Chapter 1

1) A ________ is a business owned by a single individual.

A) corporation
0
B) sole proprietorship -
C) general partnership
D) limited partnership

2) The owners of a limited liability company typically would prefer to:

0
A) be taxed like a corporation.

0
C) be taxed personally on all business income. -
B) have liability exposure similar to that of a sole proprietor.

D) have liability exposure similar to that of a general partner.

3) A firm creates value by:

A) having a greater cash inflow from its stockholders than its outflow to them.
O
B) paying more cash to creditors/stockholders than the amount it received from them. -
C) borrowing long-term debt.
D) generating sales whether or not payment is received for all of those sales.

4) Which form of business structure typically has the greatest potential for agency
problems?
A) Sole proprietorship
B) General partnership
C) Limited partnership
0D) Corporation~

5) Which one of the following results have been reported as a consequence of a corporation
“going dark?”
A) Increased market liquidity and lower costs
B) Lower audit costs and lower interest rates on bank loans
C) Increased access to capital and lower costs associated with that capital
0D Limited access to capital markets and stock price declines
Chapter 2

6) On a balance sheet, ________ is (are) reported with fixed assets.

8
A) intangible assets ~
B) accounts payable
C) preferred stock
D) inventory

7) If a firm has long-term debt, net income must equal:

OA) Pretax income − Interest expense − Taxes.-
B) EBIT − Taxes.
C) Taxes + Addition to retained earnings.
D) Operating income × (1 − Marginal tax rate).

8) The ________ tax rate applies to the next dollar of taxable income earned.
A) deductible
B) residual
O
C) marginal -
D) average

9) The cash flow of the firm must be equal to the:

A) cash flow to stockholders minus the cash flow to creditors.
B) cash flow to creditors minus the cash flow to stockholders.
C) cash flow to governments plus the cash flow to stockholders.
O
D) cash flow to stockholders plus the cash flow to creditors. ~

10) Arroyo Industries has revenues of $64,480, interest expense of $1,740, depreciation of
$3,960, cost of goods sold of $25,840, dividends paid of $5,200, and administrative expenses of
$7,040. The combined federal and state income tax rate is 22 percent. What is the addition to
retained earnings?
Pretax income = R Expense
-

Int
A) $18,091
-

B) $20,700
C) $16,359 =

25 960,

O D) $15,002
25, 900
5, 698
22%
=

Tax =
x

5, 200
20 , 202
-

EAT 20 102
15 , 002
=

, =
11) Wilson Corporation started the year with $280 in cash, $924 in inventory, $361 in
accounts payable, $1,687 in equipment, and $414 in accounts receivable. At year's end, the firm
had $311 in cash, $1,594 in equipment, $1,003 in inventory, $426 in accounts receivable, and
$398 in accounts payable. What was the change in net working capital during the year?
A) −$860 1342
B) $191
Ending NWC =

0C) $85 ~ NWC 1 , 257

=

Beg .

-
D) −$94
85
12) At the beginning of this year, Basit Framing had net fixed assets of $21,506 and total
assets of $32,687. At year’s end, net fixed assets are $20,492 and total assets are $32,915. The
annual depreciation expense is $1,520. What is net capital spending for this year?
A) −$850
0 B) $506 -
C) −$1,292
D) −$2,534

Chapter 3

13) The receivables turnover ratio equals:

A) accounts receivable divided by sales..
O
B) sales divided by accounts receivable. -
C) sales minus accounts receivable, divided by sales.
D) accounts receivable times sales.

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

O
A) credit customers.
B) employees.
C) suppliers.

0 the chai
D) mortgage holder.

15) Which one of the following circumstances is most apt to cause a profitable, stable firm to
have a higher than average price-earnings ratio?

DEF price perche

A) Slow industry outlook
0B) Very low current earnings
C) Low market share e
0
D) Low prospect of firm growth
E) Low investor opinion of firm
16) The most effective method of directly evaluating the financial performance of a firm is to
compare the financial ratios of the firm to:
O the firm's ratios from prior time periods and to the ratios of firms with similar
A)
operations. -
B) the average ratios of all firms within the same country over a period of time.
C) those of other firms located in the same geographic area that are similarly sized.
D) the average ratios of the firm's international peer group.
E) those of the largest conglomerate that has operations in the same industry as the firm.

