# Expert Answers

1. Which of the following would result in a decrease in cash flow and a use of cash?

A. A decrease in notes payable

B. An increase in long-term debt

C. A decrease in inventory

D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of

A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and owners’ equity of $33,000. Which of the following is the correct balance of the firm’s liabilities?

A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash?

A. A decrease in notes payable

B. A decrease in long-term debt

C. An increase in inventory

D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm?

A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct?

A. Accounts receivable decreased by $2,300 and represented a use of cash.

B. Accounts receivable increased by $2,300 and represented a source of cash.

C. Accounts receivable decreased by $2,300 and represented a source of cash.

D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firm’s taxable income?

A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct?

A. IPOs may be either underpriced or overpriced.

B. IPOs are never overpriced.

C. IPOs are never underpriced.

D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firm’s net income?

A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When you’re preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent?

A. Total liabilities C. Total owners’ equity B. Total assets D. Cash

11. Suppose that a corporation has a taxable income of $200,000. What is the firm’s corporate income tax for the current tax year? (You can use the following table to calculate the firm’s U.S. federal corporate tax.)

Taxable Income More Than

Taxable Income Less Than

Tax Rate

$0 $50,000 15%

$50,001 $75,000 25%

$75,001 $100,000 34%

$100,001 $335,000 39%

$335,001 $10,000,000

34%

$10,000,001

$15,000,000

35%

$15,000,001

$183,333,334

38%

$18,333,334

35%

11. A. $78,000 b. $6,250 c. $39,000 d. $61,250

12. Using the same table and information provided average tax rate?

A. 39% b. 30.625% c. 34% d. 31.625%

13. Using the same table and information provided marginal tax rate?

A. 39% b. 30.625% c. 34% d. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of

A. ownership percentage.

B. market value.

C. the firm’s current ratio.

D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firm’s operating cash flow?

A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the

A. statement of cash flows.

B. income statement.

C. balance sheet.

D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios?

A. Long-term solvency measures

B. Asset management or turnover measures

C. Short-term solvency or liquidity measures

D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct?

A. Accounts payable decreased by $3,200 and represented a use of cash

B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities?

A. Rights offering C. Green Shoe option

B. Abnormal returns D. Gross spread

20. In the United States, for the 2007 tax year, federal corporate income tax rates never

exceeded a marginal rate of

A. 15%. C. 39%.

B. 35%. D. 34%.

1. What is the present value of $3,000, discounted at 8 percent interest per period, for two periods? (Round your answer to the nearest cent.)

A. $2,777.78 C. $3,499.20 B. $2,572.02 D. $3,240.00

2. The stated interest payment made on a bond is called the

A. yield to maturity. C. face value.

B. maturity. D. coupon.

3. An ordinary annuity of $500 per period, discounted at a rate of 8 percent per period for 3 periods, has a present value of $1,288.55. If this same annuity was an annuity due, what would its present value be? (Round your answer to the nearest cent.)

A. $1,288.55 C. $1,391.63 B. $1,500.00 D. $1,788.55

4. The relationship between real returns, nominal returns, and inflation is commonly referred to as the

A. dirty price. C. Treasury yield curve. B. Fisher effect. D. bid-ask spread.

5. On an investment of $2,000, you’ll earn 10 percent interest per year compounded semiannually. What is the future value of this investment after one year?

A. $2,205 C. $2,420 B. $2,100 D. $4,500

6. What is the future value of a $10,000 investment, earning 12 percent interest per period, after three periods? (Round your answer to the nearest cent.)

A. $7,117.80 C. $12,544.00

B. $11,200.00 D. $14,049.28

7. Where does most bond trading occur?

A. At the corporate headquarters of Moody’s

B. In the New York Stock Exchange (NYSE)

C. Electronically, over the counter

D. At the corporate headquarters of Standard and Poor’s

8. Suppose that you buy a $5,000 bond with a 12 percent annual coupon, payable semiannually on January 1 and July 1. On both January 1 and July 1, the bondholder will receive $300, for a total annual interest payment of $600 ($300 + $300).

Based on the principal and accrued interest only, how much would you expect

to pay to purchase this bond on May 1?

A. $5,200 C. $5,300 B. $5,000 D. $5,600

9. Today, you deposit $1,000 into an account that pays 12 percent interest annually. How much will you have in the account after 4 years? (Round your answer to the nearest cent.)

A. $635.52 C. $1,120.00 B. $1,254.40 D. $1,573.52

10. A type of loan that’s paid off by making regular principal reductions, usually according to a specified schedule, is called a(n)

A. annuity due. C. amortizing loan. B. debenture. D. corporate bond.

11. What is the present value of the right to receive four equal payments (ordinary annuity) of $500 per period, discounted at a rate of 10 percent per period? (Round your answer to the nearest cent.)

