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Chapter 1: The Role of Financial Management
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1. "Shareholder wealth" in a firm is represented by:
the number of people employed in the firm.
the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.
2. The long-run objective of financial management is to:
maximize earnings per share.
maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.
3. What are the earnings per share (EPS) for a company that earned $100,000 last year in after-
tax profits, has 200,000 common shares outstanding and $1.2 million in retained earning at the
year end?
$100,000
$6.00
$0.50
$6.50
4. A(n) would be an example of a principal, while a(n) would be an example of an
agent.
shareholder; manager
manager; owner
accountant; bondholder
shareholder; bondholder
5. The market price of a share of common stock is determined by:
the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.
6. The focal point of financial management in a firm is:
the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.
the dollars profits earned by the firm.
7. The decision function of financial management can be broken down into the decisions.
financing and investment
investment, financing, and asset management
financing and dividend
capital budgeting, cash management, and credit management
8. The controller's responsibilities are primarily in nature, while the treasurer's
responsibilities are primarily related to .
operational; financial management
financial management; accounting
accounting; financial management
financial management; operations
9. In the US, the has been given the power to adopt auditing, quality control, ethics, and
disclosure standards for public companies and their auditors as well as investigate and discipline
those involved.
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
10. A company's is (are) potentially the most effective instrument of good corporate
governance.
common stock shareholders
board of directors
top executive officers
11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco
and numerous others.
a dramatic rise in the US trade deficit.
charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial accounting for
stock options.
The following item is NEW to the 13th edition.
12. ___________ refers to meeting the needs of the present without compromising the ability
of future generations to meet their own needs.
Corporate Social Responsibility (CSR)
Sustainability
Convergence
Green Economics
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Chapter 2: The Business, Tax, and Financial Environments
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1. Which of the following enjoys limited liability?
A general partnership.
A corporation.
A sole proprietorship.
None of the above.
2. Michael Cohn is a "member" (a type of owner) of a marine supply business. Michael's
business is
a sole proprietorship.
a corporation.
a limited liability company.
a general partnership.
3. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses
the MACRS method of depreciation. What is tax depreciation for the second year of the asset's
life?
$12,000
$19,200
$20,000
$24,000
4. A corporation in which you are a shareholder has just gone bankrupt. Its liabilities are far in
excess of its assets. You will be called on to pay:
a proportionate share of bondholder claims based on the number of common shares
that you own.
a proportional share of all creditor claims based on the number of common shares
that you own.
an amount that could, at most, equal what you originally paid for the shares of
common stock in the corporation.
nothing.
5. A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in
the
primary money market.
secondary money market.
primary capital market.
secondary capital market.
6. A major advantage of the corporate form of organization is:
reduction of double taxation.
limited owner liability.
legal restrictions.
ease of organization.
7. Money market mutual funds
enable individuals and small businesses to invest indirectly in money-market
instruments.
are available only to high net-worth individuals.
are involved in acquiring and placing mortgages.
are also known as finance companies.
8. The purpose of financial markets is to:
increase the price of common stocks.
lower the yield on bonds.
allocate savings efficiently.
control inflation.
9. Which of the following is NOT an example of a financial intermediary?
International Business Machines, Inc. (IBM).
Vanguard Mutual Fund.
El Dorado Savings and Loan Association.
Bank of America.
10. How are funds allocated efficiently in a market economy?
The most powerful economic unit receives the funds.
The economic unit that is willing to pay the highest expected return
receives the funds.
the economic unit that considers itself most in need of funds
receives them.
Receipt of the funds is rotated so that each economic unit can receive
them in turn.
11. Assume that a "temporary" additional (US federal tax related) first-year bonus
depreciation of 50 percent applies to a new, $100,000 piece of equipment purchased by
Bellemans Chocolatier, Inc. The asset has a $10,000 estimated final salvage value. If this asset is
fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will
have depreciated for tax purposes is .
$90,000
$100,000
$135,000
$150,000
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Chapter 3: The Time Value of Money
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1. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years.
You expect annual interest rates will be 8 percent over that time period. The maximum price you
would be willing to pay for the annuity is closest to
$32,000.
$39,272.
$40,000.
$80,000.
2. With continuous compounding at 10 percent for 30 years, the future value of an initial
investment of $2,000 is closest to
$34,898.
$40,171.
$164,500.
$328,282.
3. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the
present value of that future amount to you would
fall.
rise.
remain unchanged.
cannot be determined without more information.
4. Assume that the interest rate is greater than zero. Which of the following cash-inflow
streams should you prefer?
