Corporate Finance

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.
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.

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.

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

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.

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
 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.
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.

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
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 the above.
E. None of the above.
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 A and B.
E. All of the above.

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.

Chapter 02 Financial Statements and Cash Flow Answer Key

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.

4. 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

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

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

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.

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.
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 the above.
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

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 the above
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 the above.

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 A and B.
E. Both B and C.

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 the above.

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

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

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 the above.

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 the above.

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 the above 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 the above.
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 the above.

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 the above.

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 the above.
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 the above.

52. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. What is the
amount of the current assets?
A. $500
B. $550
C. $600
D. $1,150
E. $1,200

Current assets = $300 + $200 + $50 = $550

53. Total assets are $900, fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the amount of net working capital?
A. $0
B. $100
C. $200
D. $300
E. $400

Net working capital = $900 - $600 - $200 = $100

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 $400 and
could be sold to a competitor for that amount. The firm has $50 in cash and customers owe it $300. What is the accounting value of its liquid
assets?
A. $50
B. $350
C. $700
D. $750
E. $1,000

Liquid assets = $400 + $50 + $300 = $750

55. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $1,800 on today's balance
sheet but could actually be sold for $2,000. Net working capital is $200 and long-term debt is $800. Assuming the equipment is the firm's only
fixed asset, what is the book value of shareholders' equity?
A. $200
B. $800
C. $1,200
D. $1,400
E. The answer cannot be determined from the information provided

Book value of shareholders' equity = $1,800 + $200 - $800 = $1,200

1. One key reason a long-term financial plan is developed is because:
A. the plan determines your financial policy.
B. the plan determines your investment policy.
C. there are direct connections between achievable corporate growth and the financial policy.
D. there is unlimited growth possible in a well-developed financial plan.
E. None of the above.

2. Projected future financial statements are called:

A. plug statements.
B. pro forma statements.
C. reconciled statements.
D. aggregated statements.
E. none of the above.

3. The percentage of sales method:

A. requires that all accounts grow at the same rate.
B. separates accounts that vary with sales and those that do not vary with sales.
C. allows the analyst to calculate how much financing the firm will need to support the predicted sales level.
D. Both A and B.
E. Both B and C.

4. A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively.
A. tax reconciliation statement
B. statement of standardization
C. statement of cash flows
D. common-base year statement
E. common-size statement

5. Relationships determined from a firm's financial information and used for comparison purposes are known as:
A. financial ratios.
B. comparison statements.
C. dimensional analysis.
D. scenario analysis.
E. solvency analysis.

5. Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

7. The current ratio is measured as:

A. current assets minus current liabilities.
B. current assets divided by current liabilities.
C. current liabilities minus inventory, divided by current assets.
D. cash on hand divided by current liabilities.
E. current liabilities divided by current assets.

8. The quick ratio is measured as:

A. current assets divided by current liabilities.
B. cash on hand plus current liabilities, divided by current assets.
C. current liabilities divided by current assets, plus inventory.
D. current assets minus inventory, divided by current liabilities.
E. current assets minus inventory minus current liabilities.

9. The cash ratio is measured as:

A. current assets divided by current liabilities.
B. current assets minus cash on hand, divided by current liabilities.
C. current liabilities plus current assets, divided by cash on hand.
D. cash on hand plus inventory, divided by current liabilities.
E. cash on hand divided by current liabilities.
10. Ratios that measure a firm's financial leverage are known as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

11. The financial ratio measured as total assets minus total equity, divided by total assets, is the:
A. total debt ratio.
B. equity multiplier.
C. debt-equity ratio.
D. current ratio.
E. times interest earned ratio.

12. The debt-equity ratio is measured as total:

A. equity minus total debt.
B. equity divided by total debt.
C. debt divided by total equity.
D. debt plus total equity.
E. debt minus total assets, divided by total equity.

13. The equity multiplier ratio is measured as total:

A. equity divided by total assets.
B. equity plus total debt.
C. assets minus total equity, divided by total assets.
D. assets plus total equity, divided by total debt.
E. assets divided by total equity.

14. The financial ratio measured as earnings before interest and taxes, divided by interest expense is the:
A. cash coverage ratio.
B. debt-equity ratio.
C. times interest earned ratio.
D. gross margin.
E. total debt ratio.

15. The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by interest expense, is the:
A. cash coverage ratio.
B. debt-equity ratio.
C. times interest earned ratio.
D. gross margin.
E. total debt ratio.

16. Ratios that measure how efficiently a firm uses its assets to generate sales are known as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

17. The inventory turnover ratio is measured as:

A. total sales minus inventory.
B. inventory times total sales.
C. cost of goods sold divided by inventory.
D. inventory times cost of goods sold.
E. inventory plus cost of goods sold.

18. The financial ratio days' sales in inventory is measured as:

A. inventory turnover plus 365 days.
B. inventory times 365 days.
C. inventory plus cost of goods sold, divided by 365 days.
D. 365 days divided by the inventory.
E. 365 days divided by the inventory turnover.
19. The receivables turnover ratio is measured as:
A. sales plus accounts receivable.
B. sales divided by accounts receivable.
C. sales minus accounts receivable, divided by sales.
D. accounts receivable times sales.
E. accounts receivable divided by sales.

20. The financial ratio days' sales in receivables is measured as:

A. receivables turnover plus 365 days.
B. accounts receivable times 365 days.
C. accounts receivable plus sales, divided by 365 days.
D. 365 days divided by the receivables turnover.
E. 365 days divided by the accounts receivable.

21. The total asset turnover ratio is measured as:

A. sales minus total assets.
B. sales divided by total assets.
C. sales times total assets.
D. total assets divided by sales.
E. total assets plus sales.

22. Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _____
ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. market value

23. The financial ratio measured as net income divided by sales is known as the firm's:
A. profit margin.
B. return on assets.
C. return on equity.
D. asset turnover.
E. earnings before interest and taxes.

24. The financial ratio measured as net income divided by total assets is known as the firm's:
A. profit margin.
B. return on assets.
C. return on equity.
D. asset turnover.
E. earnings before interest and taxes.

25. The financial ratio measured as net income divided by total equity is known as the firm's:
A. profit margin.
B. return on assets.
C. return on equity.
D. asset turnover.
E. earnings before interest and taxes.

26. The financial ratio measured as the price per share of stock divided by earnings per share is known as the:
A. return on assets.
B. return on equity.
C. debt-equity ratio.
D. price-earnings ratio.
E. Du Pont identity.

27. The market-to-book ratio is measured as:

A. total equity divided by total assets.
B. net income times market price per share of stock.
C. net income divided by market price per share of stock.
D. market price per share of stock divided by earnings per share.
E. market value of equity per share divided by book value of equity per share.
28. The _____ breaks down return on equity into three component parts.
A. Du Pont identity
B. return on assets
C. statement of cash flows
D. asset turnover ratio
E. equity multiplier

29. The External Funds Needed (EFN) equation does not measure the:
A. additional asset requirements given a change in sales.
B. additional total liabilities raised given the change in sales.
C. rate of return to shareholders given the change in sales.
D. net income expected to be earned given the change in sales.
E. None of the above.

30. To calculate sustainable growth rate without using return on equity, the analyst needs the:
A. profit margin.
B. payout ratio.
C. debt-to-equity ratio.
D. total asset turnover.
E. All of the above.

31. Growth can be reconciled with the goal of maximizing firm value:
A. because greater growth always adds to value.
B. because growth must be an outcome of decisions that maximize NPV.
C. because growth and wealth maximization are the same.
D. because growth of any type cannot decrease value.
E. None of the above.
32. 32. Sustainable growth can be determined by the:
A. profit margin, total asset turnover and the price to earnings ratio.
B. profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.
C. Total growth less capital gains growth.
D. Either A or B.
E. None of the above.

33. Which of the following will increase sustainable growth?

A. Buy back existing stock
B. Decrease debt
C. Increase profit margin
D. Increase asset requirement or asset turnover ratio
E. Increase dividend payout ratio

34. The main objective of long-term financial planning models is to:

A. determine the asset requirements given the investment activities of the firm.
B. plan for contingencies or uncertain events.
C. determine the external financing needs.
D. All of the above.
E. None of the above.

35. On a common-size balance sheet, all _____ accounts are shown as a percentage of _____.
A. income; total assets
B. liability; net income
C. asset; sales
D. liability; total assets
E. equity; sales

36. Which one of the following statements is correct concerning ratio analysis?
A. A single ratio is often computed differently by different individuals.
B. Ratios do not address the problem of size differences among firms.
C. Only a very limited number of ratios can be used for analytical purposes.
D. Each ratio has a specific formula that is used consistently by all analysts.
E. Ratios can not be used for comparison purposes over periods of time.
37. Which of the following are liquidity ratios?
I. cash coverage ratio
II. current ratio
III. quick ratio
IV. inventory turnover
A. II and III only
B. I and II only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV

38. An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?
A. accounts payable
B. cash
C. inventory
D. accounts receivable
E. fixed assets

39. A supplier, who requires payment within ten days, is most concerned with which one of the following ratios when granting credit?
A. current
B. cash
C. debt-equity
D. quick
E. total debt

40. A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every:
A. $1 in equity.
B. $1 in total sales.
C. $1 in current assets.
D. $.53 in equity.
E. $.53 in total assets.

