!#$&$()#+,(!1. Question Which of the following isar.docx

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1. Question : Which of the following is/are true?
I. Asset management ratio indicates how effectively a firm
generates profits on sales, assets and stockholder’s equity.
II. Liquidity ratios indicate the firm’s capacity to meet its
short-term financial obligations, but not its long-term
financial obligations.
III. Profitability ratios indicate how efficiently a firm is using
its assets to generate sales.
IV. Financial leverage ratios indicate the firm’s capacity to
meet its financial obligations, both short-term and long-term.
Student Answer:
II and IV
I and II
I, II, and IV
I and III
Question 2. Question : Which of the following is/are true?
I. When a loan is amortized over a five year term, the amount
of interest paid is decreased each year.
II. The effective annual rate of interest will always be equal

to or less than the nominal annual rate of interest.
III. An annuity due is the annuity in which the payments or
receipts occur at the beginning of each period.
IV. If the present value of a given sum is equal to its future
value, then the discount rate must be zero.
Student Answer:
IV only
III & IV
II, III & IV
I, III & IV
Question 3. Question : If a firm’s current ratio is 3.0,
Student Answer:
it is possible for its quick ratio to be larger than 3.0.
its current liabilities exceed its current assets.
it is possible for its quick ratio to be smaller than 3.0.
its current liabilities equal its current assets.

Ch 3
Ch 5
Ch 3
I. The shareholder wealth maximization goal states that
management should seek to maximize the present value of
the expected future returns to the owners of the firm.
II. The primary reason for the agency problem between the
stockholders and managers is because of the separation of
ownership and management.
III. Protective covenants in a company's bond indentures are
used in agency relationships involving stockholders and
creditors.
IV. The fact that no investor can expect to earn excess
returns based on an investment strategy using only historical
stock price or return information is an example of
semistrong-form market efficiency.
Student Answer:
I and IV
I, II and IV
I, II and III
All of the above

Question 5. Question : If you’re a financial manager of a MNC
(U.S. based) and you
anticipate that your company will need to pay C$2 million 6
months later. If you would like to make use of either forward
or futures or options contracts to fix your exchange rate
today, what is your strategy?
Student Answer:
BUY forward/futures contracts for C$2 million or BUY
call options for C$2 million.
SELL forward/futures contracts for C$2 million or BUY
call options for C$2 million.
BUY forward/futures contracts for C$2 million or BUY
put options for C$2 million.
SELL forward/futures contracts for C$2 million or BUY
put options for C$2 million.
Question 6. Question : If a firm's total asset turnover ratio is
2.0, which of the
following is true?

Student Answer:
Its annual sales are less than its total assets.
It is possible that its fixed asset turnover ratio is 1.5.
Its annual sales are two times its total assets.
Ch1 and Ch2
Ch 2
Ch 3
None of the above is true.
Question 7. Question : After-tax cash flow equals:
Student Answer:
earnings after tax plus non-cash charges
net earnings plus deferred expenses
net earnings plus depreciation
earnings after tax

Question 8. Question : You would like to endow a chair at UTC
for $188,000 per
year. At 20% interest, how much do you need to donate?
Student Answer:
$1,880,000
$37,600
$940,000
$2,685,714
Question 9. Question : Clair wants to purchase a new car. She
knows that she can
afford to pay $3588 per year and that her bank will charge
her 13% interest on the car loan. She intends to pay off the
car in 4 years. Interest will be compounded annually. Of the
following, which is the most expensive vehicle in her price
range that she could consider?
Student Answer:
A Taurus selling for $10,274
A Malibu selling for $17,510

A Civic selling for $13,274
A Celica selling for $12,596
Question 10. Question : UT Inc. is considering issuing
additional long-term debt to
finance an investment opportunity. Currently, UT has $100
million in 15% debt outstanding. Its after-tax net income is
$30 million, and the company is in 40 percent tax bracket.
What is UT’s current times interest earned ratio.
Student Answer:
5.15 times
4.33 times
Ch 4
Ch 5
Ch 5
Ch 3
5.00 times
4.00 times

Question 11. Question : Continued from question 10, how much
additional 18% debt
can UT issue now to maintain its times interest earned ratio
at 4? Assume for this calculation that earnings before interest
and taxes remains at its present level.
Student Answer:
$7.81 million
$6.94 million
$18.75 million
$15.625 million
Question 12. Question : The UCD Company is considering a $70
million expansion
(capital expenditure) program next year. The company wants
to determine approximately how much additional financing
will be needed if the expansion program is undertaken. Next
year the company expects to earn $45 million after interest
and taxes. The company also plans to increase its dividends
from $5 million to $10 million. If the expansion program is
accepted, the company expects its current assets needs to
increase by approximately $15 million next year. Long-term
debt retirement obligations total $3 million next year and

depreciation is expected to be $25 million. No fixed assets
are expected to be sold next year.
Student Answer:
$28 million
$24 million
$34 million
$25 million
I. When the times interest earned ratio falls below 1.0, the
viability of the firm is not threatened because the firm
generates sufficient earnings to make interest payments when
due.
II. The price-to-earnings is a market-based ratio.
Ch 3
Ch 3
Ch 3
III. Positive earnings always indicate positive EVA
(economic value added).

