Chapter 01: Introduction to Corporate Finance

Multiple Choice Questions

1. The person generally directly responsible for overseeing the tax management, cost accounting, financial
accounting, and information system functions is the:

A. treasurer.
B. director.
C. controller.
D. chairman of the board.
E. chief executive officer.

2. The person generally directly responsible for overseeing the cash and credit functions, financial planning,
and capital expenditures is the:

A. treasurer.
B. director.
C. controller.
D. chairman of the board.
E. chief operations officer.

3. The process of planning and managing a firm's long-term investments is called:

A. working capital management.

B. financial depreciation.
C. agency cost analysis.
D. capital budgeting.
E. capital structure.

4. The mixture of debt and equity used by a firm to finance its operations is called:

A. working capital management.

B. financial depreciation.
C. cost analysis.
D. capital budgeting.
E. capital structure.

5. The management of a firm's short-term assets and liabilities is called:

A. working capital management.

B. debt management.
C. equity management.
D. capital budgeting.
E. capital structure.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
6. A business owned by a single individual is called a:

A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. limited liability company.

7. A business formed by two or more individuals who each have unlimited liability for business debts is called
a:

A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. limited liability company.

8. The division of profits and losses among the members of a partnership is formalized in the:

A. indemnity clause.
B. indenture contract.
C. statement of purpose.
D. partnership agreement.
E. group charter.

9. A business created as a distinct legal entity composed of one or more individuals or entities is called a:

A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. unlimited liability company.

10. The corporate document that sets forth the business purpose of a firm is the:

A. indenture contract.
B. state tax agreement.
C. corporate bylaws.
D. debt charter.
E. articles of incorporation.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
11. The rules by which corporations govern themselves are called:

A. indenture provisions.
B. indemnity provisions.
C. charter agreements.
D. bylaws.
E. articles of incorporation.

12. A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:

A. limited liability company.

B. general partnership.
C. limited proprietorship.
D. sole proprietorship.
E. corporation.

13. The primary goal of financial management is to:

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

B. maximize the current value per share of the existing stock.
C. avoid financial distress.
D. minimize operational costs and maximize firm efficiency.
E. maintain steady growth in both sales and net earnings.

14. A conflict of interest between the stockholders and management of a firm is called:

A. stockholders' liability.
B. corporate breakdown.
C. the agency problem.
D. corporate activism.
E. legal liability.

15. Agency costs refer to:

A. the total dividends paid to stockholders over the lifetime of a firm.

B. the costs that result from default and bankruptcy of a firm.
C. corporate income subject to double taxation.
D. the costs of any conflicts of interest between stockholders and management.
E. the total interest paid to creditors over the lifetime of the firm.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
16. A stakeholder is:

A. any person or entity that owns shares of stock of a corporation.

B. any person or entity that has voting rights based on stock ownership of a corporation.
C. a person who initially started a firm and currently has management control over the cash flows of the
firm due to his/her current ownership of company stock.
D. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows
of the firm.
E. any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of
the firm.

17. The Sarbanes Oxley Act of 2002 is intended to:

A. protect financial managers from investors.

B. not have any effect on foreign companies.
C. reduce corporate revenues.
D. protect investors from corporate abuses.
E. decrease audit costs for U.S. firms.

18. The treasurer and the controller of a corporation generally report to the:

A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. chief financial officer.

19. Which one of the following statements is correct concerning the organizational structure of a corporation?

A. The vice president of finance reports to the chairman of the board.

B. The chief executive officer reports to the board of directors.
C. The controller reports to the president.
D. The treasurer reports to the chief executive officer.
E. The chief operations officer reports to the vice president of production.

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

A. Determining how much debt should be borrowed from a particular lender

B. Deciding whether or not to open a new store
C. Deciding when to repay a long-term debt
D. Determining how much inventory to keep on hand
E. Determining how much money should be kept in the checking account

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
21. The Sarbanes Oxley Act was enacted in:

A. 1952.
B. 1967.
C. 1998.
D. 2002.
E. 2006.

22. Since the implementation of Sarbanes-Oxley, the cost of going public in the United States has:

A. increased.
B. decreased.
C. remained about the same.
D. been erratic, but over time has decreased.
E. It is impossible to tell since Sarbanes-Oxley compliance does not involve direct cost to the firm.

23. Working capital management includes decisions concerning which of the following?

I. accounts payable
II. long-term debt
III. accounts receivable
IV. inventory

A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, III, and IV only

24. Working capital management:

A. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.
B. ensures that long-term debt is acquired at the lowest possible cost.
C. ensures that dividends are paid to all stockholders on an annual basis.
D. balances the amount of company debt to the amount of available equity.
E. is concerned with the upper portion of the balance sheet.

25. Which one of the following statements concerning a sole proprietorship is correct?

A. A sole proprietorship is the least common form of business ownership.

B. The profits of a sole proprietorship are taxed twice.
C. The owners of a sole proprietorship share profits as established by the partnership agreement.
D. The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
E. A sole proprietorship is often structured as a limited liability company.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
26. Which one of the following statements concerning a sole proprietorship is correct?

A. The life of the firm is limited to the life span of the owner.
B. The owner can generally raise large sums of capital quite easily.
C. The ownership of the firm is easy to transfer to another individual.
D. The company must pay separate taxes from those paid by the owner.
E. The legal costs to form a sole proprietorship are quite substantial.

27. Which one of the following best describes the primary advantage of being a limited partner rather than a
general partner?

A. Entitlement to a larger portion of the partnership's income

B. Ability to manage the day-to-day affairs of the business
C. No potential financial loss
D. Greater management responsibility
E. Liability for firm debts limited to the capital invested

28. A general partner:

A. has less legal liability than a limited partner.

B. has more management responsibility than a limited partner.
C. faces double taxation whereas a limited partner does not.
D. cannot lose more than the amount of his/her equity investment.
E. is the term applied only to corporations which invest in partnerships.

29. A partnership:

A. is taxed the same as a corporation.

B. agreement defines whether the business income will be taxed like a partnership or a corporation.
C. terminates at the death of any general partner.
D. has less of an ability to raise capital than a proprietorship.
E. allows for easy transfer of interest from one general partner to another.

30. Which of the following are disadvantages of a partnership?

I. Limited life of the firm

II. Personal liability for firm debt
III. Greater ability to raise capital than a sole proprietorship
IV. Lack of ability to transfer partnership interest

A. I and II only
B. III and IV only
C. II and III only
D. I, II, and IV only
E. I, III, and IV only

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
31. Which of the following are advantages of the corporate form of business ownership?

I. limited liability for firm debt

II. double taxation
III. ability to raise capital
IV. unlimited firm life

A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only

32. Which one of the following statements is correct concerning corporations?

A. The largest firms are usually corporations.

B. The majority of firms are corporations.
C. The stockholders are usually the managers of a corporation.
D. The ability of a corporation to raise capital is quite limited.
E. The income of a corporation is taxed as personal income of the stockholders.

33. Which one of the following statements is correct?

A. Both partnerships and corporations incur double taxation.

B. Both sole proprietorships and partnerships are taxed in a similar fashion.
C. Partnerships are the most complicated type of business to form.
D. Both partnerships and corporations have limited liability for general partners and shareholders.
E. All types of business formations have limited lives.

34. The articles of incorporation:

A. can be used to remove company management.

B. are amended annually by the company stockholders.
C. set forth the number of shares of stock that can be issued.
D. set forth the rules by which the corporation regulates its existence.
E. can set forth the conditions under which the firm can avoid double taxation.

35. The bylaws:

A. establish the name of the corporation.

B. are rules which apply only to limited liability companies.
C. set forth the purpose of the firm.
D. mandate the procedure for electing corporate directors.
E. set forth the procedure by which the stockholders elect the senior managers of the firm.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
36. The owners of a limited liability company prefer:

A. being taxed like a corporation.

B. having liability exposure similar to that of a sole proprietor.
C. being taxed personally on all business income.
D. having liability exposure similar to that of a general partner.
E. being taxed like a corporation with liability like a partnership.

37. Which one of the following business types is best suited to raising large amounts of capital?

A. sole proprietorship
B. limited liability company
C. corporation
D. general partnership
E. limited partnership

38. Which type of business organization has all the respective rights and privileges of a legal person?

A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company

39. Financial managers should strive to maximize the current value per share of the existing stock because:

A. doing so guarantees the company will grow in size at the maximum possible rate.
B. doing so increases the salaries of all the employees.
C. the current stockholders are the owners of the corporation.
D. doing so means the firm is growing in size faster than its competitors.
E. the managers often receive shares of stock as part of their compensation.

40. The decisions made by financial managers should all be ones which increase the:

A. size of the firm.

B. growth rate of the firm.
C. marketability of the managers.
D. market value of the existing owners' equity.
E. financial distress of the firm.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
41. Which one of the following actions by a financial manager creates an agency problem?

A. Refusing to borrow money when doing so will create losses for the firm
B. Refusing to lower selling prices if doing so will reduce the net profits
C. Agreeing to expand the company at the expense of stockholders' value
D. Agreeing to pay bonuses based on the book value of the company stock
E. Increasing current costs in order to increase the market value of the stockholders' equity

42. Which of the following help convince managers to work in the best interest of the stockholders?

I. compensation based on the value of the stock

II. stock option plans
III. threat of a proxy fight
IV. threat of conversion to a partnership

A. I and II only
B. II and III only
C. I, II and III only
D. I and III only
E. I, II, III, and IV

43. Which form of business structure faces the greatest agency problems?

A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company

44. A proxy fight occurs when:

A. the board solicits renewal of current members.

B. a group solicits proxies to replace the board of directors.
C. a competitor offers to sell their ownership in the firm.
D. the firm files for bankruptcy.
E. the firm is declared insolvent.