41. The long-term debt ratio is probably of most interest to a firm's:

A. credit customers.
B. employees.
C. suppliers.
D. mortgage holder.
E. shareholders.
42. A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio of _____ and a times interest
earned ratio of _____.
A. .75; .75
B. .50; 1.00
C. .45; 1.75
D. .40; 2.50
E. .35; 3.00

43. From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A. times interest earned ratio
B. cash coverage ratio
C. cash ratio
D. quick ratio
E. Interval measure

44. The higher the inventory turnover measure, the:

A. faster a firm sells its inventory.
B. faster a firm collects payment on its sales.
C. longer it takes a firm to sell its inventory.
D. greater the amount of inventory held by a firm.
E. lesser the amount of inventory held by a firm.

45. Which one of the following statements is correct if a firm has a receivables turnover measure of 10?
A. It takes a firm 10 days to collect payment from its customers.
B. It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.
C. It takes a firm 36.5 days to pay its creditors.
D. The firm has an average collection period of 36.5 days.
E. The firm has ten times more in accounts receivable than it does in cash.
46. A total asset turnover measure of 1.03 means that a firm has $1.03 in:
A. total assets for every $1 in cash.
B. total assets for every $1 in total debt.
C. total assets for every $1 in equity.
D. sales for every $1 in total assets.
E. long-term assets for every $1 in short-term assets.

47. Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a _____ of 5%.
A. return on assets
B. return on equity
C. profit margin
D. Du Pont measure
E. total asset turnover

48. If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:
A. has no debt of any kind.
B. is using its assets as efficiently as possible.
C. has no net working capital.
D. also has a current ratio of 10.
E. has an equity multiplier of 2.

49. If shareholders want to know how much profit a firm is making on their entire investment in the firm, the shareholders should look at the:
A. profit margin.
B. return on assets.
C. return on equity.
D. equity multiplier.
E. earnings per share.

50. BGL Enterprises increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant,
the:
A. return on equity will increase.
B. return on assets will decrease.
C. profit margin will decline.
D. equity multiplier will decrease.
E. price-earnings ratio will increase.

51. The only difference between Joe's and Moe's is that Joe's has old, fully depreciated equipment. Moe's just purchased all new equipment
which will be depreciated over eight years. Assuming all else equal:
A. Joe's will have a lower profit margin.
B. Joe's will have a lower return on equity.
C. Moe's will have a higher net income.
D. Moe's will have a lower profit margin.
E. Moe's will have a higher return on assets.

52. Last year, Alfred's Automotive had a price-earnings ratio of 15. This year, the price earnings ratio is 18. Based on this information, it can be
stated with certainty that:
A. the price per share increased.
B. the earnings per share decreased.
C. investors are paying a higher price for each share of stock purchased.
D. investors are receiving a higher rate of return this year.
E. either the price per share, the earnings per share, or both changed.

53. Turner's Inc. has a price-earnings ratio of 16. Alfred's Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of
stock in Alfred's:
A. has a higher market price than one share of stock in Turner's.
B. has a higher market price per dollar of earnings than does one share of Turner's.
C. sells at a lower price per share than one share of Turner's.
D. represents a larger percentage of firm ownership than does one share of Turner's stock.
E. earns a greater profit per share than does one share of Turner's stock.
54. Which two of the following are most apt to cause a firm to have a higher price-earnings ratio?
I. slow industry outlook
II. high prospect of firm growth
III. very low current earnings
IV. investors with a low opinion of the firm
A. I and II only
B. II and III only
C. II and IV only
D. I and III only
E. III and IV only

55. Vinnie's Motors has a market-to-book ratio of 3. The book value per share is $4.00. Holding market-to-book constant, a $1 increase in the
book value per share will:
A. cause the accountants to increase the equity of the firm by an additional $2.
B. increase the market price per share by $1.
C. increase the market price per share by $12.
D. tend to cause the market price per share to rise.
E. only affect book values but not market values.

56. Which one of the following sets of ratios applies most directly to shareholders?
A. return on assets and profit margin
B. quick ratio and times interest earned
C. price-earnings ratio and debt-equity ratio
D. market-to-book ratio and price-earnings ratio
E. cash coverage ratio and times equity multiplier

57. The three parts of the Du Pont identity can be generally described as:
I. operating efficiency, asset use efficiency and firm profitability.
II. financial leverage, operating efficiency and asset use efficiency.
III. the equity multiplier, the profit margin and the total asset turnover.
IV. the debt-equity ratio, the capital intensity ratio and the profit margin.
A. I and II only
B. II and III only
C. I and IV only
D. I and III only
E. III and IV only

58. If a firm decreases its operating costs, all else constant, then:
A. the profit margin increases while the equity multiplier decreases.
B. the return on assets increases while the return on equity decreases.
C. the total asset turnover rate decreases while the profit margin increases.
D. both the profit margin and the equity multiplier increase.
E. both the return on assets and the return on equity increase.

59. Which one of the following statements is correct?

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

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

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 the above.

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.
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.

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 the above.
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.

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 A and D.

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 the above.

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 the above.

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 the above.

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 the above.

Simple Interest = $10,000 (.08)(3) = $2,400;

Compound Interest = $10,000((1.075)3 - 1) = $2,422.97;
Difference = $2,422.97 - $2,400 = $22.97

24. Bradley Snapp has deposited $7,000 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. $1,960.00
B. $2,175.57
C. $8,960.00
D. $8,837.34
E. $9,175.57

$7,000 (1.06)4 = $8,837.34

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
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

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
Difference = $111,040.97 - $102,341.91 = $8,699.06 = $8,699 (rounded)
Note: The difference = .085  $102,341.91 = $8,699.06

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

Because each payment is received one year later, then the cash flow has to equal: $5,000  (1 + .075) = $5,375

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
Difference = $4,964.72 - $4,931.84 = $32.88

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

Difference = $445,725.65 - $408,922.62 = $36,803.03

Note: Difference = $408,922.62  .09 = $36,803.03

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

Total interest = ($1,041.83  30  12) - $149,000 = $226,058.80 = $226,059 (rounded)

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
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

Amount financed = $1,200,000  (1 - .2) = $960,000

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

Amount financed = $6,890 - $500 = $6,390

 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

50. Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each
year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35%?
A. $36,811.30
B. $37,557.52
C. $39,204.04
D. $39,942.42
E. $40,006.09
 51. Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the
interest had compounded annually?
A. $15.45
B. $15.97
C. $16.65
D. $17.09
E. $21.67

Ending value at 4% simple interest = $1,000 + ($1,000  .04  5) = $1,200.00; Ending value at 4% compounded annually = $1,000  (1 +.04)5
= $1,216.65;
Difference = $1,216.65 - $1,200.00 = $16.65

52. Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on
the first day of each year starting today. The firm can earn a 4.7% rate of return. How much does the firm have to save each year to achieve its
goal?
A. $75,966.14
B. $76,896.16
C. $78,004.67
D. $81.414.14
E. $83,333.33

53. Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to his retirement account. His employer
contributes an additional 50% of the amount contributed by Sam. If both Sam and his employer continue to do this and Sam can earn a monthly
rate of ½ of 1 percent, how much will he have in his retirement account 35 years from now?
A. $199,45.944
B. $200,456.74
C. $249,981.21
D. $299,189.16
E. $300,685.11

54. You are considering an annuity which costs $100,000 today. The annuity pays $6,000 a year. The rate of return is 4.5%. What is the length
of the annuity time period?
A. 24.96 years
B. 29.48 years
C. 31.49 years
D. 33.08 years
E. 38.00 years
1. The difference between the present value of an investment and its cost is the:
A. net present value.
B. internal rate of return.
C. payback period.
D. profitability index.
E. discounted payback period.

2. Which one of the following statements concerning net present value (NPV) is correct?
A. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B. An investment should be accepted only if the NPV is equal to the initial cash flow.
C. An investment should be accepted if the NPV is positive and rejected if it is negative.
D. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and
therefore should always be accepted.
E. Any project that has positive cash flows for every time period after the initial investment should be accepted.

3. The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
A. net present value.
B. internal rate of return.
C. payback period.
D. profitability index.
E. discounted cash period.

4. Which one of the following statements is correct concerning the payback period?
A. An investment is acceptable if its calculated payback period is less than some pre-specified period of time.
B. An investment should be accepted if the payback is positive and rejected if it is negative.
C. An investment should be rejected if the payback is positive and accepted if it is negative.
D. An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.
E. An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

5. The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:
A. net present value.
B. internal rate of return.
C. payback period.
D. discounted profitability index.
E. discounted payback period.

6. The discounted payback rule states that you should accept projects:
A. which have a discounted payback period that is greater than some pre-specified period of time.
B. if the discounted payback is positive and rejected if it is negative.
C. only if the discounted payback period equals some pre-specified period of time.
D. if the discounted payback period is less than some pre-specified period of time.
E. only if the discounted payback period is equal to zero.

7. The discount rate that makes the net present value of an investment exactly equal to zero is called the:
A. external rate of return.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. equalizer.