A. $341.51 C. $1,584.94 B. $454.55 D. $732.05

12. On an initial investment of $1,000, you can earn 12 percent interest per year compounded annually, or 12 percent interest per year compounded semiannually. Which of the following statements is correct?

A. 12 percent per year, compounded annually, is the better interest rate for the investment.

B. 12 percent per year, compounded semiannually, is the better interest rate for the investment.

C. There’s no difference between the two interest rates; both rates will produce the same future value.

D. It isn’t possible to determine the future value of this investment based on the information provided.

13. The payments made by a corporation to shareholders, either in cash or in stock, are called

A. dividends. C. cash flows. B. capital gains. D. bond yields.

14. What is the future value of a $1,500 investment, earning 10 percent interest per period, after two periods? (Round your answer to the nearest cent.)

A. $1,650.00 C. $1,815.00 B. $1,363.63 D. $1,239.67

15. A stock’s expected cash dividend divided by its current price is called the

A. dividend yield. C. constant growth.

B. capital gains yield. D. ask price.

16. Today, you deposit $6,000 into an account that pays 10 percent annually. In one year, you’ll deposit another $4,000 in the account. How much will you have in the account after two years?

A. $10,600 C. $10,000 B. $11,660 D. $11,000

17. What is the present value of $2,200, discounted at 10 percent interest per period, for one period? (Round your answer to the nearest cent.)

A. $2,420.00 C. $1,818.18 B. $2,000.00 D. $1,980.00

18. Which of the following statements about stock trading is correct?

A. The NASDAQ is a computer network, with no physical location for trading.

B. The number of NYSE exchange members is unlimited.

C. The NASDAQ uses a specialist system for actively traded stocks.

D. The NYSE does not have a physical location for stock trading activities.

19. You want to invest money for 3 years in an account that pays 7 percent interest annually. How much would you need to invest today to reach a future goal of $5,000? (Round your answer to the nearest cent.)

A. $4,650.00 C. $4,762.90 B. $6,125.22 D. $4,081.49

20. What is the present value of the right to receive four equal payments (annuity due) of $1,000 per period, discounted at a rate of 10 percent per period? (Round your answer to the nearest cent.)

A. $1,909.09 C. $1,464.10 B. $3,486.85 D. $2,486.85

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lesson 3

1. The amount of time required for an investment to generate cash flows sufficient to recover its initial cost is called the

A. net present value.

B. average accounting return.

C. internal rate of return.

D. payback period.

2. To calculate a firm’s break-even point, you need to

A. divide fixed costs by variable costs.

B. add fixed costs to variable costs, and divide the total

by the unit contribution margin.

C. divide fixed costs by the unit contribution margin.

D. divide the unit contribution margin by variable costs.

3. The present value of an investment’s future cash flows

divided by its initial cost is called the

A. profitability index.

B. average accounting return.

C. net present value.

D. discounted payback

4. Assume that a firm has an average net income of $125,000 and an average book

value of $500,000. What is the firm’s average accounting return?

A. 25 percent C. 40 percent

B. 65 percent D. 12.5 percent

5. A cost that has already been incurred and that should therefore not be considered

in an investment decision is called a(n)

A. pro forma. C. erosion.

B. sunk cost. D. opportunity cost.

6. A situation in which a company can’t raise financing for a project under any

circumstances is called

A. simulation analysis. C. operating leverage.

B. hard rationing. D. forecasting risk.

7. A project requires an initial investment of $75,000 today. The present value of the

cash inflows likely to result from this initial investment is $98,293. What is the net

present value of this investment?

A. –$23,293 C. $51,707

B. $75,000 D. $23,293

8. The discount rate that makes the net present value of an investment zero is called the

A. average accounting return. C. project cash flow.

B. internal rate of return. D. crossover rate.

9. Assume that an item costs $4 per unit to manufacture, and sells for $19 per unit.

What is the unit contribution margin?