Year1 Year2 Year3 Year4
$400 $300 $200 $100
$100 $200 $300 $400
$250 $250 $250 $250
Any of the above, since they each sum to $1,000.
5. You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16
years it will be redeemed for $1,000. What approximate annual rate of growth does this
represent?
8 percent.
9 percent.
12 percent.
25 percent.
6. To increase a given present value, the discount rate should be adjusted
upward.
downward.
True.
Fred.
7. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment
of $263.80 for 5 years. The compound annual interest rate implied by this arrangement is closest
to
8 percent.
9 percent.
10 percent.
11 percent.
8. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The
loan agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years.
(Payments include both principal and interest.) The annual payment that will fully pay off
(amortize) the loan is closest to
$2,674.
$2,890.
$3,741.
$4,020.
9. When n = 1, this interest factor equals one for any positive rate of interest.
PVIF
FVIF
PVIFA
FVIFA
None of the above (you can't fool me!)
10. (1 + i) n
PVIF
FVIF
PVIFA
FVIFA
11. You can use to roughly estimate how many years a given sum of money must earn
at a given compound annual interest rate in order to double that initial amount .
Rule 415
the Rule of 72
the Rule of 78
Rule 144
12. In a typical loan amortization schedule, the dollar amount of interest paid each period
.
increases with each payment
decreases with each payment
remains constant with each payment
13. In a typical loan amortization schedule, the total dollar amount of money paid each period
.
increases with each payment
decreases with each payment
remains constant with each payment
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Chapter 4: The Valuation of Long-Term Securities
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1. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your
required rate of return is 15 percent?
More than its face value.
Less than its face value.
$1,000.
True.
2. If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
The market is overvaluing the stock.
3. When the market's required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at:
a premium.
a discount.
cannot be determined without more information.
face value.
4. If an investor may have to sell a bond prior to maturity and interest rates have risen since
the bond was purchased, the investor is exposed to
the coupon effect.
interest rate risk.
a perpetuity.
an indefinite maturity.
5. Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently
selling at $100 per share. What is the market's required return on this investment if the dividend
is expected to grow at 5% forever?
4 percent.
5 percent.
7 percent.
9 percent.
6. If a bond sells at a high premium, then which of the following relationships hold true? (P 0
represents the price of a bond and YTM is the bond's yield to maturity.)
P0 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.
7. Interest rates and bond prices
move in the same direction.
move in opposite directions.
sometimes move in the same direction, sometimes in opposite directions.
have no relationship with each other (i.e., they are independent).
8. In the formula k = (D /P ) + g, what does g represent?
e 1 0
the expected price appreciation yield from a common stock.
the expected dividend yield from a common stock.
the dividend yield from a preferred stock.
the interest payment from a bond.
9. In the United States, most bonds pay interest a year, while many European bonds pay
interest a year.
once; twice
twice; once
once; once
twice; twice
10. The expected rate of return on a bond if bought at its current market price and held to
maturity.
yield to maturity
current yield
coupon yield
capital gains yield
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Chapter 5: Risk and Return
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1. This type of risk is avoidable through proper diversification.
portfolio risk
systematic risk
unsystematic risk
total risk
2. A statistical measure of the degree to which two variables (e.g., securities' returns) move
together.
coefficient of variation
variance
covariance
certainty equivalent
3. An "aggressive" common stock would have a "beta"
equal to zero.
greater than one.
equal to one.
less than one.
4. A line that describes the relationship between an individual security's returns and returns on
the market portfolio.
characteristic line
security market line
capital market line
beta
5. According to the capital-asset pricing model (CAPM), a security's expected (required) return
is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
6. The risk-free security has a beta equal to , while the market portfolio's beta is
equal to .
one; more than one.
one; less than one.
zero; one.
less than zero; more than zero.
7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the
gamble's expected value. Carrie shows
risk aversion.
risk preference.
risk indifference.
a strange outlook on life.
8. Beta is the slope of
the security market line.
the capital market line.
a characteristic line.
the CAPM.
9. A measure of "risk per unit of expected return."
standard deviation
coefficient of variation
correlation coefficient
beta
10. The greater the beta, the of the security involved.
greater the unavoidable risk
greater the avoidable risk
less the unavoidable risk
less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company
common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-
free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of
the information above, the required return on Plaid Pants' common stock should be , and the
required return on Acme's common stock should be .
3.6 percent; 7.2 percent
9.6 percent; 13.2 percent
9.0 percent; 18.0 percent
14.0 percent; 23.0 percent
12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75.
The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is
1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that
adjusted beta would most likely be .
less than 0.75
more than 0.75, but less than 1.10
equal to 1.10
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
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Chapter 6: Financial Statement Analysis
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1. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5
percent, total assets are $8 million, and ROI is 8 percent.
