1.

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: (IVÝ unlimited firm life?
A. I and Il only
B. III and IV only
C. I. III, and IV only
D. II, III, and IV only
2. Which one of the following is a capital budgeting decision?
A. Determining how many shares of stock to issue
B. Deciding whether or not to purchase a new machine for the production line
C. Deciding how to refinance a debt issue that is maturing
D. Determining how much inventory to keep on hand
3. Which one of the following is a capital structure decision?
A. Determining which one of two projects to accept
B. Determining how to allocate investment funds to multiple projects
C. Determining the amount of funds needed to finance customer purchases of a new
product
D. Determining how much debt should be assumed to fund a project
4. Which one of the following terms is defined as a conflict of interest between the
corporate shareholders and the corporate managers?
A. Articles of incorporation
B. Corporate breakdown
C. Agency problem
D. Legal liability
5) Which one of the following best states the primary goal of financial management?
A. Maximize current dividends per share
B. Maximize the current value per share
C. Increase cash flow and avoid financial distress
D. Minimize operational costs while maximizing firm efficiency
6. Equity of a corporation is:
A. Capital within the corporation
B. Funds outside the corporation
C. Both A and B are correct
D. A and B are wrong
7. Which one of the following statements is TRUE about Average Cost of Capital
(WACC)?
A. WACC ignores taxes.
B. The optimal capital structure is the one that maximizes the WACC
C. The value of a fim will be maximized when the WACC is minimized.
D. WACC ignores the capital structure of a firm.
8. When choosing a capital structure, the objective of the firm should be to choose:
A. The one that maximizes the current value of the firm's bonds.
B. The one that minimizes the value of the firm
C. The one that minimizes the firm’s WACC
D. The one that results in the largest interest tax shield
9. Which one of the following actions would result an increase in the debt-to-equity
ratio? (Assume there are no flotation costs.)
A. A firm issues common stock and uses the proceeds to repurchase an equal amount of
preferred stock.
B.A firm issues preferred stock and uses the proceeds to repurchase an equal amount of
bonds.
C. A firm uses excess cash to repurchase common stock in an amount equal to additions
to retained earnings for the year.
D.A firm issues bonds and uses the proceeds to repurchase common stock.
10. The interest tax shield for a firm:
A.Is the tax benefit a firm derives from paying interest.
B. Will decrease as the corporate income tax rate is increased.
C. Is the yield-to-maturity on a firm's bonds multiplied by the market value of the bonds
outstanding and by the firm's tax rate.
D. Is equal to the coupon interest rate of the firm's debt.
11. Which is NOT the advantage of using debt capital?
A. Tax shield
B. Operating leverage
C. Cheaper cost
D.Not sharing the ownership
12. Which is not a disadvantage of Debt Capital comparing to Equity Capital?
A. Interest and repayment requirement
B. Default risk
C. High debt ratio
D. More expensive
13. Suppose that Topstone Industries has a cost of equity of 15 percent and a cost of
debt of 9 percent. The target debt/equity ratio is 0.75 and the tax rate is 34 percent. What
is Topstone's weighted average cost of capital (WACC)?
A.9.8 percent
B. 10.3 percent
C. 10.8 percent
D.11.1 percent
14. The cost of equity capital for a firm:
A. is the return that the firm's creditors demand on new borrowing.
B. is the return that equity investors require on their investment in the firm.
C. indicates how the market views the risk of firm's assets.
D. is the same as the cost to the company.
15. Which of the following statements are NOT correct regarding financial leverage?
A. Whenever a firm's debt increases faster than its equity, financial leverage increases.
B. Leverage is more beneficial when EBIT is relatively high.
C. Increasing financial leverage will always increase the ROE and EPS of stockholders.
D. The level of financial leverage that produces the highest firm value is the one
most beneficial to stockholders.
16. Dividends paid for preferred shares are quantities that are closely related to:
A. Operating leverage
B. Financial leverage
C. Total leverage
D.Both A and B
17. Which one of the following is NOT considered to be an incremental cash flow in
capital budgeting analysis?