A. $23 C. $15

B. 21 percent D. 4.75 percent

10. The difference between an investment’s market value and its cost is called the

A. discounted cash flow. C. net present value.

B. average accounting return. D. probability index.

11. When making capital budgeting decisions for a firm, the average net income divided by the average book value equals the

A. average accounting return. C. net present value.

B. internal rate of return. D. project cash flow

12. A situation in which the taking of one investment will prevent the taking of another is called a(n)

A. stand-alone investment.

B. opportunity cost.

C. marginal revenue investment.

D. mutually exclusive investment decision.

13. When you’re discussing operating cash flow, the tax saving that results from the

depreciation deduction, calculated as the depreciation multiplied by the corporate

tax rate is called the

A. discounted cash flow.

B. accelerated cost recovery system.

C. depreciation tax shield.

D. net working capital.

14. Under U.S. tax law, the depreciation method that allows for the accelerated write-off of property under certain classifications is called the

A. modified depreciation allowance.

B. accelerated cost recovery system.

C. bottom-up approach.

D. depreciation tax shield.

15. A type of financial statement that provides projections for future years is called a

A. pro forma statement.

B. modified depreciation statement.

C. discounted cash flow analysis.

D. project cash flow statement.

16. A company manufactures an item that has a unit contribution margin of $9. The firm

has fixed costs of $3,600 per year. What is the break-even point, in units?

A. 27 units C. 32,400 units

B. 400 units D. 200 units

17. The sales level that results in zero project net income is called the

A. operating cash flow. C. opportunity cost.

B. accounting break-even point. D. internal rate of return.

18. Which of the following statements about operating leverage is not correct?

A. Operating leverage is a measure of risk.

B. Operating leverage increases as fixed costs increase.

C. Operating leverage decreases as variable costs decrease.

D. Operating leverage is a combination of scenario and sensitivity analysis.

19. The degree to which a firm or project is committed to fixed production costs is called

A. operating leverage. C. capital rationing.

B. accelerated cost recovery. D. sunk cost.

20. When a firm introduces a new product, it can have a negative effect on the cash flows from existing products. This negative effect is known as

A. opportunity cost. C. erosion.

B. incremental cash flow. D. MACRS depreciation.

lesson 4

1. The slope of the security market line, which is the difference between the expected return on a market portfolio and the risk-free rate, is called the

A. market risk premium.

B. portfolio variance.

C. arithmetic average return.

D. cost of capital.

2. A stock with a beta coefficient (β) of 2.0 has

A. one-tenth of the risk of an average asset.

B. the same systemic risk as an average asset.

C. one-half the systemic risk of an average asset.

D. twice as much systemic risk as an average asset.

3. In a market, when all information of every kind is reflected in stock prices, the market is said to be

A. weak form efficient.

B. geometrically efficient.

C. strong form efficient.

D. average return efficient.

4. Suppose that you purchased 200 shares of a stock at $46 per share (ignore all

commissions). Assume the stock paid a dividend of $1.20 per share for the year.

The stock price rose to $52.78 per share, and was then sold at that price. What

was the total amount of dividends received?

A. $120 C. $9,200

B. $240 D. $1,356

5. The term diversifiable risk is synonymous with which of the following?

A. Risk premium C. Systematic risk

B. Unsystematic risk D. Total risk

6. The average compound return earned per year over a multiyear period is called the

A. arithmetic average return. C. geometric average return.

B. normal distribution. D. standard deviation.

7. Which of the following is the formula used to describe the components of a risk premium?

A. risk premium = expected return + projected return

B. total returns = expected return + unexpected return

C. unexpected returns = systematic portion + unsystematic portion

D. risk premium = expected return – risk-free rate

8. Suppose that you purchased 300 shares of a stock at $35 per share (ignore all

commissions). Assume the stock paid a dividend of $1.45 per share for the year.

The stock price rose to $42.50 per share, and was then sold at that price. What

was the total dollar return?

A. $12,750 C. $2,250

B. $2,685 D. $435

9. The concept that asserts that well-organized capital markets, such as the NYSE,

are efficient is called the

A. geometric average return. C. efficient markets hypothesis.

B. normal distribution. D. standard deviation.

10. The percentage of a portfolio’s total value placed in a particular investment is called the

A. portfolio weight. C. portfolio variance.

B. beta coefficient. D. systematic risk.

11. The positively sloped straight line that shows the relationship between expected return and the beta coefficient is called the

A. frequency distribution. C. geometric average return.

B. bell curve. D. security market line.

12. Assume you purchased 150 shares of a stock at $18 per share (ignore all commissions).

The stock paid a dividend of $0.75 per share for the year. What is the total cost of

the stock?