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

A. employee
B. short-term creditor
C. long-term creditor
D. preferred stockholder
E. common stockholder

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
46. Which of the following are key requirements of the Sarbanes-Oxley Act?

I. Officers of the corporation must review and sign annual reports.

II. Officers of the corporation must now own more than 5% of the firm's stock.
III. Annual reports must list deficiencies in internal controls.
IV. Annual reports must be filed with the SEC within 30 days of year end.

A. I only.
B. II only.
C. I and III only.
D. II and III only.
E. II and IV only.

47. Insider trading is:

A. legal.
B. illegal.
C. impossible to have in our efficient market.
D. discouraged, but legal.
E. list only the securities of the largest firms.

48. Sole proprietorships are predominantly started because:

A. they are easily and cheaply setup.

B. the proprietorship life is limited to the business owner's life.
C. all business taxes are paid as individual tax.
D. All of these.
E. None of these.

49. Managers are encouraged to act in shareholders' interests by:

A. shareholder election of a board of directors who select management.

B. the threat of a takeover by another firm.
C. compensation contracts that tie compensation to corporate success.
D. Both shareholder election of a board of directors who select management; and the threat of a takeover by
another firm.
E. All of these.

50. The Securities Exchange Act of 1934 focuses on:

A. all stock transactions.

B. sales of existing securities.
C. issuance of new securities.
D. insider trading.
E. Federal Deposit Insurance Corporation (FDIC) insurance.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
51. The basic regulatory framework in the United States was provided by:

A. the Securities Act of 1933.

B. the Securities Exchange Act of 1934.
C. the monetary system.
D. the Securities Act of 1933 and the Securities Exchange Act of 1934.
E. All of these.

52. The Securities Act of 1933 focuses on:

A. all stock transactions.

B. sales of existing securities.
C. issuance of new securities.
D. insider trading.
E. Federal Deposit Insurance Corporation (FDIC) insurance.

53. In a limited partnership:

A. each limited partner's liability is limited to his net worth.

B. each limited partner's liability is limited to the amount he put into the partnership.
C. each limited partner's liability is limited to his annual salary.
D. there is no limitation on liability; only a limitation on what the partner can earn.
E. None of these.

54. Accounting profits and cash flows are:

A. generally the same since they reflect current laws and accounting standards.
B. generally the same since accounting profits reflect when the cash flows are received.
C. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash
flows.
D. generally not the same because cash inflows occur before revenue recognition.
E. Both generally not the same since GAAP allows for revenue recognition separate from the receipt of cash
flows; and generally not the same because cash inflows occur before revenue recognition.

55. The Chief Executive Officer typically reports to the

A. Board of Director's
B. Granting authority
C. President
D. CFO
E. None of these

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
56. The cheapest business to form is typically the

A. General corporation
B. Sub-chapter S Corporation
C. General Partnership
D. Limited Partnership
E. Sole proprietorship

57. In a general partnership, the general partners have

A. Limited liability
B. Unlimited liability
C. No liability
D. Minimal liability
E. It depends on the partners' decision

58. Managers that are successful in pursuing stockholder goals can

A. See very little reward

B. See no financial gain through raises and bonuses
C. Never become stockholders
D. Reap enormous rewards
E. Start a proxy fight with stockholders

Essay Questions

59. List and briefly describe the three basic questions addressed by a financial manager.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
60. What advantages does the corporate form of organization have over sole proprietorships or partnerships?

61. If the corporate form of business organization has so many advantages over the sole proprietorship, why is it
so common for small businesses to initially be formed as sole proprietorships?

62. What should be the goal of the financial manager of a corporation? Why?

63. Do you think agency problems arise in sole proprietorships and/or partnerships?

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
64. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts. If
so, what impact would this have on the functioning of primary and secondary markets for common stock?

65. Suppose you own 100 shares of IBM stock which you intend to sell today. Since you will sell it in the
secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then, should
IBM's management care about the price you get for your shares?

66. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the
common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the
stock certificates can be transferred directly to the lender. Why might a lender want such an assignment?
What advantage of the corporate form of organization comes into play here?

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
67. Why might a corporation wish to list its shares on a national exchange such as the NYSE as opposed to a
regional exchange or NASDAQ?

Chapter 02:Financial Statements and Cash Flow

Multiple Choice Questions

1. The financial statement showing a firm's accounting value on a particular date is the:

A. income statement.
B. balance sheet.
C. statement of cash flows.
D. tax reconciliation statement.
E. shareholders' equity sheet.

2. A current asset is:

A. an item currently owned by the firm.

B. an item that the firm expects to own within the next year.
C. an item currently owned by the firm that will convert to cash within the next 12 months.
D. the amount of cash on hand the firm currently shows on its balance sheet.
E. the market value of all items currently owned by the firm.

3. The long-term debts of a firm are liabilities:

A. that come due within the next 12 months.

B. that do not come due for at least 12 months.
C. owed to the firm's suppliers.
D. owed to the firm's shareholders.
E. the firm expects to incur within the next 12 months.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
4. Net working capital is defined as:

A. total liabilities minus shareholders' equity.

B. current liabilities minus shareholders' equity.
C. fixed assets minus long-term liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.

5. A(n) ____ asset is one which can be quickly converted into cash without significant loss in value.

A. current
B. fixed
C. intangible
D. liquid
E. long-term

6. The financial statement summarizing a firm's accounting performance over a period of time is the:

A. income statement.
B. balance sheet.
C. statement of cash flows.
D. tax reconciliation statement.
E. shareholders' equity sheet.

7. Noncash items refer to:

A. the credit sales of a firm.

B. the accounts payable of a firm.
C. the costs incurred for the purchase of intangible fixed assets.
D. expenses charged against revenues that do not directly affect cash flow.
E. all accounts on the balance sheet other than cash on hand.

8. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.

A. deductible
B. residual
C. total
D. average
E. marginal

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
9. Your _____ tax rate is the total taxes you pay divided by your taxable income.

A. deductible
B. residual
C. total
D. average
E. marginal

10. _____ refers to the cash flow that results from the firm's ongoing, normal business activities.

A. Cash flow from operating activities

B. Capital spending
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

11. _____ refers to the changes in net capital assets.

A. Operating cash flow

B. Cash flow from investing
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

12. _____ refers to the difference between a firm's current assets and its current liabilities.

A. Operating cash flow

B. Capital spending
C. Net working capital
D. Cash flow from assets
E. Cash flow to creditors

13. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current
assets and liabilities.

A. Operating cash flow

B. Capital spending
C. Net working capital
D. Cash flow from operations
E. Cash flow to creditors

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
14. _____ refers to the firm's interest payments less any net new borrowing.

A. Operating cash flow

B. Capital spending
C. Net working capital
D. Cash flow from shareholders
E. Cash flow to creditors

15. _____ refers to the firm's dividend payments less any net new equity raised.

A. Operating cash flow

B. Capital spending
C. Net working capital
D. Cash flow from creditors
E. Cash flow to stockholders

16. Earnings per share is equal to:

A. net income divided by the total number of shares outstanding.

B. net income divided by the par value of the common stock.
C. gross income multiplied by the par value of the common stock.
D. operating income divided by the par value of the common stock.
E. net income divided by total shareholders' equity.

17. Dividends per share is equal to dividends paid:

A. divided by the par value of common stock.

B. divided by the total number of shares outstanding.
C. divided by total shareholders' equity.
D. multiplied by the par value of the common stock.
E. multiplied by the total number of shares outstanding.

18. Which of the following are included in current assets?

I. equipment
II. Inventory
III. accounts payable
IV. cash

A. II and IV only
B. I and III only
C. I, II, and IV only
D. III and IV only
E. II, III, and IV only

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
19. Which of the following are included in current liabilities?

I. Note payable to a supplier in eighteen months

II. Debt payable to a mortgage company in nine months
III. Accounts payable to suppliers
IV. Loan payable to the bank in fourteen months

A. I and III only

B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, and III only

20. An increase in total assets:

A. means that net working capital is also increasing.

B. requires an investment in fixed assets.
C. means that shareholders' equity must also increase.
D. must be offset by an equal increase in liabilities and shareholders' equity.
E. can only occur when a firm has positive net income.

21. Which one of the following assets is generally the most liquid?

A. inventory
B. buildings
C. accounts receivable
D. equipment
E. patents

22. Which one of the following statements concerning liquidity is correct?

A. If you sold an asset today, it was a liquid asset.

B. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.
C. Trademarks and patents are highly liquid.
D. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.
E. Balance sheet accounts are listed in order of decreasing liquidity.

23. Liquidity is:

A. a measure of the use of debt in a firm's capital structure.

B. equal to current assets minus current liabilities.
C. equal to the market value of a firm's total assets minus its current liabilities.
D. valuable to a firm even though liquid assets tend to be less profitable to own.
E. generally associated with intangible assets.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
24. Which of the following accounts are included in shareholders' equity?

I. interest paid
II. retained earnings
III. capital surplus
IV. long-term debt

A. I and II only
B. II and IV only
C. I and IV only
D. II and III only
E. I and III only

25. Book value:

A. is equivalent to market value for firms with fixed assets.

B. is based on historical cost.
C. generally tends to exceed market value when fixed assets are included.
D. is more of a financial than an accounting valuation.
E. is adjusted to market value whenever the market value exceeds the stated book value.

26. When making financial decisions related to assets, you should:

A. always consider market values.

B. place more emphasis on book values than on market values.
C. rely primarily on the value of assets as shown on the balance sheet.
D. place primary emphasis on historical costs.
E. only consider market values if they are less than book values.

27. As seen on an income statement:

A. interest is deducted from income and increases the total taxes incurred.
B. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and
interest expenses.
C. depreciation is shown as an expense but does not affect the taxes payable.
D. depreciation reduces both the pretax income and the net income.
E. interest expense is added to earnings before interest and taxes to get pretax income.