8. 8. An investment is acceptable if its IRR:

A. is exactly equal to its net present value (NPV).
B. is exactly equal to zero.
C. is less than the required return.
D. exceeds the required return.
E. is exactly equal to 100%.
9. The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.
A. net present value profiling
B. operational ambiguity
C. mutually exclusive investment decision
D. issues of scale
E. multiple rates of return

Difficulty level: Medium

Topic: MULTIPLE RATES OF RETURN
Type: DEFINITIONS
10. A situation in which accepting one investment prevents the acceptance of another investment is called the:
A. net present value profile.
B. operational ambiguity decision.
C. mutually exclusive investment decision.
D. issues of scale problem.
E. multiple choices of operations decision.

11. The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A. net present value.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. profile period.

12. An investment is acceptable if the profitability index (PI) of the investment is:
A. greater than one.
B. less than one.
C. greater than the internal rate of return (IRR).
D. less than the net present value (NPV).
E. greater than a pre-specified rate of return.

13. All else constant, the net present value of a typical investment project increases when:
A. the discount rate increases.
B. each cash inflow is delayed by one year.
C. the initial cost of a project increases.
D. the rate of return decreases.
E. all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project.

14. The primary reason that company projects with positive net present values are considered acceptable is that:
A. they create value for the owners of the firm.
B. the project's rate of return exceeds the rate of inflation.
C. they return the initial cash outlay within three years or less.
D. the required cash inflows exceed the actual cash inflows.
E. the investment's cost exceeds the present value of the cash inflows.

15. If a project has a net present value equal to zero, then:

I. the present value of the cash inflows exceeds the initial cost of the project.
II. the project produces a rate of return that just equals the rate required to accept the project.
III. the project is expected to produce only the minimally required cash inflows.
IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value.
A. II and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, and III only

16. Net present value:

A. cannot be used when deciding between two mutually exclusive projects.
B. is more useful to decision makers than the internal rate of return when comparing different sized projects.
C. is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management.
D. is not an as widely used tool as payback and discounted payback.
E. is very similar in its methodology to the average accounting return.

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

A. it considers the time value of money.
B. all relevant cash flows are included in the analysis.
C. it is easy and quick to calculate.
D. it is the most desirable of all the available analytical methods from a financial perspective.
E. it produces better decisions than those made using either NPV or IRR.

18. The advantages of the payback method of project analysis include the:
I. application of a discount rate to each separate cash flow.
II. bias towards liquidity.
III. ease of use.
IV. arbitrary cutoff point.
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. II, III, and IV only
19. All else equal, the payback period for a project will decrease whenever the:
A. initial cost increases.
B. required return for a project increases.
C. assigned discount rate decreases.
D. cash inflows are moved earlier in time.
E. duration of a project is lengthened.

20. The discounted payback period of a project will decrease whenever the:
A. discount rate applied to the project is increased.
B. initial cash outlay of the project is increased.
C. time period of the project is increased.
D. amount of each project cash inflow is increased.
E. costs of the fixed assets utilized in the project increase.

21. The discounted payback rule may cause:

A. some positive net present value projects to be rejected.
B. the most liquid projects to be rejected in favor of less liquid projects.
C. projects to be incorrectly accepted due to ignoring the time value of money.
D. some projects with negative net present values to be accepted.
E. Both A and D.

22. The internal rate of return (IRR):

I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II. is the rate generated solely by the cash flows of an investment.
III. is the rate that causes the net present value of a project to exactly equal zero.
IV. can effectively be used to analyze all investment scenarios.
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV

23. The internal rate of return for a project will increase if:
A. the initial cost of the project can be reduced.
B. the total amount of the cash inflows is reduced.
C. each cash inflow is moved such that it occurs one year later than originally projected.
D. the required rate of return is reduced.
E. the salvage value of the project is omitted from the analysis.

24. The internal rate of return is:

A. more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects.
B. equivalent to the discount rate that makes the net present value equal to one.
C. difficult to compute without the use of either a financial calculator or a computer.
D. dependent upon the interest rates offered in the marketplace.
E. a better methodology than net present value when dealing with unconventional cash flows.

25. The internal rate of return tends to be:

A. easier for managers to comprehend than the net present value.
B. extremely accurate even when cash flow estimates are faulty.
C. ignored by most financial analysts.
D. used primarily to differentiate between mutually exclusive projects.
E. utilized in project analysis only when multiple net present values apply.

26. You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis, you
should compute the incremental IRR by determining:
A. the internal rate of return for the cash flows of each project.
B. the net present value of each project using the internal rate of return as the discount rate.
C. the discount rate that equates the discounted payback periods for each project.
D. the discount rate that makes the net present value of each project equal to 1.
E. the internal rate of return for the differences in the cash flows of the two projects.

27. Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:
A. how the incremental IRR varies with changes in the discount rate.
B. how decisions concerning mutually exclusive projects are derived.
C. how the duration of a project affects the decision as to which project to accept.
D. how the payback period and the initial cash outflow of a project are related.
E. how the profitability index and the net present value are related.
28. The profitability index is closely related to:
A. payback.
B. discounted payback.
C. average accounting return.
D. net present value.
E. internal rate of return.

29. Analysis using the profitability index:

A. frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.
B. is useful as a decision tool when investment funds are limited.
C. cannot be used to aid capital rationing.
D. utilizes the same basic variables as those used in the average accounting return.
E. produces results which typically are difficult to comprehend or apply.

30. If you want to review a project from a benefit-cost perspective, you should use the _______ method of analysis.
A. net present value
B. payback
C. internal rate of return
D. average accounting return
E. profitability index

31. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
A. accepted because the internal rate of return is positive.
B. accepted because the profitability index is greater than 1.
C. accepted because the profitability index is negative.
D. rejected because the internal rate of return is negative.
E. rejected because the net present value is negative.
32. Which one of the following is the best example of two mutually exclusive projects?
A. planning to build a warehouse and a retail outlet side by side.
B. buying sufficient equipment to manufacture both desks and chairs simultaneously.
C. using an empty warehouse for storage or renting it entirely out to another firm.
D. using the company sales force to promote sales of both shoes and socks.
E. buying both inventory and fixed assets using funds from the same bond issue.

33. The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail
Center. Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether to build
the book outlet or the restaurant, management should rely most heavily on the analysis results from the _____ method of analysis.
A. profitability index
B. internal rate of return
C. payback
D. net present value
E. accounting rate of return

34. When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:
A. independent.
B. marginally profitable.
C. mutually exclusive.
D. acceptable.
E. internally profitable.

35. Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.

Matt has been asked for his best recommendation given this information. His recommendation should be to accept:
A. project B because it has the shortest payback period.
B. both projects as they both have positive net present values.
C. project A and reject project B based on their net present values.
D. project B and reject project A based on other criteria not mentioned in the problem.
E. project B and reject project A based on both the payback period and the average accounting return.

36. Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other
methods?
A. The other methods help validate whether or not the results from the net present value analysis are reliable.
B. You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept
indicators.
C. You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows.
D. The internal rate of return must always indicate acceptance since this is the best method from a financial perspective.
E. The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure
this aspect of a project.

37. In actual practice, managers may use the:

I. IRR because the results are easy to communicate and understand.
II. payback because of its simplicity.
III. net present value because it is considered by many to be the best method of analysis.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
E. None of the above
38. No matter how many forms of investment analysis you do:
A. the actual results from a project may vary significantly from the expected results.
B. the internal rate of return will always produce the most reliable results.
C. a project will never be accepted unless the payback period is met.
D. the initial costs will generally vary considerably from the estimated costs.
E. only the first three years of a project ever affect its final outcome.
39. Which of the following methods of project analysis are biased towards short-term projects?
I. internal rate of return
II. net present value
III. payback
IV. discounted payback
A. I and II only
B. III and IV only
C. II and III only
D. I and IV only
E. II and IV only

40. If a project is assigned a required rate of return equal to zero, then:

A. the timing of the project's cash flows has no bearing on the value of the project.
B. the project will always be accepted.
C. the project will always be rejected.
D. whether the project is accepted or rejected will depend on the timing of the cash flows.
E. the project can never add value for the shareholders.

41. You are considering a project with the following data:

Internal rate of return 8.7%
Profitability ratio .98
Net present value -$393
Payback period 2.44 years
Required return 9.5%
Which one of the following is correct given this information?
A. The discount rate used in computing the net present value must have been less than 8.7%.
B. The discounted payback period will have to be less than 2.44 years.
C. The discount rate used to compute the profitability ratio was equal to the internal rate of return.
D. This project should be accepted based on the profitability ratio.
E. This project should be rejected based on the internal rate of return.

42. Accepting positive NPV projects benefits the stockholders because:

A. it is the most easily understood valuation process.
B. the present value of the expected cash flows are equal to the cost.
C. the present value of the expected cash flows are greater than the cost.
D. it is the most easily calculated.
E. None of the above.

43. Which of the following does not characterize NPV?

A. NPV does not explicitly incorporate risk into the analysis.
B. NPV incorporates all relevant cash flow information.
C. NPV uses all of the project's cash flows.
D. NPV discounts all future cash flows.
E. Using NPV will lead to decisions that maximize shareholder wealth.

44. The payback period rule:

A. discounts cash flows.
B. ignores initial cost.
C. always uses all possible cash flows in its calculation.
D. Both A and C.
E. None of the above.

45. The payback period rule accepts all investment projects in which the payback period for the cash flows is:
A. greater than one.
B. greater than the cutoff point.
C. less than the cutoff point.
D. positive.
E. None of the above.

