The document consists of a set of multiple-choice questions that cover key concepts in finance and accounting. Topics include definitions of financial terms, calculations of ratios, investment evaluations like net present value, and characteristics of bonds and stock dividends. It aims to assess understanding of financial principles and tools used in corporate finance.

1. Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best
completes the statement or answers the
question.
1) Which one of these is a correct definition?
A) Long-term debt is defined as a residual claim on a firm’s
assets.
B) Tangible assets are fixed assets such as patents.
C) Net working capital equals current assets plus current
liabilities.
D) Current assets are assets with short lives, such as inventory.
E) Current liabilities are debts that must be repaid in 18 months
or less.
1)
2) Which one of these accounts is included in net working
capital?
A) inventory
B) long-term debt
C) copyright
D) manufacturing equipment
E) common stock
2)
3) The ultimate control of a corporation lies in the hands of the
corporate:

2. A) president.
B) stockholders.
C) chairman of the board.
D) board of directors.
E) chief executive officer.
3)
4) Net working capital is defined as:
A) fixed assets minus long-term liabilities.
B) current assets plus stockholders’ equity.
C) current assets minus current liabilities.
D) total assets minus total liabilities.
E) current assets plus fixed assets.
4)
5) An asset that can be quickly converted into cash without
significant loss in value is
referred to as being:
A) liquid.
B) tangible.
C) intangible.
D) fixed.
E) marketable.
5)
1
6) Noncash items refer to:
A) expenses charged against revenues that do not directly affect
cash flow.

3. B) the costs incurred for the purchase of intangible fixed assets.
C) all accounts on the balance sheet other than cash on hand.
D) the credit sales of a firm.
E) the accounts payable of a firm.
6)
7) The cash flow resulting from a firm’s ongoing, normal
business activities is referred to
as the:
A) cash flow to investors.
B) net capital spending.
C) additions to net working capital.
D) operating cash flow.
E) cash flow to retained earnings.
7)
8) Projected future financial statements are called:
A) plug statements.
B) comparative statements.
C) reconciled statements.
D) aggregated statements.
E) pro forma statements.
8)
9) Which statement expresses all accounts as a percentage of
total assets?
A) common-size income statement
B) common-size balance sheet
C) pro forma balance sheet
D) pro forma income statement
E) statement of cash flows

4. 9)
10) The quick ratio is measured as:
A) current assets minus inventory minus current liabilities.
B) current liabilities divided by current assets, plus inventory.
C) current assets minus inventory, divided by current liabilities.
D) current assets divided by current liabilities.
E) cash on hand plus current liabilities, divided by current
assets.
10)
11) Ratios that measure a firm’s financial leverage are known as
________ ratios.
A) asset management
B) profitability
C) long-term solvency
D) market value
E) short-term solvency
11)
2
12) The debt-equity ratio is measured as:
A) long-term debt divided by total equity.
B) total equity divided by total debt.
C) total debt divided by total equity.
D) total equity divided by long-term debt.
E) total assets minus total debt, divided by total equity.
12)
13) The financial ratio measured as net income divided by sales

5. is known as the firm’s:
A) return on assets.
B) earnings before interest and taxes.
C) asset turnover.
D) profit margin.
E) return on equity.
13)
14) A perpetuity differs from an annuity because:
A) perpetuity payments vary with the rate of inflation.
B) annuity payments occur at irregular intervals of time.
C) perpetuity payments vary with the market rate of interest.
D) perpetuity payments never cease.
E) perpetuity payments are variable while annuity payments are
constant.
14)
15) The difference between the present value of an investment’s
future cash flows and its
initial cost is the:
A) profitability index.
B) discounted payback period.
C) net present value.
D) payback period.
E) internal rate of return.
15)
16) Which statement concerning the net present value (NPV) of
an investment or a
financing project is correct?
A) Any type of project with greater total cash inflows than total

6. cash outflows, should
always be accepted.
B) An investment project that has positive cash flows for every
time period after the
initial investment should be accepted.
C) A financing project should be accepted if, and only if, the
NPV is exactly equal to
zero.
D) An investment project should be accepted only if the NPV is
equal to the initial
cash flow.
E) Any type of project should be accepted if the NPV is positive
and rejected if it is
negative.
16)
3
17) The discount rate that makes the net present value of an
investment exactly equal to
zero is called the:
A) external rate of return.
B) profitability index.
C) equalizer.
D) average accounting return.
E) internal rate of return.
17)