28. The earnings per share will:

A. increase as net income increases.

B. increase as the number of shares outstanding increase.
C. decrease as the total revenue of the firm increases.
D. increase as the tax rate increases.
E. decrease as the costs decrease.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
29. Dividends per share:

A. increase as the net income increases as long as the number of shares outstanding remains constant.
B. decrease as the number of shares outstanding decrease, all else constant.
C. are inversely related to the earnings per share.
D. are based upon the dividend requirements established by Generally Accepted Accounting Procedures.
E. are equal to the amount of net income distributed to shareholders divided by the number of shares
outstanding.

30. Earnings per share

A. will increase if net income increases and number of shares remains constant.
B. will increase if net income decreases and number of shares remains constant.
C. is number of shares divided by net income.
D. is the amount of money that goes into retained earnings on a per share basis.
E. None of these.

31. According to Generally Accepted Accounting Principles, costs are:

A. recorded as incurred.
B. recorded when paid.
C. matched with revenues.
D. matched with production levels.
E. expensed as management desires.

32. Depreciation:

A. is a noncash expense that is recorded on the income statement.

B. increases the net fixed assets as shown on the balance sheet.
C. reduces both the net fixed assets and the costs of a firm.
D. is a non-cash expense which increases the net operating income.
E. decreases net fixed assets, net income, and operating cash flows.

33. When you are making a financial decision, the most relevant tax rate is the __________ rate.

A. average
B. fixed
C. marginal
D. total
E. variable

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
34. An increase in which one of the following will cause the operating cash flow to increase?

A. depreciation
B. changes in the amount of net fixed capital
C. net working capital
D. taxes
E. costs

35. A firm starts its year with a 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 ending net working capital will be negative.

B. both accounts receivable and inventory decreased during the year.
C. the beginning current assets were less than the beginning current liabilities.
D. accounts payable increased and inventory decreased during the year.
E. the ending net working capital can be positive, negative, or equal to zero.

36. The cash flow to creditors includes the cash:

A. received by the firm when payments are paid to suppliers.

B. outflow of the firm when new debt is acquired.
C. outflow when interest is paid on outstanding debt.
D. inflow when accounts payable decreases.
E. received when long-term debt is paid off.

37. Cash flow to stockholders must be positive when:

A. the dividends paid exceed the net new equity raised.

B. the net sale of common stock exceeds the amount of dividends paid.
C. no income is distributed but new shares of stock are sold.
D. both the cash flow to assets and the cash flow to creditors are negative.
E. both the cash flow to assets and the cash flow to creditors are positive.

38. Which equality is the basis for the balance sheet?

A. Fixed Assets = Stockholder's Equity + Current Assets

B. Assets = Liabilities + Stockholder's Equity
C. Assets = Current Long-Term Debt + Retained Earnings
D. Fixed Assets = Liabilities + Stockholder's Equity
E. None of these

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
39. Assets are listed on the balance sheet in order of:

A. decreasing liquidity.
B. decreasing size.
C. increasing size.
D. relative life.
E. None of these.

40. Debt is a contractual obligation that:

A. requires the payout of residual flows to the holders of these instruments.

B. requires a repayment of a stated amount and interest over the period.
C. allows the bondholders to sue the firm if it defaults.
D. Both requires the payout of residual flows to the holders of these instruments; and requires a repayment
of a stated amount and interest over the period.
E. Both requires a repayment of a stated amount and interest over the period; and allows the bondholders to
sue the firm if it defaults.

41. The carrying value or book value of assets:

A. is determined under GAAP and is based on the cost of the asset.

B. represents the true market value according to GAAP.
C. is always the best measure of the company's value to an investor.
D. is always higher than the replacement cost of the assets.
E. None of these.

42. Under GAAP, a firm's assets are reported at:

A. market value.
B. liquidation value.
C. intrinsic value.
D. cost.
E. None of these.

43. Which of the following statements concerning the income statement is true?

A. It measures performance over a specific period of time.

B. It determines after-tax income of the firm.
C. It includes deferred taxes.
D. It treats interest as an expense.
E. All of these.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
44. According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

A. a contract is signed to perform a service or deliver a good.

B. the transaction is complete and the goods or services are delivered.
C. payment is requested.
D. income taxes are paid.
E. All of these.

45. Which of the following is not included in the computation of operating cash flow?

A. Earnings before interest and taxes

B. Interest paid
C. Depreciation
D. Current taxes
E. All of these are included

46. Net capital spending is equal to:

A. net additions to net working capital.

B. the net change in fixed assets.
C. net income plus depreciation.
D. total cash flow to stockholders less interest and dividends paid.
E. the change in total assets.

47. Cash flow to stockholders is defined as:

A. interest payments.
B. repurchases of equity less cash dividends paid plus new equity sold.
C. cash flow from financing less cash flow to creditors.
D. cash dividends plus repurchases of equity minus new equity financing.
E. None of these.

48. Free cash flow is:

A. without cost to the firm.

B. net income plus taxes.
C. an increase in net working capital.
D. cash that the firm is free to distribute to creditors and stockholders.
E. None of these.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
49. The cash flow of the firm must be equal to:

A. cash flow to stockholders minus cash flow to debtholders.

B. cash flow to debtholders minus cash flow to stockholders.
C. cash flow to governments plus cash flow to stockholders.
D. cash flow to stockholders plus cash flow to debtholders.
E. None of these.

50. Which of the following are all components of the statement of cash flows?

A. Cash flow from operating activities, cash flow from investing activities, and cash flow from financing
activities
B. Cash flow from operating activities, cash flow from investing activities, and cash flow from divesting
activities
C. Cash flow from internal activities, cash flow from external activities, and cash flow from financing
activities
D. Cash flow from brokering activities, cash flow from profitable activities, and cash flow from non-
profitable activities
E. None of these.

51. One of the reasons why cash flow analysis is popular is because:

A. cash flows are more subjective than net income.

B. cash flows are hard to understand.
C. it is easy to manipulate, or spin the cash flows.
D. it is difficult to manipulate, or spin the cash flows.
E. None of these.

52. A firm has $450 in inventory, $700 in fixed assets, $210 in accounts receivable, $50 in accounts payable,
and $60 in cash. What is the amount of the current assets?

A. $510
B. $560
C. $600
D. $660
E. $720

53. Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt is $300. What is
the amount of net working capital?

A. $0
B. $50
C. $300
D. $650
E. $700

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
54. Brad's Company has equipment with a book value of $500 that could be sold today at a 50% discount. Its
inventory is valued at $450 and could be sold to a competitor for that amount. The firm has $100 in cash and
customers owe it $250. What is the accounting value of its liquid assets?

A. $100
B. $550
C. $800
D. $1,050
E. $1,300

55. Martha's Enterprises spent $2,500 to purchase equipment three years ago. This equipment is currently
valued at $2,000 on today's balance sheet but could actually be sold for $2,200. Net working capital is $300
and long-term debt is $900. Assuming the equipment is the firm's only fixed asset, what is the book value of
shareholders' equity?

A. $1,100
B. $1,400
C. $1,600
D. $1,900
E. The answer cannot be determined from the information provided

56. Mart's Boutique has sales of $670,000 and costs of $460,000. Interest expense is $50,000 and depreciation is
$55,000. The tax rate is 34%. What is the net income?

A. $35,700
B. $69,300
C. $105,000
D. $138,600
E. $210,000

57. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?

A. 21.38%
B. 23.88%
C. 25.76%
D. 34.64%
E. 39.00%

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
58. The tax rates are as shown. Your firm currently has taxable income of $79,400. How much additional tax
will you owe if you increase your taxable income by $21,000?

A. $7,004
B. $7,014
C. $7,140
D. $7,160
E. $7,174

59. Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax
rate is 34%. The firm does not have interest expenses. What is the operating cash flow?

A. $93
B. $241
C. $340
D. $383
E. $485

60. Awnings Incorporated has beginning net fixed assets of $560 and ending net fixed assets of $720. Assets
valued at $210 were sold during the year. Depreciation was $50. What is the amount of capital spending?

A. $110
B. $160
C. $210
D. $300
E. $420

61. At the beginning of the year, a firm has current assets of $420 and current liabilities of $380. At the end of
the year, the current assets are $500 and the current liabilities are $410. What is the change in net working
capital?

A. -$80
B. -$50
C. $0
D. $50
E. $80

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
62. At the beginning of the year, long-term debt of a firm is $310 and total debt is $350. At the end of the year,
long-term debt is $280 and total debt is $370. The interest paid is $50. What is the amount of the cash flow
to creditors?

A. -$30
B. $0
C. $20
D. $30
E. $80

63. Pete's Boats has beginning long-term debt of $180 and ending long-term debt of $210. The beginning and
ending total debt balances are $340 and $360, respectively. The interest paid is $20. What is the amount of
the cash flow to creditors?

A. -$10
B. $0
C. $10
D. $40
E. $50

64. Peggy Grey's Cookies has net income of $360. The firm pays out 40% of the net income to its shareholders
as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to
stockholders?

A. $64
B. $136
C. $144
D. $224
E. $296

65. Thompson's Jet Skis has operating cash flow of $218. Depreciation is $45 and interest paid is $35. A net
total of $69 was paid on long-term debt. The firm spent $180 on fixed assets and increased net working
capital by $38. What is the amount of the cash flow to stockholders?

A. -$104
B. -$28
C. $28
D. $114
E. $142

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
66.

What is the change in the net working capital from 2010 to 2011?

A. $1,235
B. $1,035
C. $1,335
D. $3,405
E. $4,740

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
67.

What is the amount of the non-cash expenses for 2011?