46. The payback period rule is a convenient and useful tool because:
A. it provides a quick estimate of how rapidly the initial investment will be recouped.
B. results of a short payback rule decision will be quickly seen.
C. it does not have to take into account time value of money.
D. All of the above.
E. None of the above.
47. The discounted payback period rule:
A. considers the time value of money.
B. discounts the cutoff point.
C. ignores uncertain cash flows.
D. is preferred to the NPV rule.
E. None of the above.

48. The payback period rule:

A. determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule.
B. determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year.
C. requires an arbitrary choice of a cutoff point.
D. varies the cutoff point with the interest rate.
E. Both A and D.

1. A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon

2. An asset characterized by cash flows that increase at a constant rate forever is called a:
A. growing perpetuity.
B. growing annuity.
C. common annuity.
D. perpetuity due.
E. preferred stock.

3. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

4. The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

5. The specified date on which the principal amount of a bond is repaid is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

6. The rate of return required by investors in the market for owning a bond is called the:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.

7. The annual coupon of a bond divided by its face value is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.
8. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.
A. par value
B. discount
C. premium
D. zero coupon
E. floating rate

9. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.
A. par
B. discount
C. premium
D. zero coupon
E. floating rate

10. The relationship between nominal rates, real rates, and inflation is known as the:
A. Miller and Modigliani theorem.
B. Fisher effect.
C. Gordon growth model.
D. term structure of interest rates.
E. interest rate risk premium.

11. The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation premium.
E. interest rate risk premium.

12. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price
appreciation.
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk

13. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in
the amount of _____ each.
A. $1,007; $70
B. $1,070; $35
C. $1,070; $70
D. $1,000; $35
E. $1,000; $70

14. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
A. a premium; higher than
B. a premium; equal to
C. at par; higher than
D. at par; less than
E. a discount; higher than

15. All else constant, a coupon bond that is selling at a premium, must have:
A. a coupon rate that is equal to the yield to maturity.
B. a market price that is less than par value.
C. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
E. a coupon rate that is less than the yield to maturity.
16. The market price of a bond is equal to the present value of the:
A. face value minus the present value of the annuity payments.
B. annuity payments plus the future value of the face amount.
C. face value plus the present value of the annuity payments.
D. face value plus the future value of the annuity payments.
E. annuity payments minus the face value of the bond.

17. American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The company plans to issue
the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value
of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8%.
A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, III, and IV only

18. The newly issued bonds of the Wynslow Corp. offer a 6% coupon with semiannual interest payments. The bonds are currently priced at par
value. The effective annual rate provided by these bonds must be:
A. equal to 3%.
B. greater than 3% but less than 4%.
C. equal to 6%.
D. greater than 6% but less than 7%.
E. equal to 12%.

19. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the
current market rate for this type and quality of bond is 7.5%, then you would expect:
A. the bond issuer to increase the amount of each interest payment on these bonds.
B. the yield to maturity to remain constant due to the fixed coupon rate.
C. to realize a capital loss if you sold the bond at the market price today.
D. today's market price to exceed the face value of the bond.
E. the current yield today to be less than 7%.

20. A bond with semi-annual interest payments, all else equal, would be priced _________ than one with annual interest payments.
A. higher
B. lower
C. the same
D. it is impossible to tell
E. either higher or the same

21. A zero coupon bond:

A. is sold at a large premium.
B. has a price equal to the future value of the face amount given a specified rate of return.
C. can only be issued by the U.S. Treasury.
D. has less interest rate risk than a comparable coupon bond.
E. has implicit interest which is calculated by amortizing the loan.

22. The total interest paid on a zero-coupon bond is equal to:

A. zero.
B. the face value minus the issue price.
C. the face value minus the market price on the maturity date.
D. $1,000 minus the face value.
E. $1,000 minus the par value.

23. The yield to maturity is:

A. the rate that equates the price of the bond with the discounted cash flows.
B. the expected rate to be earned if held to maturity.
C. the rate that is used to determine the market price of the bond.
D. equal to the current yield for bonds priced at par.
E. All of the above.
24. Face value is:
A. always higher than current price.
B. always lower than current price.
C. the same as the current price.
D. the coupon amount.
E. None of the above.

25. One basis point is equal to:

A. .01%.
B. .10%.
C. 1.0%.
D. 10%.
E. 100%.

26. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the estimated:
A. yield to maturity.
B. difference between the current yield and the yield to maturity.
C. difference between the bond's yield and the yield of a particular Treasury issue.
D. range of yields to maturity provided by the bond over its life to date.
E. difference between the yield to call and the yield to maturity.

27. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bond pays:
A. $127.50 in July and January.
B. $63.75 in July and January.
C. $127.50 in July.
D. $63.75 in July.
E. None of the above.

28. If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will _____.
A. discount; decrease this discount.
B. discount; increase this discount.
C. premium; decrease this premium.
D. premium; increase this premium.
E. None of the above.

29. The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate, and h is the inflation rate.
A. 1 + r = (1 + R)  (1 + h)
B. 1 + r = (1 + R)  (1 + h)
C. 1 + h = (1 + r)  (1 + R)
D. 1 + R = (1 + r)  (1 + h)
E. 1 + R = (1 + r)  (1 + h)

30. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.
A. default
B. market
C. interest rate
D. inflation
E. maturity

31. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market requires an interest rate of 8% on bonds of this risk.
What is this bond's price?
A. $942.50
B. $911.52
C. $941.74
D. $1,064.81
E. None of the above

N = 16 I/Y = 4 PMT = 35 FV = $1000 PV = ? = $941.74

32. The value of a 20 year zero-coupon bond when the market required rate of return is 9% (semiannual) is ____.
A. $171.93
B. $178.43
C. $318.38
D. $414.64
E. None of the above
$1,000/(1.045)40 = $171.93

33. The bonds issued by Jensen & Son bear a 6% coupon, payable semiannually. The bond matures in 8 years and has a $1,000 face value.
Currently, the bond sells at par. What is the yield to maturity?
A. 5.87%
B. 5.97%
C. 6.00%
D. 6.09%
E. 6.17%

This can not be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the
rate in the formula just to verify that your answer is correct.

Answer is 6.00%

34. A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The
bond matures in 20 years. What is the yield to maturity?
A. 7.79%
B. 7.82%
C. 8.00%
D. 8.04%
E. 8.12%

This can not be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the
rate in the formula just to verify that your answer is correct.

Answer is 7.79%

35. Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par
value of $1,000. Interest is paid semiannually. What is the yield to maturity?
A. 8.67%
B. 10.13%
C. 10.16%
D. 10.40%
E. 10.45%

This can not be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the
rate in the formula just to verify that your answer is correct.

Answer is 10.40% (rounded)

36. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%. The bonds mature in 9 years.
What is the market price of a $1,000 face value bond?
A. $953.28
B. $963.88
C. $1,108.16
D. $1,401.26
E. $1,401.86

37. Party Time, Inc. has a 6% coupon bond that matures in 11 years. The bond pays interest semiannually. What is the market price of a $1,000
face value bond if the yield to maturity is 12.9%?
A. $434.59
B. $580.86
C. $600.34
D. $605.92
E. $947.87

38. Gugenheim, Inc. offers a 7% coupon bond with annual payments. The yield to maturity is 5.85% and the maturity date is 9 years. What is
the market price of a $1,000 face value bond?
A. $742.66
B. $868.67
C. $869.67
D. $1,078.73
E. $1,079.59
39. The Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The yield to maturity is 7.34%. The face value is $1,000.
Interest is paid semiannually. How many years is it until this bond matures?
A. 16 years
B. 18 years
C. 24 years
D. 30 years
E. 32 years

The easiest way to solve this problem is using a financial calculator. You can then use the calculator answer as the time period in the formula
just to verify that your answer is correct.

The number of six-month periods is 32. The number of years is 16.

40. High Noon Sun, Inc. has a 5%, semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a
yield to maturity of 5.29%. How many years is it until this bond matures?
A. 4.0 years
B. 4.5 years
C. 6.5 years
D. 8.0 years
E. 9.0 years

The easiest way to solve this problem is using financial calculator. You can then use the calculator answer as the time period in the formula just
to verify that your answer is correct.

The number of six-month periods is 9. The number of years is 4.5.

41. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price of a $1,000 face value bond?
A. $430.24
B. $473.26
C. $835.56
D. $919.12
E. $1,088.00
 42. Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000
face value bond?
A. $178.78
B. $180.33
C. $188.36
D. $190.09
E. $192.18

43. The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87%. How many
years is it until this bond matures?
A. 7 years
B. 10 years
C. 14 years
D. 18 years
E. 21 years

44. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the
market yield rises to 6% from the current yield of 4.5%?
A. 11.11% decrease
B. 12.38% decrease
C. 12.38% increase
D. 14.13% decrease
E. 14.13% increase
45. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year, 8% annual coupon bond with
a $1,000 par value. Both bonds currently have a yield to maturity of 6%. Which of the following statements are correct if the market yield
increases to 7%?
A. Both bonds would decrease in value by 4.61%.
B. The Earls bond will increase in value by $88.25.
C. The Jackson bond will increase in value by 4.61%.
D. The Earls bond will decrease in value by 7.56%.
E. The Earls bond will decrease in value by $50.68.

Difference in Jackson's prices = $1,047.67 - $1,098.35 = -$50.68 (decrease) percentage difference in Jackson's prices =

Difference in Earls' prices = $1,079.43 - $1,167.68 = -$88.25 (decrease) percentage difference in Earls' prices =

(decrease)
The correct answer states that the Earls' bond will decrease in value by 7.56%.