7. 18) A situation in which accepting one investment prevents the
acceptance of another
investment is called the:
A) operational ambiguity decision.
B) net present value profile.
C) issues of scale problem.
D) multiple rates of return decision.
E) mutually exclusive investment decision.
18)
19) All else constant, the net present value of a typical
investment project increases when:
A) the initial cost of a project increases.
B) the discount rate increases.
C) all cash inflows occur during the last year instead of
periodically throughout a
project’s life.
D) each cash inflow is delayed by one year.
E) the rate of return decreases.
19)
20) The primary reason that company projects with positive net
present values are
considered acceptable is that:
A) they return the initial cash outlay within three years or less.
B) they create value for the owners of the firm.
C) the required cash inflows exceed the actual cash inflows.
D) the investment’s cost exceeds the present value of the cash
inflows.
E) the project’s rate of return exceeds the rate of inflation.

8. 20)
21) A bond that makes no coupon payments and is initially
priced at a deep discount is
called a _____ bond.
A) municipal
B) zero coupon
C) Treasury
D) junk
E) floating-rate
21)
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22) The stated interest payment, in dollars, made on a bond each
period is called the bond’s:
A) maturity.
B) yield to maturity.
C) coupon rate.
D) coupon.
E) face value.
22)
23) The _____ premium is that portion of a nominal interest rate
or bond yield that
represents compensation for expected future loss in purchasing
power.
A) liquidity
B) interest rate risk

9. C) default risk
D) inflation
E) taxability
23)
24) The _____ premium is that portion of the bond yield that
represents compensation for
potential difficulties that might be encountered should the bond
holder wish to sell the
bond prior to maturity.
A) taxability
B) liquidity
C) default risk
D) inflation
E) interest rate risk
24)
25) The market price of a bond increases when the:
A) face value decreases.
B) coupon rate decreases.
C) coupon is paid annually rather than semiannually.
D) par value decreases.
E) discount rate decreases.
25)
26) Next year’s annual dividend divided by the current stock
price is called the:
A) capital gains yield.
B) yield to maturity.
C) dividend yield.
D) earnings yield.
E) total yield.

10. 26)
5
27) The rate at which a stock’s price is expected to appreciate
(or depreciate) is called the
_____ yield.
A) capital gains
B) earnings
C) total
D) current
E) dividend
27)
28) The underlying assumption of the dividend growth model is
that a stock is worth:
A) the present value of the future income that the stock is
expected to generate.
B) the same amount to every investor regardless of their desired
rate of return.
C) an amount computed as the next annual dividend divided by
the required rate of
return.
D) the same amount as any other stock that pays the same
current dividend and has
the same required rate of return.
E) an amount computed as the next annual dividend divided by
the market rate of

11. return.
28)
29) For a firm with a constant payout ratio, the dividend growth
rate can be estimated as:
A) Payout ratio × Return on equity.
B) Return on retained earnings × Retention ratio.
C) Payout ratio × Return on assets.
D) Return on equity × (1 + Retention ratio).
E) Return on assets × Retention ratio.
29)
30) The total return on a stock is equal to the:
A) dividend growth rate minus the dividend yield.
B) dividend yield minus the capital gains yield.
C) growth rate of the dividends.
D) dividend divided by the sum of the dividend yield and
capital gains yield.
E) dividend yield plus the dividend growth rate.
30)
31) Which one of these factors generally has the greatest impact
on a firm’s PE ratio?
A) depreciation method used by the firm
B) required rate of return
C) the overall risk level of the current firm
D) future opportunities
E) current dividends
31)
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12. 32) A forward PE is generally based on the projected:
A) average earnings for the next five years.
B) average earnings for the next three years.
C) stock price in one year.
D) earnings for the upcoming quarter.
E) earnings for the next year.
32)
33) The excess return you earn by moving from a relatively
risk-free investment to a risky
investment is called the:
A) inflation premium.
B) time premium.
C) geometric average return.
D) risk premium.
E) arithmetic average return.
33)
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