A. $570
B. $630
C. $845
D. $1,370
E. $2,000

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
68.

What is the amount of the net capital spending for 2011?

A. -$290
B. $795
C. $1,080
D. $1,660
E. $2,165

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
69.

What is the operating cash flow for 2011?

A. $845
B. $1,930
C. $2,215
D. $2,845
E. $3,060

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
70.

What is the cash flow of the firm for 2011?

A. $430
B. $485
C. $1,340
D. $2,590
E. $3,100

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
71.

What is the amount of net new borrowing for 2011?

A. -$225
B. -$25
C. $0
D. $25
E. $225

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
72.

What is the cash flow to creditors for 2011?

A. -$405
B. -$225
C. $225
D. $405
E. $630

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
73.

What is the net working capital for 2011?

A. $345
B. $405
C. $805
D. $812
E. $1,005

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
74.

What is the change in net working capital from 2010 to 2011?

A. -$93
B. -$7
C. $7
D. $85
E. $97

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
75.

What is net capital spending for 2011?

A. -$250
B. -$57
C. $0
D. $57
E. $477

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
76.

What is the operating cash flow for 2011?

A. $143
B. $297
C. $325
D. $353
E. $367

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
77.

What is the cash flow of the firm for 2011?

A. $50
B. $247
C. $297
D. $447
E. $517

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
78.

What is net new borrowing for 2011?

A. -$70
B. -$35
C. $35
D. $70
E. $105

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
79.

What is the cash flow to creditors for 2011?

A. -$170
B. -$35
C. $135
D. $170
E. $205

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
80.

What is the cash flow to stockholders for 2011?

A. $408
B. $417
C. $452
D. $482
E. $503

81.

What is the taxable income for 2011?

A. $360
B. $520
C. $640
D. $780
E. $800

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
82.

What is the operating cash flow for 2011?

A. $520
B. $800
C. $1,015
D. $1,110
E. $1,390

83.

What are the sales for 2011?

A. $4,225
B. $4,385
C. $4,600
D. $4,815
E. $5,000

84. Calculate net income based on the following information. Sales are $250, cost of goods sold is $160,
depreciation expense is $35, interest paid is $20, and the tax rate is 34%.

A. $11.90
B. $23.10
C. $35.00
D. $36.30
E. $46.20

Essay Questions

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
85. What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets?

86. Why is interest expense excluded from the operating cash flow calculation?

87. Explain why the income statement is not a good representation of cash flow.

88. Discuss the difference between book values and market values on the balance sheet and explain which is
more important to the financial manager and why.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
89. Note that in all of our cash flow computations to determine cash flow of the firm, we never include the
addition to retained earnings. Why not? Is this an oversight?

90. Note that we added depreciation back to operating cash flow and to additions to fixed assets. Why add it
back twice? Isn't this double-counting?

91. Sometimes when businesses are critically delinquent on their tax liabilities, the tax authority comes in and
literally seizes the business by chasing all of the employees out of the building and changing the locks. What
does this tell you about the importance of taxes relative to our discussion of cash flow? Why might a
business owner want to avoid such an occurrence?

92. Interpret, in words, what cash flow of the firm represents by discussing operating cash flow, changes in net
working capital, and additions to fixed assets.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
93. Why is cash flow management important?

94. What is operating cash flow and how does it different from the total cash flow to the firm?

Chapter 03: Financial Statement Analysis and Financial Model

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/218 .

Chapter 03: Financial Statement Analysis and Financial Model

1. Act ivities o f a firm which re quire the s pending of cash are known a s:
A. sources of cash.
B. uses of cash.
C. cash collections.
D. cash receipts.
E. cash on hand.

2. The sources and us es of ca sh over a stat ed per iod of t ime ar e refl ected on the :
A. income statement.
B. balance sheet.
C. tax reconciliation statement.
D. statement of cash flows.
E. statement of operating position.

3. A common-size income statemen t is an accounting statement that expresses all of a firm's expenses as
percentage of:
A. total assets.
B. total equity.
C. net income.
D. taxable income.
E. sales.

4. Which on e of the following standar dizes items on t he incom e statement and balance sheet relative to their
values as of a common point in time?
A. statement of standardization
B. statement of cash flows
C. common-base year statement
D. common-size statement
E. base reconciliation statement

5. Relationships de termined from a firm's financial informati on and used fo r comp arison purposes are
known as:
A. financial ratios.
B. identities.
C. dimensional analysis.
D. scenario analysis.
E. solvency analysis.
6. The for mula wh ich breaks down the retur n on equ ity into three com ponent pa rts is referred to as which
one of the following?
A. equity equation
B. profitability determinant
C. SIC formula
D. Du Pont identity
E. equity performance formula

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

7. The U.S. governmentcoding system that classifies a irm

f bythe nature of its business operations is
known as the:
A. NASDAQ 100.
B. Standard & Poor's 500.
C. Standard Industrial Classification code.
D. Governmental ID code.
E. Government Engineered Coding System.

8. Whichoneof the following si a source of cash?

A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in accounts payable
E. increase in inventory

9. Whichoneof the following si a use of cash?

A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock
10. Which one of the following is a sou
rce of cas
h?
A. repurchase of common stock
B. acquisition of debt
C. purchase of inventory
D. payment to a supplier
E. granting credit to a customer

11. Which one of the fo

llowing is a sou
rce of cas
h?
A. increase in accounts receivable

B. decrease in
C. decrease in long-term
common stock
debt
D. decrease in accounts payable
E. decrease in inventory

12. On the Stat ement of Cashlows,

F whi
ch of the follow
ing are consid
ered financi
ng activitie
s?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and IV only
B. III and IV only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV

13. On the Stat ement of Cashlows,

F whi
ch of the follow
ing are consid
ered operati
ng activitie
s?
I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and III only
B. III and IV only
C. I, II, and III only http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
D. I, III, and IV only
E. I, II, III, and IV
 5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test Bank - slidepdf
...

14. According t o the Statem ent of Cash Fl ows, a decre ase in accounts r eceivable will _____ the cas h flow
from _____ activities.
A. decrease; operating
B. decrease; financing
C. increase; operating
D. increase; financing
E. increase; investment

15. According to the St atement of Cash Fl ows, an increas e in interest expense wi ll _____ the cash flow from
_____ activities.
A. decrease; operating
B. decrease; financing
C. increase; operating
D. increase; financing
E. increase; investment

16. On a comm on-size ba lance sheet all accou nts are exp ressed as a percentage of:
A. sales for the period.
B. the base year sales.
C. total equity for the base year.
D. total assets for the current year.
E. total assets for the base year.

17. On a common-bas e year financial stat ement, accou nts receivables will be expressed rel ative to which one
of the following?
A. current year sales
B. current year total assets
C. base-year sales
D. base-year total assets
E. base-year accounts receivables

A firm uses 2008 as the base year for its fina ncial statements. The comm on-size, base year statement for
18.inventory
has an 2009 value of 1.08. This is interpreted to mean that the 2009 inventory is equal to - 108
percent of which one of the following?
A. 2008 inventory
B. 2008 total assets
C. 2009 total assets
D. 2008 inventory expressed as a percent of 2008 total assets
E. 2009 inventory expressed as a percent of 2009 total assets

19. Which of t he follow ing ratios are measur es of a firm's liqui dity?
I. cash coverage ratio
II. interval measure
III. debt-equity ratio
IV. quick ratio
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

20. An increase in curre nt liabilities will have which one of the follow ing effects, all els e held constant?
Assume all ratios have positive values.
A. increase in the cash ratio
B. increase in the net working capital to total assets ratio
http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
C. decrease in the quick ratio
D. decrease in the cash coverage ratio
E. increase in the current ratio
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

21. An increaseniwhich one of theollowing

f w
ill increase airm's
f quickatio
r withou
t affectingtsi cash
ratio?
A. accounts payable
B. cash
C. inventory
D. accounts receivable
E. fixed assets

22. A supplier,who require

s payment within ten days,hould
s be most co
ncerned wit
h which one of the
following ratios when granting credit?
A. current
B. cash
C. debt-equity
D. quick
E. total debt

23. A firm has an terval

in measure of 48. Thi
s means that theirm
f has suffi
cient liquidssets
a to do whic
h one
of the following?
A. pay all of its debts that are due within the next 48 hours
B. pay all of its debts that are due within the next 48 days
C. cover its operating costs for the next 48 hours
D. cover its operating costs for the next 48 days
E. meet the demands of its customers for the next 48 hours

24. Over the past year, the ck

quiratio for a firm increas
ed while the current io
ratremained const
ant. Given
this information, which one of the following must have occurred? Assume all ratios have positive
values.
A. current assets increased
B. current assets decreased
C. inventory increased
D. inventory decreased
E. accounts payable increased
25. Ratios th
at measure a firm'sfinancialleverage re
a known sa _____ rati
os.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. book value

26. Whichone ofthe followingstatement s iscorrect?

A. If the total debt ratio is greater than .50, then the debt-equit
y ratio must be less than 1.0.
B. Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C. The debt-equity ratio can be computed as 1 plus the equity multiplier.
D. An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E. An increase in the depreciation expense will not affect the cash coverage ratio.

27. If a firm has a debt

-equity rat
io of 1.0, thentsi total debt ra
tio must be whi
ch one of the foll
owing?
A. 0.0
B. 0.5
C. 1.0
D. 1.5
E. 2.0

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - ...
Test Bank - slidepdf

28. The cash cove

rage ratio dir
ectly measu
res the abilit
y of a firm's rev
enues to meethich
w one of its
following obligations?
A. payment to supplier
B. payment to employee
C. payment of interest to a lender
D. payment of principle to a lender
E. payment of a dividend to a shareholder

29. Jasper Unit

ed had sales of $21
,000 in 2008 and $24
,000 in 2009.he
T firm's cu
rrent accoun
ts remained
constant. Given this information, which one of the following statements must be true?
A. The total asset turnover rate increased.
B. The days' sales in receivables increased.
C. The net working capital turnover rate increased.
D. The fixed asset turnover decreased.
E. The receivables turnover rate decreased.

