1. Which one of the following terms is defined as a conflict of inte.docx

1. 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.
bylaws
E.
legal liability
2. Which of the following questions are addressed by financial
managers?
I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their
credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?
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
3. 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
E.
determining how much money should be kept in the checking
account
4. Decisions made by financial managers should primarily focus
on increasing which one of the following?
A.
size of the firm
B.
growth rate of the firm
C.
gross profit per unit produced
D.
market value per share of outstanding stock

E.
total sales
5. Essay
List and briefly describe the three general areas of
responsibility for a financial manager.
Section II: Financial Statements, Taxes and Cash Flow
6. The book value of a firm is:
A.
equivalent to the firm's market value provided that the firm has
some fixed assets.
B.
based on historical cost.
C.
generally greater than the market value when fixed assets are
included.
D.
more of a financial than an accounting valuation.
E.
adjusted to the market value whenever the market value exceeds
the stated book value.
7. Which of the following are expenses for accounting purposes
but are not operating cash flows for financial purposes?

I. interest expense
II. taxes
III. costs of goods sold
IV. depreciation
A.
IV only
B.
II and IV only
C.
I and III only
D.
I and IV only
E.
I, II, and IV only
8. A firm has $520 in inventory, $1,860 in fixed assets, $190 in
accounts receivables, $210 in accounts payable, and $70 in
cash. What is the amount of the current assets?
A.
$710
B.
$780
C.
$990
D.
$2,430

E.
$2,640
9. Crandall Oil has total sales of $1,349,800 and costs of
$903,500. Depreciation is $42,700 and the tax rate is 34
percent. The firm does not have any interest expense. What is
the operating cash flow?
A.
$129,152
B.
$171,852
C.
$179,924
D.
$281,417
E.
$309,076
10.

What is the change in the net working capital from 2010 to
2011?
A.
-$1,194
B.
$1,306
C.
$1,887
D.
$4,780
E.
$5,172
11.
Relationships determined from a firm's financial information
and used for comparison purposes are known as:
A.
financial ratios.
B.
identities.
C.
dimensional analysis.
D.
scenario analysis.
E.

solvency analysis.
12.
According to the Statement of Cash Flows, a decrease in
accounts receivable will _____ the cash flow from _____
activities.
A.
decrease; operating
B.
decrease; financing
C.
increase; operating
D.
increase; financing
E.
increase; investment
13.
The Corner Hardware has succeeded in increasing the amount of
goods it sells while holding the amount of inventory on hand at
a constant level. Assume that both the cost per unit and the
selling price per unit also remained constant. This
accomplishment will be reflected in the firm's financial ratios in
which one of the following ways?
A.
decrease in the inventory turnover rate
B.
decrease in the net working capital turnover rate
C.

no change in the fixed asset turnover rate
D.
decrease in the day's sales in inventory
E.
no change in the total asset turnover rate
14.
Shareholders probably have the most interest in which one of
the following sets of ratios?
A.
return on assets and profit margin
B.
long-term debt and times interest earned
C.
price-earnings and debt-equity
D.
market-to-book and times interest earned
E.
return on equity and price-earnings
15.
Al's Sport Store has sales of $897,400, costs of goods sold of
$628,300, inventory of $208,400, and accounts receivable of
$74,100. How many days, on average, does it take the firm to
sell its inventory assuming that all sales are on credit?
A.
74.19 days

B.
84.76 days
C.
121.07 days
D.
138.46 days
E.
151.21 days
Essay Question
16.
You need to analyze a firm's performance in relation to its
peers. You can do this either by comparing the firms' balance
sheets and income statements or by comparing the firms' ratios.
If you only had time to use one means of comparison which
method would you use and why?
Section III: Valuation of Future Cash Flows
17.
The process of determining the present value of future cash
flows in order to know their worth today is called which one of
the following?
A.
compound interest valuation
B.
interest on interest computation
C.
discounted cash flow valuation

D.
present value interest factoring
E.
complex factoring
18.
You invested $1,400 in an account that pays 5 percent simple
interest. How much more could you have earned over a 20-year
period if the interest had compounded annually?
A.
$749.22
B.
$830.11
C.
$882.19
D.
$901.15
E.
$914.62
19.
You just received $225,000 from an insurance settlement. You
have decided to set this money aside and invest it for your
retirement. Currently, your goal is to retire 25 years from today.
How much more will you have in your account on the day you
retire if you can earn an average return of 10.5 percent rather

than just 8 percent?
A.
$417,137
B.
$689,509
C.
$1,050,423
D.
$1,189,576
E.
$1,818,342
20.
When you retire 40 years from now, you want to have $1.2
million. You think you can earn an average of 12 percent on
your investments. To meet your goal, you are trying to decide
whether to deposit a lump sum today, or to wait and deposit a
lump sum 2 years from today. How much more will you have to
deposit as a lump sum if you wait for 2 years before making the
deposit?
A.
$1,414.14
B.
$2,319.47
C.
$2,891.11
D.
$3,280.78