46. A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a $1,000 face value?
A. $1,000.28
B. $1,002.77
C. $1,027.67
D. $1,102.77
E. $1,276.70

Market price = 102.767  10 = $1,027.67

47. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit
interest, in dollars, for the first year of the bond's life?
A. $9.08
B. $12.56
C. $14.48
D. $21.47
E. $31.25
 r = 3.125%; PV = = $477.82; Implicit interest = $477.82 - $463.34 = $14.48

48. The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this, it plans to sell 30-year, $1,000 face value
zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs?
A. 47,411
B. 52,667
C. 57,435
D. 60,000
E. 117,435

PV = = $174.11; (rounded)

49. Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of
5%? The face value is $1,000 and the bond matures in 3 years. There are exactly six months before the first interest payment.
A. $888
B. $1,000
C. $1,014
D. $1,025
E. $1,055

Value = $55(PVIFA5%,6) + $1,000(PVIF5%,6) = $279.16 + $746.22 = $1,025.38

50. Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond
if the appropriate discount rate is 4% and the bond matures in 8 years?
A. $730.69
B. $968.00
C. $1,000.00
D. $1,032.00
E. This problem cannot be worked without the annual interest payments provided

Current Price = Face Value/(1 + r)n = 1000/(1 + 0.04)8 = $730.69

51. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the
bond is $932. What is the yield to maturity for this bond?
A. 5.05%
B. 6.48%
C. 8.58%
D. 10.15%
E. 11.92%

Current Price = Int(PVIFAr,4) + Face value(PVIFr,4) $932 = $80[1 - 1/(1 + r)4]/r + $1000/(1 + r)4 r = 10.152

1. The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount
rate less the dividend growth rate is called the _____ model.
A. zero growth
B. dividend growth
C. capital pricing
D. earnings capitalization
E. differential growth

2. Next year's annual dividend divided by the current stock price is called the:
A. yield to maturity.
B. total yield.
C. dividend yield.
D. capital gains yield.
E. earnings yield.
3. The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.
A. current
B. total
C. dividend
D. capital gains
E. earnings

4. A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____
stock.
A. dual class
B. cumulative
C. deferred
D. preferred
E. common

6. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called:
A. retained earnings.
B. net income.
C. dividends.
D. redistributions.
E. infused equity.

7. 6. The constant dividend growth model is:

A. generally used in practice because most stocks have a constant growth rate.
B. generally used in practice because the historical growth rate of most stocks is constant.
C. generally not used in practice because most stocks grow at a non constant rate.
D. generally not used in practice because the constant growth rate is usually higher than the required rate of return.
E. based on the assumption Dow 30 represents a good estimate of the market index.

7. The constant dividend growth model:

I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point of time.
III. states that the market price of a stock is only affected by the amount of the dividend.
IV. considers capital gains but ignores the dividend yield.
A. I only
B. II only
C. III and IV only
D. I and II only
E. I, II, and III only

8. The underlying assumption of the dividend growth model is that a stock is worth:
A. the same amount to every investor regardless of their desired rate of return.
B. the present value of the future income which the stock generates.
C. an amount computed as the next annual dividend divided by the market rate of return.
D. the same amount as any other stock that pays the same current dividend and has the same required rate of return.
E. an amount computed as the next annual dividend divided by the required rate of return.

9. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on
all equity securities, then you should also expect the:
A. market values of all stocks to increase, all else constant.
B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate.
C. market values of all stocks to decrease, all else constant.
D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price.
E. dividend growth rates to increase to offset this change.

10. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on retaining all of its earnings for the
next six years. Seven years from now, the company projects paying an annual dividend of $.25 a share and then increasing that amount by 3%
annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before
determining today's value.
A. 4
B. 5
C. 6
D. 7
E. 8
11. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0, $.10, $.20, and $.30 over the next 6
years, respectively. After that, the company anticipates increasing the dividend by 4% annually. The first step in computing the value of this
stock today, is to compute the value of the stock when it reaches constant growth in year:
A. 3
B. 4
C. 5
D. 6
E. 7

12. Differential growth refers to a firm that increases its dividend by:
A. three or more percent per year.
B. a rate which is most likely not sustainable over an extended period of time.
C. a constant rate of two or more percent per year.
D. $.10 or more per year.
E. an amount in excess of $.10 a year.

13. The total rate of return earned on a stock is comprised of which two of the following?
I. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only

14. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The
stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.
A. remain constant
B. decrease by 5%
C. increase by 5%
D. increase by 10%
E. increase by 15%

15. The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000
shares of stock outstanding. The company:
A. must always show a current liability of $1,000 for dividends payable.
B. is obligated to continue paying $1 per share per year.
C. will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis.
D. has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E. must still declare each dividend before it becomes an actual company liability.

16. The value of common stock today depends on:

A. the expected future holding period and the discount rate.
B. the expected future dividends and the capital gains.
C. the expected future dividends, capital gains and the discount rate.
D. the expected future holding period and capital gains.
E. None of the above

17. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the
following statements is correct?
A. The closing price on the previous day was $1.42 higher than today's closing price.
B. A dealer will buy the stock at $22.87 and sell it at $26 a share.
C. The stock increased in value between yesterday's close and today's close by $.0142.
D. The earnings per share are equal to 1/26th of $22.87.
E. The earnings per share have increased by $1.42 this year.

18. A stock listing contains the following information: P/E 17.5, closing price 33.10, dividend .80, YTD% chg 3.4, and net chg - .50. Which of
the following statements are correct given this information?
I. The stock price has increased by 3.4% during the current year.
II. The closing price on the previous trading day was $32.60.
III. The earnings per share are approximately $1.89.
IV. The current yield is 17.5%.
A. I and II only
B. I and III only
C. II and III only
D. III and IV only
E. I, III, and IV only
19. The discount rate in equity valuation is composed entirely of:
A. the dividends paid and the capital gains yield.
B. the dividend yield and the growth rate.
C. the dividends paid and the growth rate.
D. the capital gains earned and the growth rate.
E. the capital gains earned and the dividends paid.

20. The net present value of a growth opportunity, NPVGO, can be defined as:
A. the initial investment necessary for a new project.
B. the net present value per share of an investment in a new project.
C. a continual reinvestment of earnings when r < g.
D. a single period investment when r > g.
E. None of the above.

21. Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has
been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum
amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?
A. $21.60
B. $22.46
C. $27.44
D. $34.62
E. $36.00

22. How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4%
annually and you require an 8% rate of return?
A. $19.23
B. $20.00
C. $20.40
D. $20.80
E. $21.63

23. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share
of this stock worth to you today if the appropriate discount rate is 14%?
A. $7.14
B. $7.50
C. $11.11
D. $11.67
E. $12.25

24. Majestic Homes' stock traditionally provides an 8% rate of return. The company just paid a $2 a year dividend which is expected to increase
by 5% per year. If you are planning on buying 1,000 shares of this stock next year, how much should you expect to pay per share if the market
rate of return for this type of security is 9% at the time of your purchase?
A. $48.60
B. $52.50
C. $55.13
D. $57.89
E. $70.00
25. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to
maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity
investments?
A. $10.00
B. $13.33
C. $16.67
D. $18.88
E. $20.00

26. Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now
predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the
lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to
pay to buy one share today?
A. $10.00
B. $13.33
C. $16.67
D. $18.88
E. $20.00

27. The common stock of Eddie's Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the
annual dividend is distributed. Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so.
What is the market rate of return on this stock?
A. 7%
B. 9%
C. 11%
D. 13%
E. 15%

28. The current yield on Alpha's common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205
next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?
A. 10.04%
B. 16.07%
C. 21.88%
D. 43.75%
E. 45.94%

29. Martha's Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend increases at an average rate of 3.5% per year.
The stock is currently selling for $62.10 a share. What is the market rate of return?
A. 2.5%
B. 3.5%
C. 5.5%
D. 6.0%
E. 9.5%
 30. Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected
to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share?
A. 9.5%
B. 11.0%
C. 12.5%
D. 13.5%
E. 15.0%

31. Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The
dividend yield must be:
A. -4%.
B. 4%.
C. 8%.
D. 12%.
E. 20%.