Student Answer:
III
II
II & III
I & III
Question 14. Question : You are given the information of firm A
and B for their
performance evaluation.
Firm A B
Sales 15 20
EAT 2 2
Total Assets 25 40
Stockholder’s Equity 10 10
Suppose the industry average of net profit margin ratio, total
asset turnover and equity multiplier is around 10%, 0.58
times and 2.5 respectively.
Which firm appears to have problems?
Student Answer:
Firm A has problems.

Firm B has problems
None of them presents problems
Both of them have problems
Question 15. Question : Continued from question 14, what is the
debt ratio of firm A?
Student Answer:
2.5
0.4
0.6
none of the above
Ch 3
Ch 3

Question 16. Question : Continued from question 14, which of
the following is true?
Student Answer:
Firm A shall restructure its capital structure to achieve a
higher financial leverage since it appears to be lower than the
industry average.
Firm B shall improve its total asset turnover ratio since it
is lower than the industry average and thus indicates an
inefficient utilization of assets.
Firm A shall improve its total asset turnover ratio since
it is higher than the industry average and thus indicates an
inefficient utilization of assets.
Question 17. Question : George plans to open his own furniture
store in 12 years. To
do so, he has committed $50,000 in a bank certificate of
deposit for 12 years. In addition, he plans to save $10,000 per
year (end of year) for the next 4 years and $5,000 per year
(end of year) for the following 8 years. How much money
will George have in 12 years if the investments (i.e., CD and
savings) earn 13 percent per year compounded annually?

Student Answer:
$761,329.20
$299,392.37
$409,441.62
$521,926.01
Question 18. Question : If a firm wishes to retain the same
return on equity when its
net profit margin and total asset turnover has declined, it
must
Student Answer:
decrease its equity multiplier.
reduce sales and increase assets.
increase its equity multiplier.

none of the above.
Ch 3
Ch 5
Ch 3
Question 19. Question : In 2011, the Deluxe Company's sales
were $12.0 million. Its
balance sheet at year end 2011 is shown below. Deluxe's
2012 sales are expected to be $18 million. Earnings after tax
is expected to be 8.0% of sales, and annual dividends of
$200,000 are expected to be paid in 2012. The company
presently has excess plant and equipment capacity. As a
result, assume that the net fixed asset figure on the balance
sheet will remain constant for 2012. Assuming that the ratios
of assets (except fixed assets, net) to sales and accounts
payable to sales in 2011 remain the same in 2012, calculate
the total amount, i.e., one number, of external financing
required for 2012, using the percentage of sales method.
Deluxe Co. Balance Sheet
(December 31, 2011)
($ millions)
Current assets: Current liabilities:
Cash $0.2 Accts. payable $0.6

Accts. Rec. 1.2 Notes payable 0.7
Inventory 2.0 Long-term debt 2.5
Fixed assets,
net 2.6
Stockholders'
equity 2.2
Total Assets $6.0 Total Liabilities and Equity $6.0
Student Answer:
$160,000
$250,000
$750,000
None of the above
Question 20. Question : Continued from question 19, assuming
Deluxe plans to raise
its external financing exclusively from notes payable, what is
the number of notes payable in the pro forma Balance Sheet
for 2012?
Student Answer:
$1,450,000

$850,000
$860,000
None of the above
Ch 4
Ch 4
Question 21. Question : P&G Company has revenues of
$80,000, general &
administrative expenses of $25,000, interest expense of
$4,200 and depreciation expense of $2,000. The firm is in
the 35% tax bracket. What would be the firm’s cash flow
from operations?
Student Answer:
$33,720
$23,792
$18,416

$26,800
Question 22. Question : Last year A&M’s net cash provided by
operating activities
was $13.6 million and its net cash used by investing activities
was $19.7 million. If net cash provided by financing
activities was $9.3 million, what was the net increase (or
decrease) in cash and cash equivalents during the year?
A&M started the year with $2.1 million in cash.
Student Answer:
$9.2 million
$3.2 million
$11.3 million
$5.3 million
Question 23. Question : You are preparing a cash budget for
A&M Inc. for the first quarter of
2012. You have summarized the following information.
A&M Inc.
Cash Budget Worksheet
First Quarter, 2012