30. The Corner ardware

H has cceeded
su in inc
reasing the am
ount of goods itlls
se while hol
ding the amoun
t
of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit
also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one
of the following ways?
A. decrease in the inventory turnover rate
B. decrease in the net working capital turnover rate
C. no change in the fixed asset turnover rate
D. decrease in the day's sales in inventory
E. no change in the total asset turnover rate

31. Dee's has a ed fix asset turnov

er rate of 1.12 dana total asset rnover
tu rate of91
0.. Sam's ha
s a fixed asset
turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar operations.
Based on this information, Dee's must be doing which one of the following?
A. utilizing its fixed assets more efficiently than Sam's
B. utilizing its total assets more efficiently than Sam's
C. generating $1 in sales for every $1.12 in net fixed assets
D. generating $1.12 in net income for every $1 in net fixed assets
E. maintaining the same level of current assets as Sam's

32. Ratios that easure

m how eff
iciently arm
fi managestsi assets and ope
rations to gene
rate net incom
e are
referred to as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. turnover

33. If a firm produ

ces a twelve rcent
pe return onssets
a and also a elve
tw percenteturn
r on equity
, then the
firm:
A. may have short-term, but not long-term debt.
B. is using its assets as efficiently as possible.
C. has no net working capital.
D. has a debt-equity ratio of 1.0.
E. has an equity multiplier of 1.0.

34. Which one of theollowing

f w
ill decreasef ai firm can decr
ease its opera
ting costs,llaelse consta
nt?
A. return on equity
B. return on assets
C. profit margin http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
D. equity multiplier
E. price-earnings ratio
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

35. Al's has a pric

e-earningsatio
r of 18.5. en's
B also has a pri ce-earning
s ratio of 18.5.
Which one of the
following statements must be true if Al's has a higher PEG ratio than Ben's?
A. Al's has more net income than Ben's.
B. Ben's is increasing its earnings at a faster rate than the Al's.
C. Al's has a higher market value per share than does Ben's.
D. Ben's has a lower market-to-book ratio than Al's.
E. Al's has a higher net income than Ben's.

36. Tobin's Q re lates the mar

ket value of a m's
fir assets to hich
w one of the llowing?
fo
A. initial cost of creating the firm
B. current book value of the firm
C. average asset value of similar firms
D. average market value of similar firms
E. today's cost to duplicate those assets

37. The price-sales ratio isspecially

e us
eful when anal
yzing firmshat
t have whic
h one of the follow
ing?
A. volatile market prices
B. negative earnings
C. positive PEG ratios
D. a negative Tobin's Q
E. increasing sales
38. Shareholders probably ha
ve the most int
erest in whic
h one of the follow
ing sets of rati
os?
A. return on assets and profit margin
B. long-term debt and times interest earned
C. price-earnings and debt-equity
D. market-to-book and times interest earned
E. return on equity and price-earnings

39. Which one of theollowing

f ac
curately des
cribes the thr
ee parts of the Duont
P identity?
A. operating efficiency, equity multiplier, and profitability ratio

B. financial
C. equity leverage,profit
multiplier, operating efficiency,
margin, and totaland profitability
asset turnover ratio
D. debt-equity ratio, capital intensity ratio, and profit margin
E. return on assets, profit margin, and equity multiplier

40. An increaseni which of the fol

lowing wi
ll increase th
e return on equit
y, all else con
stant?
I. sales
II. net income
III. depreciation
IV. total equity
A. I only
B. I and II only
C. II and IV only
D. II and III only
E. I, II, and III only

41. Which of het following can be us

ed to compute the ret
urn on equi
ty?
I. Profit margin × Return on assets
II. Return on assets × Equity multiplier
III. Net income/Total equity
IV. Return on assets × Total asset turnover
A. I and III only
B. II and III only
C. II and IV only http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
D. I, II, and III only
E. I, II, III, and IV
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test Bank - slidep

42. The Du Pont identity can be used to help managers answer which of the following questions
related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?A. I and III
only
B. II and IV only

C. I, II, and III onlyD. II, III and IV only

E. I, II, III, and IV

43. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its
cash to decrease its debt while maintaining its current equity and net income. Which one of
the following will decrease as a result of this action?
A. equity multiplier
B. total asset turnover
C. profit margin
D. return on assets
E. return on equity

44. Which one of the following statements is correct?

A. Book values should always be given precedence over market values.
B. Financial statements are frequently used as the basis for performance evaluations.
C. Historical information provides no value to someone who is predicting future performance.
D. Potential lenders place little value on financial statement information.
E. Reviewing financial information over time has very limited value.

45. It is easier to evaluate a firm using financial statements when the firm: A. is a conglomerate.
B. has recently merged with its largest competitor.
C. uses the same accounting procedures as other firms in the industry.
D. has a different fiscal year than other firms in the industry.
E. tends to have many one-time events such as asset sales and property acquisitions.

46. The most acceptable method of evaluating the financial statements of a firm is to compare the
firm's current:
A. financial ratios to the firm's historical ratios.
B. financial statements to the financial statements of similar firms operating in other
C. countries.
D. financial ratios to the average ratios of all firms located within the same geographic area.

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
 E. financial statements to those of larger firms in unrelated industries.

F. financial statements to the projections that were created based on Tobin's Q.

47. Which of the following represent problems encountered when comparing the financial
statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of
business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods.
IV. The two firms may be seasonal in nature and have different fiscal year ends.A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition -...
Test Bank -
slidepdf
48. Wise's Cor
ner Grocer ha
d the followi
ng current acc
ount values. hat
W effect ddithe change in net
working capital have on the firm's cash flows for 2009?

A. net use of cash of $37

B. net use of cash of $83
C. net source of cash of $83
D. net source of cash of $111
E. net source of cash of $135

49. During the ye

ar, Kitche
n Supply incr
eased its accou
nts receivab
le by $130, decr
eased its inve
ntory by
$75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows
for the year?
A. $245 use of cash
B. $165 use of cash
C. $95 use of cash
D. $95 source of cash
E. $165 source of cash
50. A firm gener
ated net incom
e of $878. Theepreciatio
d n expense was 7$4and dividendsere
w paid in the
amount of $25. Accounts payables decreased by $13, accounts receivables increased by $22, inventory
decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net
cash flow from operating activity?
A. $876
B. $902
C. $904
D. $922
E. $930

51. A firm has sal

es of $2,190,etn income of $17
4, net fixed ass
ets of $1,600,
and current sets
as of $720.
The firm has $310 in inventory. What is the common-size statement value of inventory?
A. 13.36 percent
B. 14.16 percent
C. 19.38 percent
D. 30.42 percent
E. 43.06 percent

52. A firm has sal

es of $3,400,etn income of $39
0, total asse
ts of $4,500,nd
a total equityf o
$2,750. Int
erest
expense is $40. What is the common-size statement value of the interest expense?
A. 0.89 percent
B. 1.18 percent
C. 3.69 percent
D. 10.26 percent
E. 14.55 percent

53. Last year, hich

w is used as thesebayear, a firm
had cash of $52,ccounts
a recei
vable of $218,
nventory
i
of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts receivable of $198,
inventory of $527, and net fixed assets of $1,216. What is the common-base year value of accounts
receivable?
A. 0.08
B. 0.10

C.
D. 0.88
0.91 http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te

E. 1.18
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition -...
Test Bank -
slidepdf
54. Russell'
s Deli has cash of
136$, account
s receivablef o
$87, account
s payable of $215,
and inventoryf o
$409. What is the value of the quick ratio?
A. 0.31
B. 0.53
C. 0.71
D. 1.04
E. 1.07

55. Uptown Me n's Wear has accounts payablef o$2,214, inv

entory of $7,9
50, cash of $1,
263, fixed ass
ets of
$8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of the net working
capital to total assets ratio?
A. 0.31
B. 0.42
C. 0.47
D. 0.51
E. 0.56

56. A firm has tot

al assets of $31
1,770 and net ed
fix assets of $167
,532. Theverage
a daily erating
op cost
s
are $2,980. What is the value of the interval measure?
A. 31.47 days
B. 48.40 days
C. 56.22 days
D. 68.05 days
E. 104.62 days

57. A firm as
h a debt-e
quity rati
o of 0.42.
What ishe
t total de
bt ratio?
A. 0.30
B. 0.36
C. 0.44
D. 1.58
E. 2.38

58. A firm has tot

al debt of $4,62
0 and a debt-equi
ty ratio of 0.5
7. What is the lue
va of the totalsets?
as
A. $6,128.05
B. $7,253.40
C. $9,571.95
D. $11,034.00
E. $12,725.26

59. A firm has sales of $68,40

0, costs of $42,900,terest
in paid of $2,100
, and depreciatio
n of $6,500. The tax
rate is 34 percent. What is the value of the cash coverage ratio?
A. 12.14
B. 15.24
C. 17.27
D. 23.41
E. 24.56

60. The BikehopS paid $2,310n interest

i and ,850
$1 in divide
nds last year.
The times terest
in earne
d ratio is
2.2 and the depreciation expense is $460. What is the value of the cash coverage ratio?
A. 1.67
B. 1.80
C. 2.21
D. 2.40
E. 2.52

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - ...
Test Bank - slidepdf

61. Al's Spor

t Store has sal
es of $897,400,
costs of goods ld
soof $628,300
, inventory of208,400
$ , and
accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory
assuming that all sales are on credit?
A. 74.19 days
B. 84.76 days
C. 121.07 days
D. 138.46 days
E. 151.21 days