E.
$3,406.78
Essay Question
21. You are considering two lottery payment options: Option A
pays $10,000 today and Option B pays $20,000 at the end of ten
years. Assume you can earn 6 percent on your savings. Which
option will you choose if you base your decision on present
values? Which option will you choose if you base your decision
on future values? Explain why your answers are either the same
or different.
22.
An ordinary annuity is best defined by which one of the
following?
A.
increasing payments paid for a definitive period of time
B.
increasing payments paid forever
C.
equal payments paid at regular intervals over a stated time
period
D.
equal payments paid at regular intervals of time on an ongoing
basis
E.
unequal payments that occur at set intervals for a limited period
of time

23.
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
$200,000 today or receive payments of $1,400 a month for 20
years. You can earn 6 percent on your money. Which option
should you take and why?
A.
You should accept the payments because they are worth
$209,414 to you today.
B.
C.
D.
You should accept the $200,000 because the payments are only
worth $189,311 to you today.
E.
You should accept the $200,000 because the payments are only
worth $195,413 to you today.
24.
You have been investing $250 a month for the last 13 years.
Today, your investment account is worth $73,262. What is your
average rate of return on your investments?
A.
8.94 percent
B.
9.23 percent
C.

9.36 percent
D.
9.41 percent
E.
9.78 percent
25.
Your parents have made you two offers. The first offer includes
annual gifts of $10,000, $11,000, and $12,000 at the end of each
of the next three years, respectively. The other offer is the
payment of one lump sum amount today. You are trying to
decide which offer to accept given the fact that your discount
rate is 8 percent. What is the minimum amount that you will
accept today if you are to select the lump sum offer?
A.
$28,216
B.
$29,407
C.
$29,367
D.
$30,439
E.
$30,691
26.
You are considering a project which will provide annual cash
inflows of $4,500, $5,700, and $8,000 at the end of each year
for the next three years, respectively. What is the present value
of these cash flows, given a 9 percent discount rate?

A.
$14,877
B.
$15,103
C.
$15,429
D.
$16,388
E.
$16,847
27.
Grand Adventure Properties offers a 9.5 percent coupon bond
with annual payments. The yield to maturity is 11.2 percent and
the maturity date is 11 years from today. What is the market
price of this bond if the face value is $1,000?
A.
$895.43
B.
$896.67
C.
$941.20
D.
$946.18
E.
$953.30

28.
You are purchasing a 20-year, zero-coupon bond. The yield to
maturity is 8.68 percent and the face value is $1,000. What is
the current market price?
A.
$106.67
B.
$108.18
C.
$182.80
D.
$221.50
E.
$228.47
29.
Which one of the following types of stock is defined by the fact
that it receives no preferential treatment in respect to either
dividends or bankruptcy proceedings?
A.
dual class
B.
cumulative
C.
non-cumulative
D.
preferred

E.
common
30.
What are the distributions to shareholders by a corporation
called?
A.
retained earnings
B.
net income
C.
dividends
D.
capital payments
E.
diluted profits
31.
Atlas Mines has adopted a policy of increasing the annual
dividend on its common stock at a constant rate of 2.75 percent
annually. The firm just paid an annual dividend of $1.67. What
will the dividend be six years from now?
A.
$1.88
B.
$1.92
C.

$1.97
D.
$2.02
E.
$2.05
Section IV: Capital Budgeting
32.
A project has an initial cost of $27,400 and a market value of
$32,600. What is the difference between these two values
called?
A.
net present value
B.
internal return
C.
payback value
D.
profitability index
E.
discounted payback
33.
The length of time a firm must wait to recoup the money it has
invested in a project is called the:
A.
internal return period.

B.
payback period.
C.
profitability period.
D.
discounted cash period.
E.
valuation period.
34.
The internal rate of return is defined as the:
A.
maximum rate of return a firm expects to earn on a project.
B.
rate of return a project will generate if the project in financed
solely with internal funds.
C.
discount rate that equates the net cash inflows of a project to
zero.
D.
discount rate which causes the net present value of a project to
equal zero.
E.
discount rate that causes the profitability index for a project to
equal zero.