December January
Estimated Sales $825,000 $730,000
Estimated Credit
Sales 770,000 690,000
Estimated Receipts:
Cash sales 40,000
Collections of Accounts Receivable
75% of last month’s credit sales 577,500
25% of current month credit sales 172,500
Total Accounts Receivable
Ch 4
Ch 4
Ch 4
collections 750,000
Estimated purchases $438,000 504,000
Estimated payments of accounts
payable 438,000
504,000
Other estimated disbursements for January 2012, include
____________________________
Wages and Salaries $250,000
Rent 27,000
Other Expenses 10,000
Tax Payments 115,000
A&M’s projected cash balance at the beginning of January is
$120,000 and the company desires to maintain a balance of
$120,000
at the end of each month. Will A&M need to have a short-term

loan in
January?
Student Answer:
Yes.
No.
Question 24. Question : Continued from question 23, what is the
amount of short-
term loan required to meet the desired level of cash balance
at the end of January?
Student Answer:
$0
$50000
$55000
Question 25. Question : Your monthly statement from your bank
credit card shows
that the monthly rate of interest is 1.5%. What is the annual
effective rate of interest you are being charged on your credit
card?

Student Answer:
19.56%
1.50%
18.00%
29.56%
Ch 4
Ch 5
Question 26. Question : If the spot rate for the Japanese yen is
$0.009204 and the
one-year forward rate is $0.009227, what is the annualized
premium (discount) for Japanese yen?
Student Answer:
premium of 1.00%
premium of 0.50%
discount of -0.99%

premium of 0.25%
I. In an efficient capital market, all security investments will
have a zero NPV.
II. In an efficient capital market, corporate diversification is
inexpensive.
III. In an efficient capital market, corporate diversification is
unnecessary.
Student Answer:
I and II
I and III
II and III
All of the above
Question 28. Question : Sandy just won a $6,000,000 lottery in
Maryland. Instead of
receiving a lump sum, she found that she would receive
$240,000 annually (end of year) for 25 years. Sandy is 75
years old and wants her money now. She has been offered
$1,778,500 to sell her ticket. What rate of return is the buyer
expecting to make if Sandy accepts the offer?
HINT: This is a present value of an ordinary annuity

problem, and you would like to solve for I. The buyer
would get the end-of-year annual payment for 25 years.
The PV is the offered price.
Student Answer:
less than 10%
13.82%
14.67%
12.84%
Ch 2
Ch 2
Ch 5
Question 29. Question : What is the value in 3 years of $21,500
deposited in an
account earning 3% compounded monthly?
Student Answer:

$23,493.63
$23,522.11
$21,661.65
$62,312.98
Question 30. Question : Over the past 3 years, your $15,000 in
gold coins has
increased value by 250 percent. You plan to sell these coins
today. You have paid annual storage and insurance costs of
$520 per year. Assay expenses at the time of sales are
expected to total $450. What is your 3-year holding period
return to this investment?
Student Answer:
236.60%
243.53%
143.53%

136.60%
Question 31. Question : Two years ago you bought 100 shares
of UCD convertible
preferred stock at $45 per share. The preferred stock had an
annual dividend of $4.50 per share, and a total of $8.25 in
dividends per share have been paid so far. Today the
company announced that the stock is redeemable for $47.25
plus accrued and unpaid dividends, for a total of $48.00.
Alternatively, holders may convert their shares of preferred
stock at a conversion rate of 1.20 shares of UCD common
stock for each share of preferred stock. If the closing price of
UCD common stock is $47.50, what is your holding period
return?
Ch 5
Ch 2
Ch 2
Student Answer:
27.84%
36.25%

25.00%
45.00%
Question 32. Question : Canadian Motors exports cars to the
U.S. Market. On
January 20, 2008, its most popular model was selling
(wholesale) to U.S. dealers for $48,000 (US dollars). What
price must Canadian Motors charge for the same model on
January 29, 2012 to realize the same amount of Canadian
dollar as it did in 2008? ($0.9350/C$ on 1/20/08 and
$1.10/C$ on 1/29/2012)
Student Answer:
$56,470.59.
$39,927.27.
$53,443.30.
$43,111.11.

Question 33. Question : M&M Inc. has an agreement with it
banks that allow M&M
to borrow money on a short term basis to finance its
inventories and accounts receivable. The agreement requires
M&M to maintain a current ratio of 2.2 or higher and a debt
ratio of 45% or lower. From the balance sheet, M&M has
total assets of $1,750,000, current assets of $975,000, and
total debts of $550,000 (consist of current liabilities of
$125,000 and long-term debt of $425,000). Determine how
much M&M could borrow this time to invest in inventory
and accounts receivable without violating the terms of its
borrowing agreement.
Student Answer:
$87,211.08
$431,818.18
Ch 2
Ch 3

$498,095.27
$96,153.85
Question 34. Question : What is the return on stockholders'
equity for a firm with a
net profit margin of 5.5 percent, sales of $375,000, an equity
multiplier of 3.5, and total assets of $175,000?
Student Answer:
24.11%
29.27%
41.25%
21.59%
I. A common-size balance sheet shows the firm's assets and
liabilities as a percentage of net sales.
II. The average collection period is the average number of
days an accounts receivable remains outstanding.