A. $112.50 C. $1,800

B. $2,812.50 D. $2,700

13. A high degree of uncertainty about the future for a firm is likely to lead to

A. greater variability in the firm’s stock price.

B. lower variability in the firm’s stock price.

C. a lower variance and standard deviation.

D. less volatile returns on the stock.

14. The equation of the security market line that shows the relationship between expected return and beta is called the

A. security market beta line.

B. unsystematic risk equation.

C. principle of diversification.

D. capital asset pricing model (CAPM).

15. The minimum required return on a new investment is called the

A. average return. C. beta coefficient.

B. cost of capital. D. risk premium.

16. The return earned in an average year over a multiyear period is called the

A. normal distribution. C. arithmetic average return.

B. geometric average return. D. standard deviation.

17. Which of the following is the formula used to calculate the total return on a stock?

A. Total Return = Expected Return + Unexpected Return

B. Total Return = Unexpected Return + Stock Price

C. Total Return = Stock Price Number of Shares

D. Total Return = Dividend Number of Shares

18. The concept of spreading an investment across a number of assets to eliminate some (but not all) of the risk is called the

A. systematic component of return. C. principle of diversification.

B. portfolio variance. D. beta coefficient.

19. Suppose that you purchased 100 shares of a stock at $28 per share (ignore all

commissions). Assume that the stock paid a dividend of $1.40 per share for the

year. The stock price rose to $34.65 per share, and was then sold at that price.

What was the total amount of the capital gain (or loss)?

A. $2,800 C. $140

B. $665 D. $3,465

20. When you move from a risk-free investment to a risky investment, the excess return required on the risky investment is called a

A. risk premium. C. frequency distribution.

B. portfolio weight. D. portfolio variance.

lesson 5

1. Which of the following is the minimum return a company

needs to earn to satisfy all its investors?

A. NPV C. BASF 2015

B. RE D. WACC

2. The equation RP = D/P0 is used to determine the

A. cost of a bond.

B. cost of preferred stock.

C. cost of common stock.

D. dividend resulting from one share of stock.

3. The cost of equity can be viewed as the combination of

A. the financial leverage and the cost of capital.

B. corporate taxes and shareholder claims.

C. business risk and financial risk.

D. the weighted average cost of capital and the capital structure.

4. The return that lenders require on a firm’s new borrowing is known as the

A. financial leverage. C. warrant.

B. cost of debt. D. cost of equity.

5. The legal proceeding for liquidating or reorganizing a business is called

A. internal financing. C. flotation.

B. financial leveraging. D. bankruptcy.

6. When a firm places projects into one of several risk classes and adds or subtracts

adjustment factors to or from the WACC, the firm is using the _______ approach.

A. basic C. objective

B. subjective D. pure play

7. The dividend growth model approach is one approach to estimating a firm’s

A. cost of equity. C. conversion value.

B. financial leverage. D. beta coefficient.

8. A firm that pays few or no dividends and instead provides shareholders with

capital gains through an increase in stock values is called a

A. business failure. C. leveraged firm.

B. pure play. D. growth firm.

9. If a firm has publicly held debt and measures it cost as the yield to maturity on the

outstanding debt, the company rate is

A. critical. C. low.

B. (E/V) RE. D. irrelevant.

10. The cost of capital for a firm that has no debt is called the

A. weighted average cost of capital.

B. financial leverage.

C. interest tax shield.

D. unlevered cost of capital.

11. A procedure in which a failing firm is financially restructured in an attempt

to continue operations is called

A. liquidation. C. reorganization.

B. tax shielding. D. capital structuring.

12. Issuing stock and using the money to pay off debt is one way a firm

A. restructures. C. prepares for bankruptcy.

B. refinances. D. prepares for its IPO

13. In Wall Street language, a company that focuses on only one line of business

is called a(n)

A. pure play. C. growth firm.

B. unlevered company. D. internally financed firm.

14. The overall return that a company must earn on its existing assets to maintain the value of its stock and to satisfy its owners, creditors, and providers of capital is

called the

A. reorganization value.

B. flotation cost.

C. weighted average cost of capital.

D. capital structure.

15. During most cases, when a company files for bankruptcy,

A. the court assigns an unbiased individual to run the company in the interim.

B. the judge prepares a reorganization plan the company must follow.

C. payments to creditors and shareholders are suspended.

D. the “debtor in possession” runs the business.

16. The return that equity investors require on their investment in a firm is called the

A. cost of equity.

B. weighted average cost of capital.

C. capital structure weight.

D. project cost of capital.

17. When a firm raises money by issuing new stocks or bonds, the costs associated

with the new stock or bond issues are called the

A. intrinsic value. C. strike costs.

B. floor value. D. flotation costs.

18. The run establishing priority of claims during a liquidation is called the

A. reorganization priority list. C. absolute priority rule.

B. bankruptcy proceeding rule. D. prepack claims petition.

19. The separate cost of capital in each section of a corporation is called the

A. floor value. C. capital appreciation.

B. divisional cost of capital. D. option cost.

20. The situation in which a firm is unable to meet its financial obligations is called

A. technical insolvency. C. reorganization.

B. liquidation. D. accounting insolvency.

A. A decrease in notes payable

B. An increase in long-term debt

C. A decrease in inventory

D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of

A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and owners’ equity of $33,000. Which of the following is the correct balance of the firm’s liabilities?