1.60
2.05
2.50
4.00
2. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a
net profit margin of 5 percent. What are its sales?
$3,750,000
$480,000
$300,000
$1,500,000
3. Which of the following would NOT improve the current ratio?
Borrow short term to finance additional fixed assets.
Issue long-term debt to buy inventory.
Sell common stock to reduce current liabilities.
Sell fixed assets to reduce accounts payable.
4. The gross profit margin is unchanged, but the net profit margin declined over the
same period. This could have happened if
cost of goods sold increased relative to sales.
sales increased relative to expenses.
the U.S. Congress increased the tax rate.
dividends were decreased.
5. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry
average of 1.4. This means that the company
will not experience any difficulty with its creditors.
has less liquidity than other firms in the industry.
will be viewed as having high creditworthiness.
has greater than average financial risk when compared to other firms in its industry.
6. Kanji Company had sales last year of $265 million, including cash sales of $25
million. If its average collection period was 36 days, its ending accounts receivable
balance is closest to . (Assume a 365-day year.)
$26.1 million
$23.7 million
$7.4 million
$18.7 million
7. A company can improve (lower) its debt-to-total assets ratio by doing which of the
following?
Borrow more.
Shift short-term to long-term debt.
Shift long-term to short-term debt.
Sell common stock.
8. Which of the following statements (in general) is correct?
A low receivables turnover is desirable.
The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
An increase in net profit margin with no change in sales or assets means a poor ROI.
The higher the tax rate for a firm, the lower the interest coverage ratio.
9. Retained earnings for the "base year" equals 100.0 percent. You must be looking at
a common-size balance sheet.
a common-size income statement.
an indexed balance sheet.
an indexed income statement.
10. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-
equity (D/E) ratio?
.2
.6
.667
.333
11. A firm's operating cycle is equal to its inventory turnover in days (ITD)
plus its receivable turnover in days (RTD).
minus its RTD.
plus its RTD minus its payable turnover in days (PTD).
minus its RTD minus its PTD.
12. When doing an "index analysis," we should expect that changes in a number of the
firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts
payable) would move roughly together with for a normal, well-run company.
net sales
cost of goods sold
earnings before interest and taxes (EBIT)
earnings before taxes (EBT)
The following item is NEW to the 13th edition.
13. The process of convergence of accounting standards around the world aims to
.
narrow or remove national accounting differences
move non-US accounting standards towards US Generally Accepted Accounting
Principles (US GAAP)
create one set of rules-based accounting standards for all countries
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Chapter 7: Funds Analysis, Cash Flow Analysis, and Financial Planning
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1. According to the accounting profession, which of the following would be considered
a cash-flow item from an "investing" activity?
cash inflow from interest income.
cash inflow from dividend income.
cash outflow to acquire fixed assets.
all of the above.
2. According to the Financial Accounting Standards Board (FASB), which of the
following is a cash flow from a "financing" activity?
cash outflow to the government for taxes.
cash outflow to shareholders as dividends.
cash outflow to lenders as interest.
cash outflow to purchase bonds issued by another company.
3. If the following are balance sheet changes:
$5,005 decrease in accounts receivable
$7,000 decrease in cash
$12,012 decrease in notes payable
$10,001 increase in accounts payable
a "use" of funds would be the:
$7,000 decrease in cash.
$5,005 decrease in accounts receivable.
$10,001 increase in accounts payable.
$12,012 decrease in notes payable.
4. On an accounting statement of cash flows an "increase(decrease) in cash and cash
equivalents" appears as
a cash flow from operating activities.
a cash flow from investing activities.
a cash flow from financing activities.
none of the above.
5. Uses of funds include a (an):
decrease in cash.
increase in any liability.
increase in fixed assets.
tax refund.
6. Which of the following would be included in a cash budget?
depreciation charges.
dividends.
goodwill.
patent amortization.
7. An examination of the sources and uses of funds statement is part of:
a forecasting technique.
a funds flow analysis.
a ratio analysis.
calculations for preparing the balance sheet.
8. Which of the following is NOT a cash outflow for the firm?
depreciation.
dividends.
interest payments.
taxes.
9. Which of the following would be considered a use of funds?
a decrease in accounts receivable.
a decrease in cash.
an increase in account payable.
an increase in cash.
10. The cash flow statement in the United States is most likely to appear using
a "supplementary method."
a "direct method."
an "indirect method."
a "flow of funds method."
11. For a profitable firm, total sources of funds will always total uses of funds.
be equal to
be greater than
be less than
have no consistent relationship to
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