32. The common stock of Grady Co. had an 11.25% rate of return last year. The dividend amount was $.70 a share which equated to a dividend
yield of 1.5%. What was the rate of price appreciation on the stock?
A. 1.50%
B. 8.00%
C. 9.75%
D. 11.25%
E. 12.75%

g = .1125 - .015 = .0975 = 9.75%

33. Weisbro and Sons' common stock sells for $21 a share and pays an annual dividend that increases by 5% annually. The market rate of return
on this stock is 9%. What is the amount of the last dividend paid by Weisbro and Sons?
A. $.77
B. $.80
C. $.84
D. $.87
E. $.88

34. The common stock of Energizer's pays an annual dividend that is expected to increase by 10% annually. The stock commands a market rate
of return of 12% and sells for $60.50 a share. What is the expected amount of the next dividend to be paid on Energizer's common stock?
A. $.90
B. $1.00
C. $1.10
D. $1.21
E. $1.33

35. The Reading Co. has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 3% annually. The last
dividend it paid was $0.90 a share. What will the company's dividend be in six years?
A. $0.90
B. $0.93
C. $1.04
D. $1.07
E. $1.11
36. A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this stock is 9%, what is the dividend amount?
A. $1.40
B. $1.80
C. $2.20
D. $2.40
E. $2.80

37. You have decided that you would like to own some shares of GH Corp. but need an expected 12% rate of return to compensate for the
perceived risk of such ownership. What is the maximum you are willing to spend per share to buy GH stock if the company pays a constant
$3.50 annual dividend per share?
A. $26.04
B. $29.17
C. $32.67
D. $34.29
E. $36.59

38. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of
$1.20. What is the rate of growth of its dividend?
A. 5.2%
B. 5.5%
C. 5.9%
D. 6.0%
E. 6.3%

39. B&K Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week, the company paid a dividend of
$2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of B&K common stock be worth ten years
from now if the applicable discount rate is 8%?
A. $71.16
B. $74.01
C. $76.97
D. $80.05
E. $83.25

40. Wilbert's Clothing Stores just paid a $1.20 annual dividend. The company has a policy whereby the dividend increases by 2.5% annually.
You would like to purchase 100 shares of stock in this firm but realize that you will not have the funds to do so for another three years. If you
desire a 10% rate of return, how much should you expect to pay for 100 shares when you can afford to buy this stock? Ignore trading costs.
A. $1,640
B. $1,681
C. $1,723
D. $1,766
E. $1,810

P3 = $17.66; Purchase cost = 100  $17.66 = $1,766

41. The Merriweather Co. just announced that it will pay a dividend next year of $1.60 and is establishing a policy whereby the dividend will
increase by 3.5% annually thereafter. How much will one share be worth five years from now if the required rate of return is 12%?
A. $21.60
B. $22.36
C. $23.14
D. $23.95
E. $24.79

P5 = $22.36

42. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year
for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual dividend in the amount of $1.00 per
share. What is the current value of one share if the required rate of return is 9.25%?
A. $35.63
B. $38.19
C. $41.05
D. $43.19
E. $45.81

Dividends for the first 4 years are: $1.20, $1.44, $1.728, and $2.0736.

43. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and
$10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price
of this stock if the market rate of return is 15%?
A. $17.04
B. $22.39
C. $26.57
D. $29.08
E. $33.71

44. Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years,
respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per
share if you demand a 7% rate of return?
A. $7.20
B. $14.48
C. $18.88
D. $21.78
E. $25.06
45. NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.25 a share.
The following dividends will be $.40, $.60, and $.75 a share annually for the following three years, respectively. After that, dividends are
projected to increase by 3.5% per year. How much are you willing to pay to buy one share of this stock if your desired rate of return is 12%?
A. $1.45
B. $5.80
C. $7.25
D. $9.06
E. $10.58

46. Now or Later, Inc. recently paid $1.10 as an annual dividend. Future dividends are projected at $1.14, $1.18, $1.22, and $1.25 over the next
four years, respectively. After that, the dividend is expected to increase by 2% annually. What is one share of this stock worth to you if you
require an 8% rate of return on similar investments?
A. $15.62
B. $19.57
C. $21.21
D. $23.33
E. $25.98

47. The Red Bud Co. just paid a dividend of $1.20 a share. The company announced today that it will continue to pay this constant dividend for
the next 3 years after which time it will discontinue paying dividends permanently. What is one share of this stock worth today if the required
rate of return is 7%?
A. $2.94
B. $3.15
C. $3.23
D. $3.44
E. $3.60

48. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $.30 a
share for two years commencing two years from today. After that time, the company plans on paying a constant $1 a share dividend indefinitely.
Given a required return of 14%, what is the value of this stock?
A. $4.82
B. $5.25
C. $5.39
D. $5.46
E. $5.58

49. The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to
lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. The required rate
of return is 16%. What is one share of this stock worth?
A. $3.76
B. $4.08
C. $4.87
D. $5.13
E. $5.39
50. Mother and Daughter Enterprises is a relatively new firm that appears to be on the road to great success. The company paid its first annual
dividend yesterday in the amount of $.28 a share. The company plans to double each annual dividend payment for the next three years. After that
time, it is planning on paying a constant $1.50 per share indefinitely. What is one share of this stock worth today if the market rate of return on
similar securities is 11.5%?
A. $9.41
B. $11.40
C. $11.46
D. $11.93
E. $12.43

Dividends for the next three years are $.56, $1.12, and $2.24.

51. BC ‘n D just paid its annual dividend of $.60 a share. The projected dividends for the next five years are $.30, $.50, $.75, $1.00, and $1.20,
respectively. After that time, the dividends will be held constant at $1.40. What is this stock worth today at a 6% discount rate?
A. $20.48
B. $20.60
C. $21.02
D. $21.28
E. $21.43

1. A
portfolio is:
A. a group of assets, such as stocks and bonds, held as a collective unit by an investor.
B. the expected return on a risky asset.
C. the expected return on a collection of risky assets.
D. the variance of returns for a risky asset.
E. the standard deviation of returns for a collection of risky assets.

2. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
A. portfolio return.
B. portfolio weight.
C. portfolio risk.
D. rate of return.
E. investment value.

3. Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.
A. idiosyncratic
B. diversifiable
C. systematic
D. asset-specific
E. total

4. Risk that affects at most a small number of assets is called _____ risk.
A. portfolio
B. undiversifiable
C. market
D. unsystematic
E. total

5. The principle of diversification tells us that:

A. concentrating an investment in two or three large stocks will eliminate all of your risk.
B. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.
C. spreading an investment across five diverse companies will not lower your overall risk at all.
D. spreading an investment across many diverse assets will eliminate all of the risk.
E. spreading an investment across many diverse assets will eliminate some of the risk.
6. The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A. Efficient Markets Hypothesis (EMH)
B. systematic risk principle
C. Open Markets Theorem
D. Law of One Price
E. principle of diversification

7. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the
particular asset's:
A. beta coefficient.
B. reward-to-risk ratio.
C. total risk.
D. diversifiable risk.
E. Treynor index.

8. The linear relation between an asset's expected return and its beta coefficient is the:
A. reward-to-risk ratio.
B. portfolio weight.
C. portfolio risk.
D. security market line.
E. market risk premium.

9. The slope of an asset's security market line is the:

A. reward-to-risk ratio.
B. portfolio weight.
C. beta coefficient.
D. risk-free interest rate.
E. market risk premium.

10. You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a
recessionary period. The overall expected rate of return on this stock will:
A. be equal to one-half of 8% if there is a 50% chance of an economic boom.
B. vary inversely with the growth of the economy.
C. increase as the probability of a recession increases.
D. be equal to 75% of 8% if there is a 75% chance of a boom economy.
E. increase as the probability of a boom economy increases.

11. Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the
economy?
A. The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
B. The expected return is an arithmetic average of the individual returns for each state of the economy.
C. The expected return is a weighted average where the probabilities of the economic states are used as the weights.
D. The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the
probability of the state.
E. As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the
expected returns for each economic state.

12. The expected return on a stock that is computed using economic probabilities is:
A. guaranteed to equal the actual average return on the stock for the next five years.
B. guaranteed to be the minimal rate of return on the stock over the next two years.
C. guaranteed to equal the actual return for the immediate twelve month period.
D. a mathematical expectation based on a weighted average and not an actual anticipated outcome.
E. the actual return you will receive.

13. The characteristic line is graphically depicted as:

A. the plot of the relationship between beta and expected return.
B. the plot of the returns of the security against the beta.
C. the plot of the security returns against the market index returns.
D. the plot of the beta against the market index returns.
E. None of the above.

14. The beta of a security is calculated by:

A. dividing the covariance of the security with the market by the variance of the market.
B. dividing the correlation of the security with the market by the variance of the market.
C. dividing the variance of the market by the covariance of the security with the market.
D. dividing the variance of the market by the correlation of the security with the market.
E. None of the above.
15. If investors possess homogeneous expectations over all assets in the market portfolio, when riskless lending and borrowing is allowed, the
market portfolio is defined to:
A. be the same portfolio of risky assets chosen by all investors.
B. have the securities weighted by their market value proportions.
C. be a diversified portfolio.
D. All of the above.
E. None of the above.

16. Which one of the following is an example of a nondiversifiable risk?

A. a well respected president of a firm suddenly resigns
B. a well respected chairman of the Federal Reserve suddenly resigns
C. a key employee suddenly resigns and accepts employment with a key competitor
D. a well managed firm reduces its work force and automates several jobs
E. a poorly managed firm suddenly goes out of business due to lack of sales

17. The risk premium for an individual security is computed by:

A. multiplying the security's beta by the market risk premium.
B. multiplying the security's beta by the risk-free rate of return.
C. adding the risk-free rate to the security's expected return.
D. dividing the market risk premium by the quantity (1 - beta).
E. dividing the market risk premium by the beta of the security.

18. Standard deviation measures _____ risk.

A. total
B. nondiversifiable
C. unsystematic
D. systematic
E. economic

19. When computing the expected return on a portfolio of stocks the portfolio weights are based on the:
A. number of shares owned in each stock.
B. price per share of each stock.
C. market value of the total shares held in each stock.
D. original amount invested in each stock.
E. cost per share of each stock held.