A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash?

A. A decrease in notes payable

B. A decrease in long-term debt

C. An increase in inventory

D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm?

A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct?

A. Accounts receivable decreased by $2,300 and represented a use of cash.

B. Accounts receivable increased by $2,300 and represented a source of cash.

C. Accounts receivable decreased by $2,300 and represented a source of cash.

D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firm’s taxable income?

A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct?

A. IPOs may be either underpriced or overpriced.

B. IPOs are never overpriced.

C. IPOs are never underpriced.

D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firm’s net income?

A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When you’re preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent?

A. Total liabilities C. Total owners’ equity B. Total assets D. Cash

11. Suppose that a corporation has a taxable income of $200,000. What is the firm’s corporate income tax for the current tax year? (You can use the following table to calculate the firm’s U.S. federal corporate tax.)

Taxable Income More Than

Taxable Income Less Than

Tax Rate

$0 $50,000 15%

$50,001 $75,000 25%

$75,001 $100,000 34%

$100,001 $335,000 39%

$335,001 $10,000,000

34%

$10,000,001

$15,000,000

35%

$15,000,001

$183,333,334

38%

$18,333,334

35%

11. A. $78,000 b. $6,250 c. $39,000 d. $61,250

12. Using the same table and information provided average tax rate?

A. 39% b. 30.625% c. 34% d. 31.625%

13. Using the same table and information provided marginal tax rate?

A. 39% b. 30.625% c. 34% d. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of

A. ownership percentage.

B. market value.

C. the firm’s current ratio.

D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firm’s operating cash flow?

A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the

A. statement of cash flows.

B. income statement.

C. balance sheet.

D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios?

A. Long-term solvency measures

B. Asset management or turnover measures

C. Short-term solvency or liquidity measures

D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct?

A. Accounts payable decreased by $3,200 and represented a use of cash

B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities?

A. Rights offering C. Green Shoe option

B. Abnormal returns D. Gross spread

20. In the United States, for the 2007 tax year, federal corporate income tax rates never

exceeded a marginal rate of

A. 15%. C. 39%.

B. 35%. D. 34%.

1. What is the present value of $3,000, discounted at 8 percent interest per period, for two periods? (Round your answer to the nearest cent.)

A. $2,777.78 C. $3,499.20 B. $2,572.02 D. $3,240.00

2. The stated interest payment made on a bond is called the

A. yield to maturity. C. face value.

B. maturity. D. coupon.

3. An ordinary annuity of $500 per period, discounted at a rate of 8 percent per period for 3 periods, has a present value of $1,288.55. If this same annuity was an annuity due, what would its present value be? (Round your answer to the nearest cent.)

A. $1,288.55 C. $1,391.63 B. $1,500.00 D. $1,788.55

4. The relationship between real returns, nominal returns, and inflation is commonly referred to as the

A. dirty price. C. Treasury yield curve. B. Fisher effect. D. bid-ask spread.

5. On an investment of $2,000, you’ll earn 10 percent interest per year compounded semiannually. What is the future value of this investment after one year?

A. $2,205 C. $2,420 B. $2,100 D. $4,500

6. What is the future value of a $10,000 investment, earning 12 percent interest per period, after three periods? (Round your answer to the nearest cent.)

A. $7,117.80 C. $12,544.00

B. $11,200.00 D. $14,049.28

7. Where does most bond trading occur?

A. At the corporate headquarters of Moody’s

B. In the New York Stock Exchange (NYSE)

C. Electronically, over the counter

D. At the corporate headquarters of Standard and Poor’s

8. Suppose that you buy a $5,000 bond with a 12 percent annual coupon, payable semiannually on January 1 and July 1. On both January 1 and July 1, the bondholder will receive $300, for a total annual interest payment of $600 ($300 + $300).

Based on the principal and accrued interest only, how much would you expect

to pay to purchase this bond on May 1?

A. $5,200 C. $5,300 B. $5,000 D. $5,600

9. Today, you deposit $1,000 into an account that pays 12 percent interest annually. How much will you have in the account after 4 years? (Round your answer to the nearest cent.)

A. $635.52 C. $1,120.00 B. $1,254.40 D. $1,573.52

10. A type of loan that’s paid off by making regular principal reductions, usually according to a specified schedule, is called a(n)

A. annuity due. C. amortizing loan. B. debenture. D. corporate bond.

11. What is the present value of the right to receive four equal payments (ordinary annuity) of $500 per period, discounted at a rate of 10 percent per period? (Round your answer to the nearest cent.)