17) Financial planning models are most likely to omit:

A) the changes in net working capital required for additional sales.
B) the increases in costs required to increase sales.
C) any change in retained earnings due to changes in the income statement.
OD) the timing, risk, and size of the cash flows.
-

18) Guillory Group has sales of $363,000, total assets of $323,500, and a net profit margin of
14.6 percent. The firm has a total debt ratio of 54 percent. What is the return on equity?
A) 28.45% x To tat assets
turnover x EM
8
B) 35.61% - ROE =
Profit Margin .. 17
14 6% x 1 12 X 2
C) 23.29%
. .

D) 31.74% 323 , 500 E 148,810

-

54% =
- - ( =

323 , 588
19) Audacious Coffee has sales of $318,200, net income of $41,400, current assets of
$118,400, net fixed assets of $238,300, net working capital of $18,900, and long-term debt of
$175,000. What is the equity multiplier?
A) 1.71 18 , 900 99 , 500
118 400 - =

CL ,
0
B) 4.34 ~
=

50 274 500
175
=

,
C) 1.44 99 , 500
+D
+
=
,
D) 3.82
238 , 300
=
356 , 700
118 , 400
+

in =

T
=
82, 200
T
-

T =

it =
4 .
34
EM=-
IE
 > Retention o
20) Flash eBikes has a net profit margin of 6.2 percent and a dividend payout ratio of 40
percent. The capital intensity is 1.08 and the debt-equity ratio is .54. What is the sustainable rate
ROEX Retention
-

of growth? I ROE 6 2 % x 0 93x1 54

.

>
.
=
.

- - -

A) 6.30%
1 ROEX Retention I 0 O
O
.

B) 5.53%
OC) 5.60%
D) 6.41% 1 =
.
1 88 = TAT = 0 93 .

TAT
Chapter 4 EM = 1 + 0 54
.
=

1-54
21) Assume you are comparing two investments, each of which will result in $20,000 of total
cash inflow. Investment A pays $8,000 in Year 1, followed by four annual payments of $3,000
each. Investment B pays five annual payments of $4,000 each. Which one of the following
statements regarding the investments is correct?
A) Both options are of equal value today.
0 B) Given a positive rate of return, Option A has a higher present value than Option B. -
C) Given a positive rate of return, Option B has a higher present value than Option A.
D) Given a zero rate of return, Option B has a lower present value than Option A.

22) You have been awarded an insurance settlement of $211,400 that is payable one year
from today. What is the minimum amount you should accept today in exchange for this
settlement if you can earn 6.3 percent on your investments?
A) $198,525.36
B) $224,718.20 211 , 400
⑧
C) $198,871.12 -
D) $207,239.13 3 6 %
1
+
.

23) Theo will deposit $3,500 in an account one year from today, an additional $6,500 two
years from today, and $9,000 three years from today. If the account earns 7.35 percent per year,
compounded annually, what will his account balance be 14 years from today?
O $43,661t
A) 23 14
B) $15,358
C) $51,284
Hi
D) $22,382
24) A credit card compounds interest monthly and has an effective annual rate of 12.67
- - -

percent. What is the annual percentage rate?

A) 12.35%
! 67
B) 12.00%

( n) 1 12
= .

+
0
C) 11.99% -
D) 11.87%

25) A preferred stock pays an annual dividend of $6.50 per share and has an annual rate of
return of 7.35 percent. What is the stock price?
A) $74.50
B) $71.78
C) $92.09
-
7 35%
O D) $88.44
~
.

26) Victoria will receive annual payments of $10,000 for the next 25 years. The discount rate
is 6.8 percent. What is the difference in the present value of this stream of payments if they are
-

paid at the beginning of each year rather than at the end of each year?

57
-

OA) $8,069.29- 5% ) x6 5%

[
.

B) $9,216.67
C) $9,706.67
=
10 , 000 ,
D) $8,382.04

27) Assume you graduate with $26,800 in student loan debt at an interest rate of 4.25 percent,
compounded monthly. If you want to have this debt paid in full within seven years, how much

[ is text I
must you pay each month?
A) $4,506.48
26, 00
= c
B) $369.42 ~
OC) $1,174.60
D) $3,883.00

CF=
28) Jisoo expects to live 30 years after she retires. At the end of the first year of her
retirement, she wants to withdraw $35,000 from her savings. Each year thereafter, she wants to
increase her annual withdrawal by 3.5 percent. If she can earn 5.5 percent on her savings, how
much does she need to have in retirement savings on the day she retires?

