity?
a. $6,411
b. $6,758
c. $7,409
d. $7,008
e. $6,218
86. The average collection period measures the average:

a. number of customers per day who charge their purchases.
b. number of times a credit customer charges a purchase during a year.

lOMoARcPSD|19685806
c. time for a credit customer to return to make a second purchase.

d. time necessary to collect a credit sale.
e. number of items purchased in each credit transaction
87. Edgeworth Co. has an all-cash policy and sells 50 units per month at $920 a unit.
The variable cost is $700 a unit. Should the firm grant 30 days of credit, it expects its
sales would rise to 60 units without changes to price or costs per unit. The monthly
required return is .75 percent. What is the NPV of switching to a credit policy?
a. $346,333
b. $266,667
c. $258,778
d. $366,667
e. $240,333
88. Seasonal dating is used to promote sales during the off-season. This process
involves:
a. accepting orders early but withholding shipment until the peak season.
b. accepting orders early but dating the invoice when the goods are actually shipped.
c. extending both the discount period and the credit period by two months.
d. extending the credit period until after the season ends.
e. dating an invoice at a later date than when the goods are shipped

a. Sight drafts require immediate payment.
b. Commercial drafts represent a way to obtain a credit commitment from a customer
before the goods are delivered.
c. Banker's acceptances arise when a bank guarantees payment on a commercial draft.
d. When a banker's acceptance is discounted in the secondary market it becomes a
commercial note.
e. A commercial draft becomes a trade acceptance once the buyer accepts the draft and
promises to pay

lOMoARcPSD|19685806
90. Which one of these statements is true regarding promissory notes?

a. Promissory notes are used when firms do not anticipate a problem with collections.
b. Promissory notes are used for small orders only.
c. Most trade credit arrangements use promissory notes.
d. Promissory notes usually involve no cash discount.
e. A promissory note must be signed and delivered prior to goods being shipped
91. The basic assumption of the ABC approach to inventory management is that:
a. firms should receive A customer's order Before incurring inventory Costs.
b. inventory should be divided dependent on the type of cash or credit sale anticipated.
c. firms should Always Be Consistent in the amount of inventory ordered.
d. a small portion of inventory represents a large portion of inventory costs.
e. most items are ordered, stocked, and sold in a relatively short period of time
92. The credit period begins on the:

a. invoice date.
b. shipping date.
c. purchase order date.
d. shipping arrival date.
e. order process date
93. The total restocking cost is calculated as:

a. Order size × Variable cost per unit.
b. Carrying costs + Fixed costs.
c. Number of orders × Variable cost per unit.
d. Fixed cost per order × Number of orders.
e. Fixed cost per unit × Average inventory

lOMoARcPSD|19685806
94. One characteristic of a conditional sales contract is that the:

a. seller receives a prepayment in full.
b. ownership of the goods changes to the buyer immediately upon delivery.
c. buyer is compensated for its opportunity costs.
d. seller retains legal ownership until the buyer completes payment for the goods.
e. invoice is paid in one lump sum at the end of the credit period
95. Credit terms of 1/5, net 15 should be interpreted as granting:

a. a 1/5 percent discount for payments within 15 days.
b. a total credit period of 20 days.
c. a one percent discount for payments received within five days.
d. a five percent discount for next day payments.
e. a credit period of 10 days
96. Yesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice
was sent today with the terms, 3/10 net 40. This customer normally pays on the net
date. What is the effective rate of interest the customer is paying by not taking the
discount? Assume a 365-day year.
a. 44.86 percent
b. 40.54 percent
c. 39.27 percent
d. 45.38 percent
e. 42.31 percent
97. Jaxon Markets currently has credit terms of net 30, an average collection period of
29 days, and average receivables of $211,410. The firm estimates that if it offered
terms of 2/10, net 30 that 45 percent of its customers would pay on Day 10 with the
remainder paying on average in 32 days. How much cash could the company free up
from its accounts receivables if it switched its credit policy?
a. $50,301
b. $64,219