A. $341.51 C. $1,584.94 B. $454.55 D. $732.05

12. On an initial investment of $1,000, you can earn 12 percent interest per year compounded annually, or 12 percent interest per year compounded semiannually. Which of the following statements is correct?

A. 12 percent per year, compounded annually, is the better interest rate for the investment.

B. 12 percent per year, compounded semiannually, is the better interest rate for the investment.

C. There’s no difference between the two interest rates; both rates will produce the same future value.

D. It isn’t possible to determine the future value of this investment based on the information provided.

13. The payments made by a corporation to shareholders, either in cash or in stock, are called

A. dividends. C. cash flows. B. capital gains. D. bond yields.

14. What is the future value of a $1,500 investment, earning 10 percent interest per period, after two periods? (Round your answer to the nearest cent.)

A. $1,650.00 C. $1,815.00 B. $1,363.63 D. $1,239.67

15. A stock’s expected cash dividend divided by its current price is called the

A. dividend yield. C. constant growth.

B. capital gains yield. D. ask price.

16. Today, you deposit $6,000 into an account that pays 10 percent annually. In one year, you’ll deposit another $4,000 in the account. How much will you have in the account after two years?

A. $10,600 C. $10,000 B. $11,660 D. $11,000

17. What is the present value of $2,200, discounted at 10 percent interest per period, for one period? (Round your answer to the nearest cent.)

A. $2,420.00 C. $1,818.18 B. $2,000.00 D. $1,980.00

18. Which of the following statements about stock trading is correct?

A. The NASDAQ is a computer network, with no physical location for trading.

B. The number of NYSE exchange members is unlimited.

C. The NASDAQ uses a specialist system for actively traded stocks.

D. The NYSE does not have a physical location for stock trading activities.

19. You want to invest money for 3 years in an account that pays 7 percent interest annually. How much would you need to invest today to reach a future goal of $5,000? (Round your answer to the nearest cent.)

A. $4,650.00 C. $4,762.90 B. $6,125.22 D. $4,081.49

20. What is the present value of the right to receive four equal payments (annuity due) of $1,000 per period, discounted at a rate of 10 percent per period? (Round your answer to the nearest cent.)

A. $1,909.09 C. $1,464.10 B. $3,486.85 D. $2,486.85

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lesson 3

1. The amount of time required for an investment to generate cash flows sufficient to recover its initial cost is called the

A. net present value.

B. average accounting return.

C. internal rate of return.

D. payback period.

2. To calculate a firm’s break-even point, you need to

A. divide fixed costs by variable costs.

B. add fixed costs to variable costs, and divide the total

by the unit contribution margin.

C. divide fixed costs by the unit contribution margin.

D. divide the unit contribution margin by variable costs.

3. The present value of an investment’s future cash flows

divided by its initial cost is called the

A. profitability index.

B. average accounting return.

C. net present value.

D. discounted payback

4. Assume that a firm has an average net income of $125,000 and an average book

value of $500,000. What is the firm’s average accounting return?

A. 25 percent C. 40 percent

B. 65 percent D. 12.5 percent

5. A cost that has already been incurred and that should therefore not be considered

in an investment decision is called a(n)

A. pro forma. C. erosion.

B. sunk cost. D. opportunity cost.

6. A situation in which a company can’t raise financing for a project under any

circumstances is called

A. simulation analysis. C. operating leverage.

B. hard rationing. D. forecasting risk.

7. A project requires an initial investment of $75,000 today. The present value of the

cash inflows likely to result from this initial investment is $98,293. What is the net

present value of this investment?

A. –$23,293 C. $51,707

B. $75,000 D. $23,293

8. The discount rate that makes the net present value of an investment zero is called the

A. average accounting return. C. project cash flow.

B. internal rate of return. D. crossover rate.

9. Assume that an item costs $4 per unit to manufacture, and sells for $19 per unit.

What is the unit contribution margin?