A. Sunk costs
B. Opportunity costs
C. Side effects
D. Addition to Net working capital
18. Calculating all costs and incomes of the project in evaluating is the advantage of:
A. IRR
B. PBP
C. NPV
D. Both A and C
19. When the discount rate of the project exceeds ......... , the NPV of the project will
change from positive to negative:
A. Required rate of return
B. WACC
C. IRR
D. Both A, B and C
20. Choosing a discount rate is very important in calculating:
A. IRR
B. NPV
C. Payback Period
D. Both A, B and C
21. A net present value (NPV) of zero implies that an investments:
A.Cost exceeds the present value of its cash inflows.
B. Cost is equal to the present value of its cash inflows.
C. Internal rate of return (IRR) is greater than the firm's required rate of return
D. Present value of cash inflows is positive.
22. According to the net present value (NPV) rule, a firm should accept a project if:
A. The estimated NPV is positive.
B. The estimated NPV exceeds a project's cost.
C. The NPV exceeds the firm's target accounting rate of return.
D. The NPV is negative.
23. What is the internal rate of return (IRR) decision rule?
A.Accept a project when the IRR is greater than zero
B. Accept a project if at the IRR the NPV is positive
C. Reject any project if the IRR is below 10 percent
D.Accept a project if the IRR exceeds the firm's required rate of return
24.DFL is calculated in percent change of .......... when the ....... change:
A. EBIT, EPS
B. EPS, EBIT
C. Sales, EBIT
D. EBIT, sales
25. The basic discount rate used in net present value analysis is:
A. the internal rate of return
B. the cost of common equity
C. the net discount rate
D. the cost of capital to the firm
26. A project costs $475 and has cash flows of $100 for the first three years and $75
in each of the project's last five years. What is the payback period of the project?
A. The project never pays back.
B. 4.75 years
C.5.00 years
D.5.33 years
27. To find the we begin by setting the net present value of a project equal to zero.
A. Payback Period
B. Discounted Payback
C. Profitability Index
D. Internal Rate of Return
28. Which of the following are among the determinants of the working capital?
A. Nature of business
B. Degree of seasonality
C. Production policies
D. All of the above
29. Net working capital equals:
A. Total working assets minus short-term debt
B. Total long-term capital minus equity
C. Total long-term capital minus the value of fixed assets
D.Both A and C
30. Which is NOT the feature of flexible policy?
A. Large amounts of cash and marketable securities
B. Large inventory level.
C. Large account receivables.
D. High levels of short-term liabilities.
31. Which is the feature of restrictive policy?
A. High levels of short-term liabilities
B. High cash and marketable security balances
C. High shortage costs
D. Both A and C
32. A company provides a credit policy of "2/10 net 30" for customers who place
order for $1.000. Which is NOT an option for customers?
A.Pay $980 immediately.
B. Pay $980 within 10 days.
C.Pay $980 within 30 days.
D.Pay $1000 within 30 days.
33. Which is NOT a factor favoring a low dividend payout?
A Taxes
B. Desire for current income
C. Flotation costs
D. Dividend restrictions
34. The current par value of Peterson's stock is $l. What is its new par value when
2 company declares a two-for-one stock split?
A. $0.5
B. $1
C. $1.5
D. $2
35. Residual dividend policy will:
A. Facilitate the listing of the company on the Stock Exchange
B. Promote the company to mobilize more capital from outside
C. Break down the company's target capital structure
D. Create attractive image about the company for investors
36. The form of dividend payment by stock helps shareholders:
A. Certainly do not pay income tax
B.Pay fixed income tax
C.Can postpone or not pay income tax
D. Has nothing to do with taxes
37......... a snapshot of the financial condition of the firm at a particular time.
A. The balance sheet provides
B. The income statement provides
C. The statement of cash flows provides
D. All of these provide
38……..of the profitability of the firm over a period of time such as a year.
A. The balance sheet is a summary
B. The income statement is a summary
C. That statement of cash flows is a summary
D. The audit report is a summary
39. If the interest rate on debt is lower than ROA, then a firm will ………..by increasing
the use of debt in the capital structure.
A. Increase the ROE
B. Not change the ROE
C. Decrease the ROE
D. Change the ROE in an indeterminable manner
40. A measure of asset efficiency is ....
A. Sales divided by working capital
B. Return on total assets
C. Return on equity capital
D. Operating profit divided by sales