20. The portfolio expected return considers which of the following factors?
I. the amount of money currently invested in each individual security
II. various levels of economic activity
III. the performance of each stock given various economic scenarios
IV. the probability of various states of the economy
A. I and III only
B. II and IV only
C. I, III, and IV ony
D. II, III, and IV only
E. I, II, III, and IV

21. The expected return on a portfolio:

A. can be greater than the expected return on the best performing security in the portfolio.
B. can be less than the expected return on the worst performing security in the portfolio.
C. is independent of the performance of the overall economy.
D. is limited by the returns on the individual securities within the portfolio.
E. is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

22. If a stock portfolio is well diversified, then the portfolio variance:

A. will equal the variance of the most volatile stock in the portfolio.
B. may be less than the variance of the least risky stock in the portfolio.
C. must be equal to or greater than the variance of the least risky stock in the portfolio.
D. will be a weighted average of the variances of the individual securities in the portfolio.
E. will be an arithmetic average of the variances of the individual securities in the portfolio.
23. Which one of the following statements is correct concerning the standard deviation of a portfolio?
A. The greater the diversification of a portfolio, the greater the standard deviation of that portfolio.
B. The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
C. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
D. Standard deviation measures only the systematic risk of a portfolio.
E. The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the
portfolio.

24. The standard deviation of a portfolio will tend to increase when:

A. a risky asset in the portfolio is replaced with U.S. Treasury bills.
B. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
C. the portfolio concentration in a single cyclical industry increases.
D. the weights of the various diverse securities become more evenly distributed.
E. short-term bonds are replaced with Treasury Bills.

25. Systematic risk is measured by:

A. the mean.
B. beta.
C. the geometric average.
D. the standard deviation.
E. the arithmetic average.

26. Which one of the following is an example of systematic risk?

A. the price of lumber declines sharply
B. airline pilots go on strike
C. the Federal Reserve increases interest rates
D. a hurricane hits a tourist destination
E. people become diet conscious and avoid fast food restaurants

27. The systematic risk of the market is measured by:

A. a beta of 1.0.
B. a beta of 0.0.
C. a standard deviation of 1.0.
D. a standard deviation of 0.0.
E. a variance of 1.0.

28. Unsystematic risk:

A. can be effectively eliminated through portfolio diversification.
B. is compensated for by the risk premium.
C. is measured by beta.
D. cannot be avoided if you wish to participate in the financial markets.
E. is related to the overall economy.

29. Which one of the following is an example of unsystematic risk?

A. the inflation rate increases unexpectedly
B. the federal government lowers income taxes
C. an oil tanker runs aground and spills its cargo
D. interest rates decline by one-half of one percent
E. the GDP rises by 2% more than anticipated

30. The primary purpose of portfolio diversification is to:

A. increase returns and risks.
B. eliminate all risks.
C. eliminate asset-specific risk.
D. eliminate systematic risk.
E. lower both returns and risks.

31. Which one of the following would indicate a portfolio is being effectively diversified?
A. an increase in the portfolio beta
B. a decrease in the portfolio beta
C. an increase in the portfolio rate of return
D. an increase in the portfolio standard deviation
E. a decrease in the portfolio standard deviation

32. The majority of the benefits from portfolio diversification can generally be achieved with just _____ diverse securities.
A. 3
B. 6
C. 30
D. 50
E. 75
33. Which one of the following measures is relevant to the systematic risk principle?
A. variance
B. alpha
C. standard deviation
D. theta
E. beta

34. A security that is fairly priced will have a return _____ the Security Market Line.
A. below
B. on or below
C. on
D. on or above
E. above

35. The intercept point of the security market line is the rate of return which corresponds to:
A. the risk-free rate of return.
B. the market rate of return.
C. a value of zero.
D. a value of 1.0.
E. the beta of the market.

36. A stock with an actual return that lies above the security market line:
A. has more systematic risk than the overall market.
B. has more risk than warranted based on the realized rate of return.
C. has yielded a higher return than expected for the level of risk assumed.
D. has less systematic risk than the overall market.
E. has yielded a return equivalent to the level of risk assumed.

37. The market risk premium is computed by:

A. adding the risk-free rate of return to the inflation rate.
B. adding the risk-free rate of return to the market rate of return.
C. subtracting the risk-free rate of return from the inflation rate.
D. subtracting the risk-free rate of return from the market rate of return.
E. multiplying the risk-free rate of return by a beta of 1.0.

38. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
A. market rate of return.
B. market risk premium.
C. systematic return.
D. total return.
E. real rate of return.

39. The efficient set of portfolios:

A. contains the portfolio combinations with the highest return for a given level of risk.
B. contains the portfolio combinations with the lowest risk for a given level of return.
C. is the lowest overall risk portfolio.
D. Both A and B.
E. Both A and C.

40. Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is:
A. individual security risk.
B. riskless security risk.
C. risk related to the market portfolio.
D. total standard deviations.
E. None of the above.

41. A well-diversified portfolio has negligible:

A. expected return.
B. systematic risk.
C. unsystematic risk.
D. variance.
E. Both C and D.

42. The Capital Market Line is the pricing relationship between:

A. efficient portfolios and beta.
B. the risk-free asset and standard deviation of the portfolio return.
C. the optimal portfolio and the standard deviation of portfolio return.
D. beta and the standard deviation of portfolio return.
E. None of the above.
43. Total risk can be divided into:
A. standard deviation and variance.
B. standard deviation and covariance.
C. portfolio risk and beta.
D. systematic risk and unsystematic risk.
E. portfolio risk and covariance.

44. Beta measures:

A. the ability to diversify risk.
B. how an asset covaries with the market.
C. the actual return on an asset.
D. the standard deviation of the assets' returns.
E. All of the above.

45. The dominant portfolio with the lowest possible risk is:
A. the efficient frontier.
B. the minimum variance portfolio.
C. the upper tail of the efficient set.
D. the tangency portfolio.
E. None of the above.

46. The measure of beta associates most closely with:

A. idiosyncratic risk.
B. risk-free return.
C. systematic risk.
D. unexpected risk.
E. unsystematic risk.

47. An efficient set of portfolios is:

A. the complete opportunity set.
B. the portion of the opportunity set below the minimum variance portfolio.
C. only the minimum variance portfolio.
D. the dominant portion of the opportunity set.
E. only the maximum return portfolio.

48. A stock with a beta of zero would be expected to have a rate of return equal to:
A. the risk-free rate.
B. the market rate.
C. the prime rate.
D. the average AAA bond.
E. None of the above.

49. The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:
A. the capital market line which shows that all investors will only invest in the riskless asset.
B. the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
C. the security market line which shows that all investors will invest in the riskless asset only.
D. the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
E. None of the above.

50. According to the Capital Asset Pricing Model:

A. the expected return on a security is negatively and non-linearly related to the security's beta.
B. the expected return on a security is negatively and linearly related to the security's beta.
C. the expected return on a security is positively and linearly related to the security's variance.
D. the expected return on a security is positively and non-linearly related to the security's beta.
E. the expected return on a security is positively and linearly related to the security's beta.

1. Payments made out of a firm's earnings to its owners in the form of cash or stock are called:
A. dividends.
B. distributions.
C. share repurchases.
D. payments-in-kind.
E. stock splits.

2. Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
A. dividends.
B. distributions.
C. share repurchases.
D. payments-in-kind.
E. stock splits.
3. A cash payment made by a firm to its owners in the normal course of business is called a:
A. share repurchase.
B. liquidating dividend.
C. regular cash dividend.
D. special dividend.
E. extra cash dividend.

4. A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:
A. liquidating dividend.
B. regular cash dividend.
C. special dividend.
D. extra cash dividend.
E. share repurchase.

5. The date on which the board of directors passes a resolution authorizing payment of a dividend to the shareholders is the _____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration

6. The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the
dividend, is called the _____ date.
A. ex-rights
B. ex-dividend
C. record
D. payment
E. declaration

7. The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is
called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. declaration date.

8. The date on which the firm mails out its declared dividends is called the:
A. ex-rights date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. declaration date.

9. The ability of shareholders to undo the dividend policy of the firm and create an alternative dividend payment policy via reinvesting dividends
or selling shares of stock is called (a):
A. perfect foresight model.
B. MM Proposition I.
C. capital structure irrelevancy.
D. homemade leverage.
E. homemade dividends.

10. The market's reaction to the announcement of a change in the firm's dividend payout is likely the:
A. information content effect.
B. clientele effect.
C. efficient markets hypothesis.
D. MM Proposition I.
E. MM Proposition II.

11. The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on
investors is called the:
A. information content effect.
B. clientele effect.
C. efficient markets hypothesis.
D. MM Proposition I.
E. MM Proposition II.
12. A _____ is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders.
A. merger
B. acquisition
C. payment-in-kind
D. stock split
E. share repurchase

13. A payment made by a firm to its owners in the form of new shares of stock is called a _____ dividend.
A. stock
B. normal
C. special
D. extra
E. liquidating

14. An increase in a firm's number of shares outstanding without any change in owners' equity is called a:
A. special dividend.
B. stock split.
C. share repurchase.
D. tender offer.
E. liquidating dividend.

15. The difference between the highest and lowest prices at which a stock has traded is called its:
A. average price.
B. bid-ask spread.
C. trading range.
D. opening price.
E. closing price.