A. $23 C. $15

B. 21 percent D. 4.75 percent

10. The difference between an investment’s market value and its cost is called the

A. discounted cash flow. C. net present value.

B. average accounting return. D. probability index.

11. When making capital budgeting decisions for a firm, the average net income divided by the average book value equals the

A. average accounting return. C. net present value.

B. internal rate of return. D. project cash flow

12. A situation in which the taking of one investment will prevent the taking of another is called a(n)

A. stand-alone investment.

B. opportunity cost.

C. marginal revenue investment.

D. mutually exclusive investment decision.

13. When you’re discussing operating cash flow, the tax saving that results from the

depreciation deduction, calculated as the depreciation multiplied by the corporate

tax rate is called the

A. discounted cash flow.

B. accelerated cost recovery system.

C. depreciation tax shield.

D. net working capital.

14. Under U.S. tax law, the depreciation method that allows for the accelerated write-off of property under certain classifications is called the

A. modified depreciation allowance.

B. accelerated cost recovery system.

C. bottom-up approach.

D. depreciation tax shield.

15. A type of financial statement that provides projections for future years is called a

A. pro forma statement.

B. modified depreciation statement.

C. discounted cash flow analysis.

D. project cash flow statement.

16. A company manufactures an item that has a unit contribution margin of $9. The firm

has fixed costs of $3,600 per year. What is the break-even point, in units?

A. 27 units C. 32,400 units

B. 400 units D. 200 units

17. The sales level that results in zero project net income is called the

A. operating cash flow. C. opportunity cost.

B. accounting break-even point. D. internal rate of return.

18. Which of the following statements about operating leverage is not correct?

A. Operating leverage is a measure of risk.

B. Operating leverage increases as fixed costs increase.

C. Operating leverage decreases as variable costs decrease.

D. Operating leverage is a combination of scenario and sensitivity analysis.

19. The degree to which a firm or project is committed to fixed production costs is called

A. operating leverage. C. capital rationing.

B. accelerated cost recovery. D. sunk cost.

20. When a firm introduces a new product, it can have a negative effect on the cash flows from existing products. This negative effect is known as

A. opportunity cost. C. erosion.

B. incremental cash flow. D. MACRS depreciation.

lesson 4

1. The slope of the security market line, which is the difference between the expected return on a market portfolio and the risk-free rate, is called the

A. market risk premium.

B. portfolio variance.

C. arithmetic average return.

D. cost of capital.

2. A stock with a beta coefficient (β) of 2.0 has

A. one-tenth of the risk of an average asset.

B. the same systemic risk as an average asset.

C. one-half the systemic risk of an average asset.

D. twice as much systemic risk as an average asset.

3. In a market, when all information of every kind is reflected in stock prices, the market is said to be

A. weak form efficient.

B. geometrically efficient.

C. strong form efficient.

D. average return efficient.

4. Suppose that you purchased 200 shares of a stock at $46 per share (ignore all

commissions). Assume the stock paid a dividend of $1.20 per share for the year.

The stock price rose to $52.78 per share, and was then sold at that price. What

was the total amount of dividends received?

A. $120 C. $9,200

B. $240 D. $1,356

5. The term diversifiable risk is synonymous with which of the following?

A. Risk premium C. Systematic risk

B. Unsystematic risk D. Total risk

6. The average compound return earned per year over a multiyear period is called the

A. arithmetic average return. C. geometric average return.

B. normal distribution. D. standard deviation.

7. Which of the following is the formula used to describe the components of a risk premium?

A. risk premium = expected return + projected return

B. total returns = expected return + unexpected return

C. unexpected returns = systematic portion + unsystematic portion

D. risk premium = expected return – risk-free rate

8. Suppose that you purchased 300 shares of a stock at $35 per share (ignore all

commissions). Assume the stock paid a dividend of $1.45 per share for the year.

The stock price rose to $42.50 per share, and was then sold at that price. What

was the total dollar return?

A. $12,750 C. $2,250

B. $2,685 D. $435

9. The concept that asserts that well-organized capital markets, such as the NYSE,

are efficient is called the

A. geometric average return. C. efficient markets hypothesis.

B. normal distribution. D. standard deviation.

10. The percentage of a portfolio’s total value placed in a particular investment is called the

A. portfolio weight. C. portfolio variance.

B. beta coefficient. D. systematic risk.

11. The positively sloped straight line that shows the relationship between expected return and the beta coefficient is called the

A. frequency distribution. C. geometric average return.

B. bell curve. D. security market line.

12. Assume you purchased 150 shares of a stock at $18 per share (ignore all commissions).

The stock paid a dividend of $0.75 per share for the year. What is the total cost of

the stock?