62. The Flowerhoppe

S has accounts rece
ivable of $3,709,ventory
in of $4,407,
ales
s of $218,640, and tcos
of goods sold of $167,306. How many days does it take the firm to both sell its inventory and collect the
payment on the sale assuming that all sales are on credit?
A. 14.67 days
B. 15.81 days
C. 16.23 days
D. 17.18 days
E. 17.47 days

63. A firm has netorking

w capi
tal of $2,715,
net fixed asset
s of $22,407,ales
s of $31,35
0, and curren
t
liabilities of $3,908. How many dollars worth of sales are generated from every $1 in total assets?
A. $1.08
B. $1.14
C. $1.19
D. $1.26
E. $1.30

64. The Purpl

e Martin has ann
ual sales of $687
,400, total ebt
d of $210,00
0, total equi
ty of $365,000,
and a
profit margin of 5.20 percent. What is the return on assets?
A. 6.22 percent
B. 6.48 percent
C. 7.02 percent
D. 7.78 percent
E. 9.79 percent

65. Reliable Ca
rs has sales of $807,200,taltoassets of $1,105,
100, and a profit margin9.6
of8 percent. The
firm has a total debt ratio of 78 percent. What is the return on equity?
A. 13.09 percent
B. 16.67 percent
C. 17.68 percent
D. 28.56 percent
E. 32.14 percent

66. The Meat Ma rket has $747,

000 in sales.he
T profit mar
gin is 4.1 perc
ent and the firmash7,500 share
s of
stock outstanding. The market price per share is $27. What is the price-earnings ratio?
A. 6.61
B. 8.98
C. 11.42
D. 13.15
E. 14.27

67. Big Guy Sub

s has net incomef $150,980,
o a ice-earni
pr ngs ratio of 12.
8, and earning
s per share of $0.
87.
How many shares of stock are outstanding?
A. 13,558
B. 14,407
C. 165,523
D. 171,000
E. 173,540

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

68. A firm has 160,000 shares oftock

s outstand ing, sales of 1.94
$ million, net incom
e of $126,400, arice-
p
earnings ratio of 18.7, and a book value per share of $9.12. What is the market-to-book ratio?
A. 1.62
B. 1.84
C. 2.23
D. 2.45
E. 2.57

69. Oscar's Dog House has a prof

it margin of 5.
6 percent, a re
turn on assets of2.5
1 percent, and an equity
multiplier of 1.49. What is the return on equity?
A. 17.14 percent
B. 18.63 percent
C. 19.67 percent
D. 21.69 percent
E. 22.30 percent

70. Taylor's Men's Wear has a de

bt-equity ra
tio of 42 percent
, sales of $749
,000, net inc
ome of $41,30
0, and
total debt of $198,400. What is the return on equity?
A. 7.79 percent
B. 8.41 percent
C. 8.74 percent
D. 9.09 percent
E. 9.16 percent

71. A firm has a deb

t-equity rat
io of 57 percent,
a total asset tu
rnover of 1.12
, and a profit ma
rgin of 4.9
percent. The total equity is $511,640. What is the amount of the net income?
A. $28,079
B. $35,143
C. $44,084
D. $47,601
E. $52,418

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

72. Whatis the quick ratio for 2009?

A. 0.56
B. 0.60
C. 1.32
D. 1.67
E. 1.79

73. How many daysof salesare in eceivable

r s? (Use2009 values)
A. 17.08 days
B. 23.33 days
C. 26.49 days
D. 29.41 days
E. 32.97 days

74. What is th
e price-sa
les ratiofor 2009 ifthe marketprice is 18.49
$ per share?
A. 2.43
B. 3.29
C. 3.67
D. 4.12
E. 4.38

75. What is de
bt-equity ratio? (Use 200
9 values)
A. 0.52
B. 0.87
C. 0.94
D. 1.01
E. 1.06

76. What si the cash coverage ratio for 2009?

A. 9.43
B. 10.53

C.
D. 11.64
11.82
E. 12.31

77. What si thereturnon equity? (Use 2009values)

A. 10.26 percent
B. 16.38 percent
C. 20.68 percent
D. 29.96 percent
E. 40.14 percent

78. What si the amount of the dividends paid for 2009?

A. $11,100
B. $15,000
C. $32,600
D. $41,200
E. $45,100

79. What is th
e amount fothe cashlow
f frominvestme
nt activit
y for 2009?
A. $18,100
B. $24,800
C. $29,300
D. $32,000
E. $39,400

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
...Bank - slidepdf

80. What is th
A. 24.18 epercent
net work
ing capita
l to totalassets rat
io for 2009?
B. 36.82 percent
C. 45.49 percent
D. 51.47 percent
E. 65.83 percent

81. How many days on average does

t take
i Precis
ion Tool to sel
l its inventor
y? (Use 2009 val
ues)
A. 164.30 days
B. 187.77 days
C. 219.63 days
D. 247.46 days
E. 283.31 days

82. How many dol

lars of salesre
a being genera
ted from ever
y dollar of net fix
ed assets? (U
se 2009 values.
)

A. $0.88
B. $1.87
C. $2.33
D. $2.59
E. $3.09

83. What si the equi

ty multiplier for 2009?
A. 1.67
B. 1.72
C. 1.88
D. 1.93
E. 2.03

84. What si thetimesinterestearnedratiofor 2009?

A. 9.63
B. 10.12
C. 12.59
D. 14.97
E. 16.05

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
... Bank - slidepdf

85. What isthe retur

n on equ
ity for2009? (Use 2009values)
A. 15.29 percent
B. 16.46 percent
C. 17.38 percent
D. 18.02 percent
E. 18.12 percent

86. What isthe netcash flowfrom investmentactivityfor 2009?

A. -$1,840
B. -$1,680
C. -$80
D. $80
E. $1,840

87. How doesaccounts receivable ffect

a the tatement
s of cash flo
ws for 200
9?
A. a use of $4,218 of cash as an investment activity
B. a source of $807 of cash as an operating activity
C. a use of $4,218 of cash as a financing activity
D. a source of $807 of cash as an investment activity
E. a use of $807 of cash as an operating activity

88. BL Lumb er has earningserp share of $1.2

1. The firm
's earnings ha
ve been increas
ing at an average
rate of 3.1 percent annually and are expected to continue doing so. The firm has 21,500 shares of stock
outstanding at a price per share of $18.70. What is the firm's PEG ratio?
A. 0.48
B. 1.24
C. 2.85
D. 3.97
E. 4.99

89. Townsend nterprises

E has a G
PEratio of 5.3, net incom
e of $49,200, a price-ea
rnings ratio of 17.6,
ndaa

profit
A. 0.33margin of 7.1 percent. What is the earnings growth rate?
percent
B. 1.06 percent
C. 3.32 percent
D. 5.30 percent
E. 10.60 percent

90. A firm has tot

al assets wi
th a current booklue
va of $68,700
, a current ma
rket value of $74
,300, and a
current replacement cost of $75,600. What is the value of Tobin's Q?
A. .85
B. .87
C. .92
D. .95
E. .98

91. Dixie Supp

ly has total ass
ets with a curr
ent book value of 68
$3,900 and a cur
rent replace
ment cost of
$486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?
A. .86
B. .92
C. .96
D. 1.01
E. 1.06

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition -...
Test Bank -
slidepdf
92. Dandelionields
F has a Tobi n's Q of .96.he
T replacem
ent cost of therm's
fi assetss i$225,000 and
het
market value of the firm's debt is $109,000. The firm has 20,000 shares of stock outstanding and a book
value per share of $2.09. What is the market to book ratio?
A. 2.56 times
B. 3.18 times
C. 3.54 times
D. 4.01 times
E. 4.20 times

93. A firm has ann

ual sales of $320
,000, a price
-earnings ra
tio of 24, and a pro
fit margin of.24percent.
There are 14,000 shares of stock outstanding. What is the price-sales ratio?
A. 0.97
B. 1.01
C. 1.08
D. 1.15
E. 1.22

94. Lassiterndustries
I ha
s annual sales of
220,000
$ with 10,000 share
s of stock outsta
nding. Theirmf has a
profit margin of 7.5 percent and a price-sales ratio of 1.20. What is the firm's price-earnings ratio?
A. 14
B. 16
C. 18
D. 20
E. 22

95. Assume a fir

m has a positiv
e cash balancehich
w is increa
sing annually
. Why then is itportant
im to
analyze a statement of cash flows?

96. You need to anal

yze a firm's rformance
pe n irelation tos itpeers. You ncado this either by
omparing
c th
e
firms' balance sheets and income statements or by comparing the firms' ratios. If you only had time to use
one means of comparison which method would you use and why?

97. In general, hat

w does a highobin's
T Q value
ndicate
i and how
reliable doe
s that value ten
d to be?

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
... Bank - slidepdf

98. What val

ue doesthe PEG ratioprovide ot financi
al analys
ts?

99. What value ca

n the price-sal
es ratio provi
de to financia
l managers th
at the price-e
arnings rati
o cannot?