lOMoARcPSD|19685806
c. $58,336
d. $38,762
e. $65,009
98. Lemoyne mailed an invoice today in the amount of $1,268 with terms of 2/7 net
30. What is the cost of credit to the customer if they pay on the last day of the credit
period? Assume a 365-day year.
a. 37.80 percent
b. 39.40 percent
c. 41.02 percent
d. 39.62 percent
e. 37.56 percent
99. The EOQ model considers all the following except the:
a. cost of the inventory.
b. fixed cost of an order.
c. carrying cost.
d. restocking cost.
e. annual sales units
100. Jaxon Markets currently has credit terms of net 30, an average collection period
of 29 days, and average receivables of $211,410. The firm estimates that if it offered
terms of 2/10, net 30 that 45 percent of its customers would pay on Day 10 with the
remainder paying on average in 32 days. How much cash could the company free up
from its accounts receivables if it switched its credit policy?
a. $50,301
b. $58,336
c. $64,219
d. $65,009
e. $38,762

lOMoARcPSD|19685806
101. On September 1, a firm grants credit with terms of 2/10 net 30. The creditor:
a. receives a discount of 2 percent when payment is made on September 1 and pays a
penalty of 10 percent if payment is made after October 1.
b. receives a discount of 2 percent when payment is made within 10 days.
c. must pay a penalty of 10 percent when payment is made later than 2 days after
October 1.
d. receives a discount of 2 percent when payment is made at least 10 days prior to
October 1.
e. must pay a penalty of 2/10 of one percent when payment is made later than October
1.
102. The reorder point considers all the following except the:
a. delivery time.
b. minimum desired inventory level.
c. safety stock.
d. rate of sales.
e. variable costs per unit
103. With an open account the formal instrument of credit is the:

a. secured loan document.
b. banker’s acceptance.
c. purchase order.
d. invoice.
e. promissory note
104. Determining the optimal credit policy is based on a trade-off between the
carrying costs of granting credit and the:
a. lost profits from refusing credit.
b. present value of uncollected sales.
c. opportunity cost of the delayed payments.

lOMoARcPSD|19685806
d. variable costs associated with the delayed payments.

e. cash flows delayed from granting credit
105. The length of the credit period offered by a firm is influenced by all of the
following except the:
a. FTC guidelines for trade credit.
b. customer type.
c. buyer's operating cycle.
d. standardization of the goods being sold.
e. level of consumer demand
106. The length of the credit period offered by a firm is influenced by all of the
following except the:
a. standardization of the goods being sold.
b. buyer's operating cycle.
c. FTC guidelines for trade credit.
d. customer type.
e. level of consumer demand
107. All the following can provide credit information about a customer except:
a. the amount of goods the customer desires to purchase.
b. credit reports.
c. the customer's financial statements.
d. banks.
e. the customer's current payment history with the seller
108. A commercial draft typically:

a. is signed upon delivery of the goods.
b. specifies the payment amount and payment due date.
c. involves a lien on the purchasers' current assets.

lOMoARcPSD|19685806
d. requires payment prior to the delivery of the goods.

e. specifies that the purchaser use the seller's bank as the guarantor
109. The EOQ model considers all the following except the:
a. cost of the inventory.
b. fixed cost of an order.
c. annual sales units.
d. restocking cost.
e. carrying cost
110. Crocket Motors has an account receivable balance of $682,400 and the average
collection period is 38 days. What are the firm's credit sales per day?
a. $236,408.11
b. $17,957.89
c. $23,333.33
d. $259,312.00
e. $71,044.38
111. If 34 percent of customers pay on Day 10 and the remainder pay in an average of
28 days, what is the average collection period?
a. 22.09 days
b. 21.88 days
c. 18.47 days
d. 19.72 days
e. 20.08 days
112. The minimum level of inventory that a firm wants to keep on hand at all times is
referred to as:
a. keiretsu.
b. the reorder point.

lOMoARcPSD|19685806
c. the base level.