35.
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.
36.
You are considering a project with an initial cost of $7,500.
What is the payback period for this project if the cash inflows
are $1,100, $1,640, $3,800, and $4,500 a year over the next four
years, respectively?
A.
3.21 years
B.
3.28 years
C.
3.36 years

D.
4.21 years
E.
4.29 years
37.
A firm evaluates all of its projects by using the NPV decision
rule. At a required return of 14 percent, the NPV for the
following project is _____ and the firm should _____ the
project.
A.
$5,684.22; reject
B.
$7,264.95; accept
C.
$7,264.95; reject
D.
$9,616.93; accept
E.
$9,616.93; reject
Essay Question
38.
How does the net present value (NPV) decision rule relate to the

primary goal of financial management, which is creating wealth
for shareholders?
Section V: Cost of Capital
39.
The average of a firm's cost of equity and aftertax cost of debt
that is weighted based on the firm's capital structure is called
the:
A.
reward to risk ratio.
B.
weighted capital gains rate.
C.
structured cost of capital.
D.
subjective cost of capital.
E.
weighted average cost of capital.
40.
The capital structure weights used in computing the weighted
average cost of capital:
A.
are based on the book values of total debt and total equity.
B.
are based on the market value of the firm's debt and equity
securities.
C.

are computed using the book value of the long-term debt and the
book value of equity.
D.
remain constant over time unless the firm issues new securities.
E.
are restricted to the firm's debt and common stock.
41.
Which one of the following statements is correct for a firm that
uses debt in its capital structure?
A.
The WACC should decrease as the firm's debt-equity ratio
increases.
B.
When computing the WACC, the weight assigned to the
preferred stock is based on the coupon rate multiplied by the par
value of the preferred.
C.
The firm's WACC will decrease as the corporate tax rate
decreases.
D.
The weight of the common stock used in the computation of the
WACC is based on the number of shares outstanding multiplied
by the book value per share.
E.
The WACC will remain constant unless a firm retires some of
its debt.

42.
Central Systems, Inc. desires a weighted average cost of capital
of 8 percent. The firm has an aftertax cost of debt of 5.4 percent
and a cost of equity of 15.2 percent. What debt-equity ratio is
needed for the firm to achieve its targeted weighted average
cost of capital?
A.
0.38
B.
0.44
C.
1.02
D.
2.77
E.
3.63
43.
Carson Electronics uses 70 percent common stock and 30
percent debt to finance its operations. The aftertax cost of debt
is 5.4 percent and the cost of equity is 15.4 percent.
Management is considering a project that will produce a cash
inflow of $36,000 in the first year. The cash inflows will then
grow at 3 percent per year forever. What is the maximum
amount the firm can initially invest in this project to avoid a
negative net present value for the project?
A.
$299,032
B.
$382,979

C.
$411,406
D.
$434,086
E.
$441,414
Section VI: Short Term Financial Planning
44.
The length of time between the purchase of inventory and the
receipt of cash from the sale of that inventory is called the:
A.
operating cycle.
B.
inventory period.
C.
accounts receivable period.
D.
accounts payable period.
E.
cash cycle.
45.
The length of time between the day a firm purchases an item
from its supplier until the day that supplier is paid for that
purchase is called the:
A.
operating cycle.

B.
inventory period.
C.
accounts receivable period.
D.
accounts payable period.
E.
cash cycle.
46.
Which one of the following increases cash?
A.
granting credit to a customer
B.
purchasing new machinery
C.
making a payment on a bank loan
D.
purchasing inventory
E.
accepting credit from a supplier
47.

Which of the following are uses of cash?
I. collecting a receivable
II. increasing inventory
III. obtaining a bank loan
IV. paying a supplier for previous purchases
A.
I and III only
B.
II and IV only
C.
I and II only
D.
I, II, and IV only
E.
II, III, and IV only
48.
Which one of the following will increase net working capital?
Assume the current ratio is greater than 1.0.
A.
paying a supplier for a previous purchase
B.
paying off a long-term debt
C.
selling inventory at cost

D.
purchasing inventory on credit
E.
selling inventory at a profit on credit
49.
An increase in which one of the following is an indicator that an
accounts receivable policy is becoming more restrictive?
A.
bad debts
B.
accounts receivable turnover rate
C.
accounts receivable period
D.
credit sales
E.
operating cycle
50.
Denver Interiors, Inc., has sales of $836,000 and cost of goods
sold of $601,000. The firm had a beginning inventory of
$36,000 and an ending inventory of $47,000. What is the length
of the inventory period?
A.
19.21 days

B.
20.89 days
C.
25.20 days
D.
30.53 days
E.
33.69 days

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