100.It is commonly recommended that the managers of a firm compare the performance of their firm to
that of its peers.
comparisons Increasingly,
of this this is becoming
type can frequently a more
be either difficult
difficult task. Explain
to perform some
or produce of the reasons
misleading results.why

101.The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13 million. The
profit margin is 11 percent. What is the return on equity?
A. 7.42 percent
B. 10.63 percent
C. 11.08 percent
D. 13.31 percent
E. 14.28 percent

102.The Home Supply Co. has a current accounts receivable balance of $300,000. Credit sales for the year
just ended were $1,83
0,000. How many days on averag
e did it take for credit
ustomers
c to pay off the
ir
accounts during this past year?
A. 54.29 days
B. 56.01 days
C. 57.50 days
D. 59.84 days
E. 61.00 days

103.BL Industries has ending inventory of $300,000, and cost of goods sold for the year just ended was
$1,410,000. On average, how long does a unit of inventory sit on the shelf before it is sold?
A. 17.16 days
B. 21.43 days
C. 77.66 days
D. 78.29 days
E. 83.13 days

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition -...
Test Bank -
slidepdf
104.Coulter Supply has a total debt ratio of 0.47. What is the equity multiplier?
A. 0.89
B. 1.13
C. 1.47
D. 1.89
E. 2.13

105.High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a profit margin of
7.5 percent. What is the return on equity?
A. 8.94 percent
B. 10.87 percent
C. 12.69 percent
D. 14.38 percent
E. 15.11 percent

106.Lancaster Toys has a profit margin of 9.6 percent, a total asset turnover of 1.71, and a return on equity of
21.01percent. What is the debt-equity ratio?
A. 0.22
B. 0.28
C. 0.46
D. 0.72
E. 0.78

107.Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total equity is
$560,000. What is the net income?
A. $105,616
B. $148,309
C. $157,136
D. $161,008
E. $164,909

108.Canine
equity isSupply has sales
15 percent. Whatof $2,200, total
is the net assets of $1,400, and a debt-equity ratio of 0.3. Its return on
income?
A. $138.16
B. $141.41
C. $152.09
D. $156.67
E. $161.54

109.Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts receivable
balance of $127,100. Assume that 66 percent of sales are on credit. What is the days' sales in receivables?

A. 21.90 days
B. 27.56 days
C. 33.18 days
D. 35.04 days
E. 36.19 days

110.Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.3. Current liabilities are $700,
sales are $4,440, the profit margin is 9.5 percent, and the return on equity is 19.5 percent. How much does
the firm have in net fixed assets?
A. $4,880.18
B. $5,197.69
C. $5,666.67
D. $5,848.15
E. $6,107.70

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
5/19/2018 Chapter 3 - Fundamentals of Corporate Finance 9th Edition - Test
... Bank - slidepdf

111.A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13 percent. What is the
return on equity?
A. 26 percent
B. 50 percent
C. 65 percent
D. 84 percent
E. 135 percent

112.The Dockside Inn has net income for the most recent year of $8,450. The tax rate was 38 percent. The
firm paid $1,300 in total interest expense and deducted $1,900 in depreciation expense. What was the
cash coverage ratio for the year?
A. 10.48 times
B. 11.48 times
C. 12.39 times
D. 12.95 times
E. 13.07 times

113.Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2, and a
current ratio of 2.9. What is the cost of goods sold?
A. $980,000
B. $1,060,000
C. $1,200,000
D. $1,400,000
E. $1,560,000

http://slidepdf.com/reader/full/chapter-3-fundamentals-of-corporate-finance-9th-edition-te
Chapter 04: Discounted Cash Flow Valuation

Multiple Choice Questions

1. An annuity stream of cash flow payments is a set of:

A. level cash flows occurring each time period for a fixed length of time.
B. level cash flows occurring each time period forever.
C. increasing cash flows occurring each time period for a fixed length of time.
D. increasing cash flows occurring each time period forever.
E. arbitrary cash flows occurring each time period for no more than 10 years.

2. 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. ordinary annuities; early annuities

B. late annuities; straight annuities
C. straight annuities; late annuities
D. annuities due; ordinary annuities
E. ordinary annuities; annuities due

3. An annuity stream where the payments occur forever is called a(n):

A. annuity due.
B. indemnity.
C. perpetuity.
D. amortized cash flow stream.
E. amortization table.

4. The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

A. stated annual interest

B. compound annual interest
C. effective annual interest
D. periodic interest
E. daily interest

1-67
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5. The interest rate expressed as if it were compounded once per year is called the _____ rate.

A. stated interest
B. compound interest
C. effective annual
D. periodic interest
E. daily interest

6. The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A. effective annual
B. annual percentage
C. periodic interest
D. compound interest
E. daily interest

7. Paying off long-term debt by making installment payments is called:

A. foreclosing on the debt.

B. amortizing the debt.
C. funding the debt.
D. calling the debt.
E. None of these.

8. You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical
with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on
the last day of each month. Which one of the following statements is correct concerning these two
annuities?

A. Both annuities are of equal value today.

B. Annuity B is an annuity due.
C. Annuity A has a higher future value than annuity B.
D. Annuity B has a higher present value than annuity A.
E. Both annuities have the same future value as of ten years from today.

9. You are comparing two investment options. The cost to invest in either option is the same today. Both
options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000
the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of
$4,000 each. Which one of the following statements is correct given these two investment options?

A. Both options are of equal value given that they both provide $20,000 of income.
B. Option A is the better choice of the two given any positive rate of return.
C. Option B has a higher present value than option A given a positive rate of return.
D. Option B has a lower future value at year 5 than option A given a zero rate of return.
E. Option A is preferable because it is an annuity due.

1-68
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
10. You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?

I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate of return.

A. II only
B. IV only
C. I and III only
D. II and IV only
E. I, II, and III only

11. A perpetuity differs from an annuity because:

A. perpetuity payments vary with the rate of inflation.

B. perpetuity payments vary with the market rate of interest.
C. perpetuity payments are variable while annuity payments are constant.
D. perpetuity payments never cease.
E. annuity payments never cease.

12. Which one of the following statements concerning the annual percentage rate is correct?

A. The annual percentage rate considers interest on interest.

B. The rate of interest you actually pay on a loan is called the annual percentage rate.
C. The effective annual rate is lower than the annual percentage rate when an interest rate is compounded
quarterly.
D. When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.
E. The annual percentage rate equals the effective annual rate when the rate on an account is designated as
simple interest.

13. Which one of the following statements concerning interest rates is correct?

A. The stated rate is the same as the effective annual rate.

B. An effective annual rate is the rate that applies if interest were charged annually.
C. The annual percentage rate increases as the number of compounding periods per year increases.
D. Banks prefer more frequent compounding on their savings accounts.
E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

1-69
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
14. Which of the following statements concerning the effective annual rate are correct?

I. When making financial decisions, you should compare effective annual rates rather than annual
percentage rates.
II. The more frequently interest is compounded, the higher the effective annual rate.
III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were
compounded daily.
IV. When borrowing and choosing which loan to accept, you should select the offer with the highest
effective annual rate.

A. I and II only
B. I and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

15. The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:

A. .09e - 1.
B. e.09 × q.
C. e × (1 + .09).
D. e.09 - 1.
E. (1 + .09)q.

16. The time value of money concept can be defined as:

A. the relationship between the supply and demand of money.

B. the relationship between money spent versus money received.
C. the relationship between a dollar to be received in the future and a dollar today.
D. the relationship between interest rate stated and amount paid.
E. None of these.

17. Discounting cash flows involves:

A. discounting only those cash flows that occur at least 10 years in the future.
B. estimating only the cash flows that occur in the first 4 years of a project.
C. multiplying expected future cash flows by the cost of capital.
D. discounting all expected future cash flows to reflect the time value of money.
E. taking the cash discount offered on trade merchandise.

1-70
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
18. Compound interest:

A. allows for the reinvestment of interest payments.

B. does not allow for the reinvestment of interest payments.
C. is the same as simple interest.
D. provides a value that is less than simple interest.
E. Both allows for the reinvestment of interest payments and provides a value that is less than simple
interest.

19. An annuity:

A. is a debt instrument that pays no interest.

B. is a stream of payments that varies with current market interest rates.
C. is a level stream of equal payments through time.
D. has no value.
E. None of these.

20. The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of
interest?

A. annual compounding
B. monthly compounding
C. daily compounding
D. continuous compounding
E. It is impossible to tell without knowing the term of the loan.

21. The present value of future cash flows minus initial cost is called:

A. the future value of the project.

B. the net present value of the project.
C. the equivalent sum of the investment.
D. the initial investment risk equivalent value.
E. None of these.

22. Find the present value of $5,325 to be received in one period if the rate is 6.5%.

A. $5,000.00
B. $5,023.58
C. $5,644.50
D. $5,671.13
E. None of these.

1-71
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
23. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded
interest at 7.5% for three years which one will pay more and by how much?

A. Simple interest by $50.00

B. Compound interest by $22.97
C. Compound interest by $150.75
D. Compound interest by $150.00
E. None of these.

24. Bradley Snapp has deposited $6,000 in a guaranteed investment account with a promised rate of 6%
compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a
car after graduation. How much of a down payment will he be able to make?

A. $2,397.00
B. $3,288.00
C. $6,321.32
D. $7,574.86
E. $8,857.59

25. Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate,
what are these payments worth to you when you first start college?

A. $3,797.40
B. $4,167.09
C. $4,198.79
D. $4,258.03
E. $4,279.32

26. You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8%
on your money, what is this prize worth to you today?

A. $87,003.69
B. $87,380.23
C. $87,962.77
D. $88,104.26
E. $90,723.76

27. Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Todd
afford to borrow to buy a car?

A. $6,961.36
B. $8,499.13
C. $8,533.84
D. $8,686.82
E. $9,588.05

1-72
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
28. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two
options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive
payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take
and why?

A. You should accept the payments because they are worth $56,451.91 today.
B. You should accept the payments because they are worth $56,523.74 today.
C. You should accept the payments because they are worth $56,737.08 today.
D. You should accept the $50,000 because the payments are only worth $47,757.69 today.
E. You should accept the $50,000 because the payments are only worth $47,808.17 today.

29. Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for
another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this
employee benefit worth to you today?

A. $13,144.43
B. $15,920.55
C. $16,430.54
D. $16,446.34
E. $16,519.02

30. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments
of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to you today?