d. the opportunity cost.
e. safety stock
113. Selling goods and services on credit is:

a. an investment in a customer.
b. never necessary unless customers cannot pay for the goods.
c. permissible only if your bank lends the money.
d. never a wise decision.
e. a decision independent of customers.
114. The reorder point considers all the following except the:
a. rate of sales.
b. variable costs per unit.
c. delivery time.
d. safety stock.
e. minimum desired inventory level.

a. Finished goods are highly liquid because they are completed.
b. Raw materials that are considered to be a commodity are generally illiquid.
c. Finished goods are classified as a commodity.
d. Work-in-progress may have less resell value than the individual component parts
did.
e. Raw materials consist of only those goods that are found in nature
116. The first step in materials requirements planning is establishing the:

a. desired minimum raw materials inventory level.
b. value of each inventory item as a percent of total inventory.

lOMoARcPSD|19685806
c. delivery time required for each type of raw material.

d. finished goods inventory level.
e. cost of each order
117. At the optimal inventory level, the:

a. shortage costs are eliminated.
b. inventory is maintained at a level equal to one week's production needs.
c. inventory is held to its daily minimum level.
d. inventory opportunity costs are zero.
e. carrying costs equal the restocking costs
118. For a JIT inventory system to be efficient, the:

a. firm must be a reseller of goods, not a manufacturer.
b. inventory must have an independent demand.
c. managers must limit production each day to a set quantity.
d. supplying firm must be a subsidiary of the ordering firm.
e. firm's suppliers need to be able to deliver goods quickly upon order
119. The net credit period for a company with terms of 2/10, net 45 is:
a. 40 days.
b. 45 days.
c. 55 days.
d. 10 days.
e. 35 days
120. Jensen's Boat Works total costs of holding inventory is $8,400 when its order
sizes are optimized. If the firm places 46 orders a year, what is the fixed cost per
order?
a. $79.08
b. $91.30

lOMoARcPSD|19685806
c. $106.87
d. $101.15
e. $87.62

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CORPORATE FINANCE QUIZ TEST

2. Which one of the following actions by a financial manager creates an agency

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c. The tax manager reports to the treasurer.

7. One intent of the Sarbanes Oxley Act of 2002 is to:

8. A firm's capital structure refers to the firm's:

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b. proportions of financing from current and long-term debt and equity.

9. Financial managers primarily create firm value by:

10. The corporate treasurer oversees which one of these areas?

11. One advantage of a partnership is the:

12. Short-term finance deals with:

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c. acquiring and selling fixed assets.

13. The owners of a limited liability company generally prefer:

15. Insider trading is:

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21. The articles of incorporation:

22. Given the corporate form of business organization, ownership:

23. A stakeholder is any person or entity:

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c. marketability of the managers.

26. Which one of these is most apt to be an agency problem?

27. Accounting profits and cash flows are generally:

28. The primary goal of financial management is to:

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d. maximize current dividends per share of the existing stock.

30. The cheapest business entity to form is typically the:

31. A firm creates value by:

32. If a firm is currently profitable, then:

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34. Corporate bylaws:

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d. Minimizing the overall size of the firm

37. A general partner:

39. A proxy fight occurs when:

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d. The proprietorship pays taxes at the corporate tax rate.

41. Which one of the following is a capital budgeting decision?

43. Which one of these is a correct definition?

44. Which one of these statements is correct?

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46. Partnership profits:

47. The Securities Act of 1933 focuses on:

48. Which one of the following statements is correct?

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d. Sole proprietorships and partnerships are taxed in a similar fashion. .

49. Members of the board of directors are selected by:

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53. One disadvantage of the corporate form of business ownership is the:

54. A business created as a distinct legal entity is called a:

56. Financial managers should primarily strive to:

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57. A financial manager should make decisions based on:

58. Which statement concerning corporations is correct?

60. A business owned by a single individual is called a:

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62. The Sarbanes-Oxley Act requires public corporations to:

64. Which one of the following parties is considered a stakeholder of a firm?