A. $112.50 C. $1,800

B. $2,812.50 D. $2,700

13. A high degree of uncertainty about the future for a firm is likely to lead to

A. greater variability in the firm’s stock price.

B. lower variability in the firm’s stock price.

C. a lower variance and standard deviation.

D. less volatile returns on the stock.

14. The equation of the security market line that shows the relationship between expected return and beta is called the

A. security market beta line.

B. unsystematic risk equation.

C. principle of diversification.

D. capital asset pricing model (CAPM).

15. The minimum required return on a new investment is called the

A. average return. C. beta coefficient.

B. cost of capital. D. risk premium.

16. The return earned in an average year over a multiyear period is called the

A. normal distribution. C. arithmetic average return.

B. geometric average return. D. standard deviation.

17. Which of the following is the formula used to calculate the total return on a stock?

A. Total Return = Expected Return + Unexpected Return

B. Total Return = Unexpected Return + Stock Price

C. Total Return = Stock Price Number of Shares

D. Total Return = Dividend Number of Shares

18. The concept of spreading an investment across a number of assets to eliminate some (but not all) of the risk is called the

A. systematic component of return. C. principle of diversification.

B. portfolio variance. D. beta coefficient.

19. Suppose that you purchased 100 shares of a stock at $28 per share (ignore all

commissions). Assume that the stock paid a dividend of $1.40 per share for the

year. The stock price rose to $34.65 per share, and was then sold at that price.

What was the total amount of the capital gain (or loss)?

A. $2,800 C. $140

B. $665 D. $3,465

20. When you move from a risk-free investment to a risky investment, the excess return required on the risky investment is called a

A. risk premium. C. frequency distribution.

B. portfolio weight. D. portfolio variance.

lesson 5

1. Which of the following is the minimum return a company

needs to earn to satisfy all its investors?

A. NPV C. BASF 2015

B. RE D. WACC

2. The equation RP = D/P0 is used to determine the

A. cost of a bond.

B. cost of preferred stock.

C. cost of common stock.

D. dividend resulting from one share of stock.

3. The cost of equity can be viewed as the combination of

A. the financial leverage and the cost of capital.

B. corporate taxes and shareholder claims.

C. business risk and financial risk.

D. the weighted average cost of capital and the capital structure.

4. The return that lenders require on a firm’s new borrowing is known as the

A. financial leverage. C. warrant.

B. cost of debt. D. cost of equity.

5. The legal proceeding for liquidating or reorganizing a business is called

A. internal financing. C. flotation.

B. financial leveraging. D. bankruptcy.

6. When a firm places projects into one of several risk classes and adds or subtracts

adjustment factors to or from the WACC, the firm is using the _______ approach.

A. basic C. objective

B. subjective D. pure play

7. The dividend growth model approach is one approach to estimating a firm’s

A. cost of equity. C. conversion value.

B. financial leverage. D. beta coefficient.

8. A firm that pays few or no dividends and instead provides shareholders with

capital gains through an increase in stock values is called a

A. business failure. C. leveraged firm.

B. pure play. D. growth firm.

9. If a firm has publicly held debt and measures it cost as the yield to maturity on the

outstanding debt, the company rate is

A. critical. C. low.

B. (E/V) RE. D. irrelevant.

10. The cost of capital for a firm that has no debt is called the

A. weighted average cost of capital.

B. financial leverage.

C. interest tax shield.

D. unlevered cost of capital.

11. A procedure in which a failing firm is financially restructured in an attempt

to continue operations is called

A. liquidation. C. reorganization.

B. tax shielding. D. capital structuring.

12. Issuing stock and using the money to pay off debt is one way a firm

A. restructures. C. prepares for bankruptcy.

B. refinances. D. prepares for its IPO

13. In Wall Street language, a company that focuses on only one line of business

is called a(n)

A. pure play. C. growth firm.

B. unlevered company. D. internally financed firm.

14. The overall return that a company must earn on its existing assets to maintain the value of its stock and to satisfy its owners, creditors, and providers of capital is

called the

A. reorganization value.

B. flotation cost.

C. weighted average cost of capital.

D. capital structure.

15. During most cases, when a company files for bankruptcy,

A. the court assigns an unbiased individual to run the company in the interim.

B. the judge prepares a reorganization plan the company must follow.

C. payments to creditors and shareholders are suspended.

D. the “debtor in possession” runs the business.

16. The return that equity investors require on their investment in a firm is called the

A. cost of equity.

B. weighted average cost of capital.

C. capital structure weight.

D. project cost of capital.

17. When a firm raises money by issuing new stocks or bonds, the costs associated

with the new stock or bond issues are called the

A. intrinsic value. C. strike costs.

B. floor value. D. flotation costs.

18. The run establishing priority of claims during a liquidation is called the

A. reorganization priority list. C. absolute priority rule.

B. bankruptcy proceeding rule. D. prepack claims petition.

19. The separate cost of capital in each section of a corporation is called the

A. floor value. C. capital appreciation.

B. divisional cost of capital. D. option cost.

20. The situation in which a firm is unable to meet its financial obligations is called

A. technical insolvency. C. reorganization.

B. liquidation. D. accounting insolvency.

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