A. $180,238.81
B. $201,867.47
C. $210,618.19
D. $223,162.58
E. $224,267.10

31. The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary
periods. The money will be set aside in a separate savings account which pays 3.25% interest compounded
monthly. It deposits the first $1,500 today. If the company had wanted to deposit an equivalent lump sum
today, how much would it have had to deposit?

A. $82,964.59
B. $83,189.29
C. $83,428.87
D. $83,687.23
E. $84,998.01

1-73
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
32. 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% interest per
month. How much money are you borrowing?

A. $113.94
B. $115.65
C. $119.34
D. $119.63
E. $119.96

33. You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day
of each year. What is the value of this annuity today at a 7% discount rate?

A. $84,282.98
B. $87,138.04
C. $90,182.79
D. $96,191.91
E. $116,916.21

34. You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your discount rate
is 8.5%. What is the difference in the present value if you receive these payments at the beginning of each
year rather than at the end of each year?

A. $8,699
B. $9,217
C. $9,706
D. $10,000
E. $10,850

35. You are comparing two annuities with equal present values. The applicable discount rate is 7.5%. One
annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay
each year for twenty years if it pays at the end of each year?

A. $4,651
B. $5,075
C. $5,000
D. $5,375
E. $5,405

1-74
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
36. Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both
Martha and Stewart will receive payments for five years. At an 8% discount rate, what is the difference in
the present value of these two sets of payments?

A. $32.88
B. $40.00
C. $99.01
D. $108.00
E. $112.50

37. What is the future value of $1,000 a year for five years at a 6% rate of interest?

A. $4,212.36
B. $5,075.69
C. $5,637.09
D. $6,001.38
E. $6,801.91

38. What is the future value of $2,400 a year for three years at an 8% rate of interest?

A. $6,185.03
B. $6,847.26
C. $7,134.16
D. $7,791.36
E. $8,414.67

39. Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of
twenty-five years if she earns what she expects?

A. $219,317.82
B. $230,702.57
C. $236,003.38
D. $244,868.92
E. $256,063.66

40. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day
of each year. They both earn a 9% rate of return. What is the difference in their savings account balances at
the end of thirty years?

A. $35,822.73
B. $36,803.03
C. $38,911.21
D. $39,803.04
E. $40,115.31

1-75
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
41. You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9%
rate of interest. What is the amount of each payment?

A. $103.22
B. $103.73
C. $130.62
D. $131.26
E. $133.04

42. You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments
are made monthly. If you pay for the house according to the loan agreement, how much total interest will
you pay?

A. $138,086
B. $218,161
C. $226,059
D. $287,086
E. $375,059

43. The Great Giant Corp. has a management contract with its newly hired president. The contract requires a
lump sum payment of $25 million be paid to the president upon the completion of her first ten years of
service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash
outflow. The company can earn 6.5% on these funds. How much must the company set aside each year for
this purpose?

A. $1,775,042.93
B. $1,798,346.17
C. $1,801,033.67
D. $1,852,617.25
E. $1,938,018.22

44. You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your
retirement savings account. You are conservative and expect to earn 4.5% on your money during your
retirement. How much can you withdraw from your retirement savings each month if you plan to die on the
day you spend your last penny?

A. $2,001.96
B. $2,092.05
C. $2,398.17
D. $2,472.00
E. $2,481.27

1-76
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
45. The McDonald Group purchased a piece of property for $1.2 million. It paid a down payment of 20% in
cash and financed the balance. The loan terms require monthly payments for 15 years at an annual
percentage rate of 7.75% compounded monthly. What is the amount of each mortgage payment?

A. $7,440.01
B. $8,978.26
C. $9,036.25
D. $9,399.18
E. $9,413.67

46. You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%.
If you want to have this debt paid in full within five years, how much must you pay each month?

A. $471.30
B. $473.65
C. $476.79
D. $479.37
E. $480.40

47. You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and
financing the balance for 36 months at 7.9%. What is the amount of each loan payment?

A. $198.64
B. $199.94
C. $202.02
D. $214.78
E. $215.09

48. The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years.
You want to earn a minimum rate of return of 5.5%. What is the most you are willing to pay as a lump sum
today to buy this annuity?

A. $26,988.16
B. $27,082.94
C. $27,455.33
D. $28,450.67
E. $28,806.30

49. Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the
first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9%, what
is the current value of the lease?

A. $15,882.75
B. $15,906.14
C. $15,947.61
D. $16,235.42
E. $16,289.54

1-77
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
70. You are considering a project with the following cash flows:

What is the present value of these cash flows, given an 11% discount rate?

A. $8,695.61
B. $8,700.89
C. $13,732.41
D. $13,812.03
E. $19,928.16

71. You are considering a project with the following cash flows:

What is the present value of these cash flows, given a 3% discount rate?

A. $13,732.41
B. $13,812.03
C. $14,308.08
D. $14,941.76
E. $14,987.69

72. You have some property for sale and have received two offers. The first offer is for $189,000 today in cash.
The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the
applicable discount rate is 8.75%, which offer should you accept and why?

A. You should accept the $189,000 today because it has the higher net present value.
B. You should accept the $189,000 today because it has the lower future value.
C. You should accept the second offer because you will receive $200,000 total.
D. You should accept the second offer because you will receive an extra $11,000.
E. You should accept the second offer because it has a present value of $194,555.42.

73. Your local travel agent is advertising an extravagant global vacation. The package deal requires that you pay
$5,000 today, $15,000 one year from today, and a final payment of $25,000 on the day you leave two years
from today. What is the cost of this vacation in today's dollars if the discount rate is 6%?

A. $39,057.41
B. $41,400.85
C. $43,082.39
D. $44,414.14
E. $46,518.00

1-78
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
74. One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of
buying new equipment four years from today. Today, it is adding another $5,000 to this account. It plans on
making a final deposit of $7,500 to the account next year. How much will be available when it is ready to
buy the equipment, assuming it earns a 7% rate of return?

A. $18,159.65
B. $19,430.84
C. $19,683.25
D. $20,194.54
E. $20,790.99

75. What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash
flows occur at the end of each year.

A. $15,916.78
B. $18,109.08
C. $18,246.25
D. $19,341.02
E. $19,608.07

76. What is the future value of the following cash flows at the end of year 3 if the interest rate is 9%? The cash
flows occur at the end of each year.

A. $15,213.80
B. $15,619.70
C. $15,916.78
D. $16,177.14
E. $17,633.08

77. What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25%? The
cash flows occur at the end of each year.

A. $8,758.04
B. $8,806.39
C. $10,073.99
D. $10,314.00
E. $10,804.36

1-79
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
78. Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will
receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this
money and investing it for her retirement. If Suzette can earn an average of 11% on her investments, how
much will she have in her account if she retires 25 years from today?

A. $536,124.93
B. $541,414.14
C. $546,072.91
D. $570,008.77
E. $595,098.67

79. The Bluebird Company has a $10,000 liability it must pay three years from today.
The company is opening a savings account so that the entire amount will be available when this debt needs
to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the
next three years, starting one year from today. The account pays a 3% rate of return. How much does the
Bluebird Company need to deposit today?

A. $1,867.74
B. $2,079.89
C. $3,108.09
D. $4,276.34
E. $4,642.28

80. The government has imposed a fine on the Not-So-Legal Company. The fine calls for annual payments of
$100,000, $250,000, and $250,000, respectively over the next three years. The first payment is due one year
from today. The government plans to invest the funds until the final payment is collected and then donate
the entire amount, including investment earnings, to a national health center. The government will earn
3.5% on the funds held. How much will the national health center receive three years from today?

A. $613,590.00
B. $614,622.50
C. $615,872.50
D. $616,006.00
E. $619,050.05

81. George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy
students. The trust fund earns a 4.25% rate of return. How much money did Mr. Jefferson contribute to the
fund assuming that only the interest income is distributed?

A. $3,291,613.13
B. $3,529,411.77
C. $3,750,000.00
D. $4,328,970.44
E. $6,375,000.00

1-80
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
82. A 9% preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

A. $0.41
B. $4.50
C. $5.00
D. $45.00
E. $50.00

83. You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust
fund is going to be invested very conservatively so the expected rate of return is only 2.75%. How much
money must you deposit today to fund this gift for your heirs?

A. $1,333,333.33
B. $1,375,000.00
C. $1,425,000.00
D. $1,666,666.67
E. $1,818,181.82

84. You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of
return are you earning on this policy?

A. 3.25%
B. 3.33%
C. 3.43%
D. 3.50%
E. 3.67%

85. The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000 a year
forever. The cost of the policy is $285,000. What is the rate of return on this policy?

A. 2.85%
B. 3.25%
C. 3.46%
D. 3.51%
E. 3.60%

86. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4%
rate of return. How much will you receive each year if the trust is required to pay you all of the interest
earnings on an annual basis?

A. $3,750
B. $4,000
C. $4,500
D. $5,400
E. $6,000

1-81
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
87. The preferred stock of ABC Co. offers an 8.4% rate of return. The stock is currently priced at $50.00 per
share. What is the amount of the annual dividend?

A. $2.10
B. $4.20
C. $5.00
D. $6.40
E. $8.60

88. Your credit card company charges you 1.5% per month. What is the annual percentage rate on your
account?

A. 12.00%
B. 15.00%
C. 15.39%
D. 18.00%
E. 19.56%

89. What is the annual percentage rate on a loan with a stated rate of 2% per quarter?

A. 2.00%
B. 2.71%
C. 4.04%
D. 8.00%
E. 8.24%

90. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded monthly.
What is the annual percentage rate on your account?

A. 11.50%
B. 12.00%
C. 13.00%
D. 13.80%
E. 14.71%

1-82
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 1-83
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.