16. In a reverse stock split:

A. the number of shares outstanding increases and owners' equity decreases.
B. the firm buys back existing shares of stock on the open market.
C. the firm sells new shares of stock on the open market.
D. the number of shares outstanding decreases but owners' equity is unchanged.
E. shareholders make a cash payment to the firm.

17. The last date on which you can purchase shares of stock and still receive the dividend is the date _____ business day(s) prior to the date of
record.
A. zero
B. one
C. three
D. five
E. seven

18. Leslie purchased 100 shares of GT, Inc. stock on Wednesday, June 7th. Marti purchased 100 shares of GT, Inc. stock on Thursday, July 8th.
GT declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements
concerning the dividend paid on August 1st is correct given this information?
A. Neither Leslie nor Marti are entitled to the dividend.
B. Leslie is entitled to the dividend but Marti is not.
C. Marti is entitled to the dividend but Leslie is not.
D. Both Marti and Leslie are entitled to the dividend.
E. Both Marti and Leslie are entitled to one-half of the dividend amount.

19. All else equal, the market value of a stock will tend to decrease by roughly the amount of the dividend on the:
A. dividend declaration date.
B. ex-dividend date.
C. date of record.
D. date of payment.
E. day after the date of payment.

20. Which one of the following is an argument in favor of a low dividend policy?
A. the tax on capital gains is deferred until the gain is realized
B. few, if any, positive net present value projects are available to the firm
C. a preponderance of stockholders have minimal taxable income
D. a majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics
E. corporate tax rates exceed personal tax rates
21. The fact that flotation costs can be significant is justification for:
A. a firm to issue larger dividends than its closest competitors.
B. a firm to maintain a constant dividend policy even if it frequently has to issue new shares of stock to do so.
C. maintaining a constant dividend policy even when profits decline significantly.
D. maintaining a high dividend policy.
E. maintaining a low dividend policy and rarely issuing extra dividends.

22. Which of the following may tend to keep dividends low?

I. a state law restricting dividends in excess of retained earnings
II. a term contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV

23. Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a:
A. lower dividend policy.
B. constant dividend policy.
C. zero-dividend policy.
D. higher dividend policy.
E. restrictive dividend policy.

24. Which of the following are factors that favor a high dividend policy?
I. stockholders desire for current income
II. tendency for higher stock prices for high dividend paying firms
III. investor dislike of uncertainty
IV. high percentage of tax-exempt institutional stockholders
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

25. An investor is more likely to prefer a high dividend payout if a firm:

A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers high capital gains which are taxed at a favorable rate.

26. The information content of a dividend increase generally signals that:

A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes that the future earnings of the firm will be strong.
D. the firm has more cash than it needs due to sales declines.
E. future dividends will be lower.

27. Of the following factors, which one is considered to be the primary factor affecting a firm's dividend decision?
A. personal taxes of company stockholders
B. consistent dividend policy
C. attracting retail investors
D. attracting institutional investors
E. sustainable changes in earnings

28. Financial managers:

A. are reluctant to cut dividends.
B. tend to ignore past dividend policies.
C. tend to prefer cutting dividends every time quarterly earnings decline.
D. prefer cutting dividends over incurring flotation costs.
E. place little emphasis on dividend policy consistency.
29. If you ignore taxes and transaction costs, a stock repurchase will:
I. reduce the total assets of a firm.
II. increase the earnings per share.
III. reduce the PE ratio more than an equivalent stock dividend.
IV. reduce the total equity of a firm.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, III, and IV only
E. I, II, III, and IV

30. From a tax-paying investor's point of view, a stock repurchase:

A. is equivalent to a cash dividend.
B. is more desirable than a cash dividend.
C. has the same tax effects as a cash dividend.
D. is more highly taxed than a cash dividend.
E. creates a tax liability even if the investor does not sell any of the shares he owns.

31. All else equal, a stock dividend will _____ the number of shares outstanding and _____ the value per share.
A. increase; increase
B. increase; decrease
C. not change; increase
D. decrease; increase
E. decrease; decrease

32. A small stock dividend is defined as a stock dividend of less than _____%.
A. 10 to 15
B. 15 to 20
C. 20 to 25
D. 25 to 30
E. 30 to 35

33. Nu Tech, Inc. is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its
shareholders but needs all of its available cash to fund its rapid growth. The market price of its stock is currently trading in the middle of its
preferred trading range. The firm could consider:
A. issuing a liquidating dividend.
B. a stock split.
C. a reverse stock split.
D. issuing a stock dividend.
E. a special cash dividend.

34. Which of the following are valid reasons for a firm to reduce or eliminate its cash dividends?
I. The firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.
II. A firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the
marketplace.
III. The firm can raise new capital easily at a very low cost.
IV. The tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV

35. A stock split:

A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. does not affect the total value of any of the equity accounts.
D. increases the value of the capital in excess of par account.
E. decreases the total owners' equity on the balance sheet.

36. Stock splits are often used to:

A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm.
C. increase both the number of shares outstanding and the market price per share simultaneously.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio such that it falls within a preferred range.
37. Which of the following tend to increase the appeal of a firm's stock to the average investor?
I. a cessation of dividends by a firm which has a long history of increasing dividends
II. the distribution of a special dividend by a dividend-paying firm
III. a reverse stock split for a low-priced stock
IV. the declaration of a stock dividend by a growth firm
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
38. Wydex, Inc. stock is currently trading at $82 a share. The firm feels that its primary clientele can afford to spend between $2,000 and
$2,500 to purchase a round lot of 100 shares. The firm should consider a:
A. reverse stock split.
B. liquidating dividend.
C. stock dividend.
D. stock split.
E. special dividend.
39. A one-for-four reverse stock split will:
A. increase the par value by 25%.
B. increase the number of shares outstanding by 400%.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value by $4.
40. A reverse stock split is sometimes used as a means of:
A. decreasing the liquidity of a stock.
B. decreasing the market value per share of stock.
C. increasing the number of stockholders.
D. keeping a firm's stock eligible for trading on a stock exchange.
E. raising cash from current stockholders.
41. Which of the following lists events in chronological order from earliest to latest?
A. date of record, declaration date, ex-dividend date.
B. date of record, ex-dividend date, declaration date.
C. declaration date, date of record, ex-dividend date.
D. declaration date, ex-dividend date, date of record.
E. ex-dividend date, date of record, declaration date.
42. In an efficient market, ignoring taxes and time value, the price of stock should:
A. decrease by the amount of the dividend immediately on the declaration date.
B. decrease by the amount of the dividend immediately on the ex-dividend date.
C. increase by the amount of the dividend immediately on the declaration date.
D. increase by the amount of the dividend immediately on the ex-dividend date.
E. Both B and C.
43. On the date of record the stock price drop is:
A. a full adjustment for the dividend payment.
B. a partial adjustment for the dividend payment because of the tax effect.
C. zero because it happens on the ex-dividend date.
D. zero because it happens on the payment date.
E. None of the above.

44. 44. The use of homemade dividends allows stockholders to change the:
A. return pattern of the firm by leveraging their position like the firm.
B. cash payout received by selling off shares to receive current dividends or purchasing additional shares with the dividends, as desired.
C. value of the company by sending dividend requirement letters to the home office of the corporation.
D. Both A and C.
E. Both B and C.

45. Homemade dividends are described by Modigliani and Miller to be the:

A. dividend one pays oneself to avoid risky stocks.
B. re-arrangement of the firm's dividend stream as management needs.
C. re-arrangement of the firm's dividend stream by investors buying or selling their holdings in the stock.
D. present value of all dividends to be paid.
E. None of the above.

46. The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and
dividend policy:
A. The level of investment does not influence or matter to the dividend decision.
B. Once dividend policy is set the investment decision can be made as desired.
C. The investment policy is set before the dividend decision and not changed by dividend policy.
D. Since dividend policy is irrelevant there is no relationship between investment policy and dividend policy.
E. Miller and Modigliani were only concerned about capital structure.

47. Dividends are relevant and dividend policy irrelevant when:

A. cash dividends are always constant and dividend policy is changed as management needs.
B. cash dividends are increased for one year while others are held constant, thus causing an increase in stock price, and dividend policy
establishes the trade-off between dividends at different dates.
C. cash dividends are always constant and dividend policy establishes the trade-off between dividends at different dates.
D. cash dividends are increased for one payment while others are held constant and dividend policy is changed as management needs.
E. None of the above.

48. A reverse split is when:

A. the stock price gets too high for investors to purchase in round lots.
B. the stock becomes too liquid and highly marketable.
C. the stock price moves into the popular trading range.
D. several old shares, such as 4, are replaced by 1 new share.
E. None of the above.

49. A firm announces that it is willing to purchase a number of shares back at various prices and shareholders have the option to indicate how
many shares they are willing to sell at various prices. This process is called a:
A. dividend creation model.
B. secondary market transaction.
C. free market sale.
D. Dutch auction.
E. None of the above.

50. Characteristics of a sensible dividend policy include:

A. over time pay out all free cash flows
B. set the current regular dividend consistent with a long-run target payout ratio
C. use repurchases to distribute transitory cash flow increases
D. A and B
E. All of the above

51. You owned 200 shares last year and received a stock dividend of 5% at the end of last year. The number of shares you now have is _____
and your wealth has increased by ______%.
A. 10; 5
B. 210; 5
C. 210; 0
D. 50,000; 5
E. 50,000; 0
# shares = 200(1.05) = 210