57- (6)
A) $862,001.34
B) $648,909.18
C) $764,458.87 ~
0
-
-
3
.

D) $919,028.56

Chapter 8

29) Aspen leaf is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will
be repaid in 10 years. The company plans to issue the bonds at par value and pay interest
annually. Which one of the following statements is correct? Assume a face value of $1,000.
A) The bonds will pay 19 interest payments and one principal payment.
B) The bonds will initially sell at a discount.
C) At maturity, the bonds will pay a final payment of $1,027.50.
⑧D) At issuance, the bond's yield to maturity is 5.5 percent.
-

30) Most of the trading in bonds is conducted:

A) in person on the floor of the NYSE.
B) by dealers located in Chicago.
O
C) by brokers on various trading floors.
0
D) electronically.

31) The relationship between nominal rates, real rates, and inflation is known as the:
A) Miller and Modigliani theorem.
OB) Fisher effect. -
C) Gordon growth model.
D) term structure of interest rates.
 L =
30
32) Otto Enterprises has a bond issue outstanding with an annual coupon rate of 6 percent
that matures in 9 years. The bond is currently priced at $1,046.92 and has a par value of $1,000.

29]
Interest is paid semiannually. What is the yield to maturity?

90[1 ) +
-

O A) 5.34% -
B) 4.83% 1 , 046 92 .
=

C) 2.67%
D) 2.77%

33) Jackson’s has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5
years. What is the current value of one of these bonds if the market rate of interest is 7.6 percent?
Assume semiannual compounding.
o
A) $365.32 f 1 , 500
B) $401.12 5

6 % /2x13
.

C) $360.49
D) $378.17

34) The 5-year bond of Bulgarelli Corporation has a bid quote of 131.2891 and an asked
quote of 131.3470. Assume you purchase one of these bonds with a face value of $5,000 and a
coupon rate of 7.4 percent, paid semiannually. The next interest payment will be paid two -

months from today. What will be your invoice price for this purchase?
-
↳

A) $7,220.01 dirty price

O B) $6,690.68 -
2 =

185
C) $6,809.47
D) $7,001.32
6567 .

35
dusted price
=

+ (4/6) x 185
Accrued Int
=

- 123 33
.

Dirty price
Chapter 9

35) The ________ equals the total return on a stock.

A) dividend yield minus the capital gains yield
B) dividend growth rate minus the dividend yield
0
C) dividend yield plus the dividend growth rate-
D) growth rate of the dividends

36) A limit order to buy:

A) guarantees the quantity purchased but not the price.
B) guarantees both the purchase price and the order fulfillment.
0
C) is executed only if the purchase price is less than the limit amount.
D) guarantees the purchase price but not the order execution.
0
37) The Reading Company has adopted a policy of increasing the annual dividend on its Do
common stock at a constant rate of 3 percent annually. The last dividend it paid (T = 0) was $.90
per share. What will be the company’s dividend six years from now?
A) $.90
9(1 9 %)
D6
=
B) $.93 =
u .
+

C) $1.04
0D) $1.07-

Do
38) Wholesome Foods paid its first annual dividend yesterday in the amount of $.28 per
share. The company plans to double each annual dividend payment for the next three years. After
that time, it plans to pay a constant $2.25 per share indefinitely. What is one share of this stock
worth today if the market rate of return on similar securities is 11.5 percent?
A) $19.41
1
B) $18.40 Gr
=

-mon)"
C) $17.46
D) $17.13
0 ~

-
2 .
25 I

+ 11 -6)
+
 Do
39) Hernandez Diving just paid an annual dividend of $2.20 and announced that all future
-

dividends would be $2.25 per share indefinitely. What is your required rate of return if you are
willing to pay $15.25 per share for this stock?
O A) 14.75% ~ 2 25
R= - -
.

B) 16.07%
C) 13.88% 15 25 .

D) 13.67%

40) Alcala Imports has annual revenue of $506,000 with costs of $369,400. Depreciation is
$64,900 and the tax rate is 21 percent. The firm has debt outstanding with a market value of
$240,000 along with 7,500 shares of stock that is valued at $87 per share. The firm has $51,200
of cash, all of which is needed to run the business. What is the firm’s EV/EBITDA ratio?
A) 6.37
7 50 x87 240 , 000
EV
+

0 B) 6.53 -
=

C) 5.39 =

892 ,
500
D) 6.15
136 , 600
369 , 400
=

506 , 800
-

EBITDA =

EV =
6 53
.

-
EBITA