III. If a firm wishes to retain the same return on equity when
its net profit margin and total asset turnover has declined, it
must decrease its equity multiplier.
IV. An average collection period far above the industry
norm may indicate that the firm's credit policy is hurting
sales by restricting credit to the very best customer
Student Answer:
I and III
III
II
II and III
III and IV
Ch 3
Ch 3
Question 36. Question : The ____ ratio, sometimes called the
"acid test," is a more
stringent measure of ____ than the ____ ratio.

Student Answer: current; financial leverage; quick
quick; liquidity; current
current; liquidity; quick
quick; financial leverage; current
Question 37. Question : Nancy bought 100 shares of Risky
Venture stock six months
ago for $14 per share and sold it yesterday for $12. The
company paid a total of $0.24 per share in dividends to
Nancy during the time you held the stock. What was Nancy’s
holding period return?
Student Answer:
-12.57%
-25.14%
-16.67%
16.00%
Question 38. Question : An exchange rate quoted as $0.88 per
Australian dollar in the
U.S. is known as a(n) ____ quote.

Student Answer: hedge
indirect
direct
value
Question 39. Question : The difference between the bid price
and the ask price on a
security is the:
Student Answer: asset factor
commission
value
spread
Question 40. Question : A treasury bond can be purchased for
$8,820 today and the
bond holder will receive $950 in interest and the $10,000

Ch 3
Ch3
Ch 2
Ch 2
Ch 2
face value at maturity. If you require a holding period rate of
return of 23%, do you believe this is a good invest at today's
price of $8,820?
Student Answer:
Yes, the holding period return is greater than 23%.
No, the holding period return is less than 23%.
Yes, the holding period return is equal to 23%.
Question 41. Question : Which of the following statements is
true?
I. Securities not listed on exchanges are said to be traded
over the counter.
II. The bid quote on a security from a dealer is always
smaller than the ask quote on a security.
III. Trading on the NYSE is conducted by members of the

exchange. The members that execute orders and act as
agents on behalf of their clients are floor brokers.
IV. The Dow Jones Industrial Average is calculated using the
total market value of 30 stocks.
Student Answer: All of the above.
II and IV only
I, II and III
I,II, and IV
None of the above
Points Received: 0 of 4.2
Question 42. Question : A&M Stores, a U.S. department store
chain, annually
negotiates a contract with UT watch company, located in
France, to purchase a large shipment of watches. On July 8,
2013, A&M purchased 2,500 watches for 850,000 euros. The
exchange rate on July 28, 2013 was $1.15/!. What is the cost
per watch in U.S. dollars for A&M Stores?
Student Answer: $977,500
$739,130.44
$295.65

$391
Ch 2
Ch 2
Question 43. Question : Which of the following is/are false?
I. If a firm's current ratio is 2.5, it is possible for its quick
ratio to be 2.0.
II. If a firm’s current ratio is greater than 1, it means that the
firm’s current liabilities exceed its current assets.
Student Answer: I
II
I and II
Neither I nor II
44. Question : Bank of America has granted you a ten year loan
for

$65,000. If your ten annual end of the year payments are
$13,380.50, what is the rate of interest Bank of America is
charging?
Student Answer: 14.76%
15.86%
20.21%
19.24%
I. In preparing a statement of cash flows, the indirect method
involves adjusting net income to reconcile it to net cash
flows from operating activities.
II. The balance sheet shows the effects of a company’s
operating, investing, and financing activities on its cash
flows.
Student Answer:
I
II
All of the above
None of the above

Ch 3
Ch 5
Ch 3
Question 46. Question : The stock of A&M, Inc. has just been
sold in an initial public
offering at a price of $280 per share. One week after this
offering,
the stock has risen to $290. You believe the stock will rise to
$300
over the coming year. You expect A&M to pay a $10 dividend
during the coming year. If you require your one-year holding
period return to be 10%, is A&M stock a good investment at the
current price of $290?
Student Answer:
Yes, the expected one-year holding period return is 10.71%,
greater than the required return, 10%.
No, the expected one-year holding period return is 7.14%,
smaller
than the required return, 10%.

smaller
greater
Question 47. Question : A firm with an equity multiplier of 2.5,
will have a debt ratio
of
Student Answer: 2.50
0.75
4.00
0.60
Ch 2
Ch 3

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