QN=1 (3767) (20275) Which of the following is a principal within the agency relationship?

a. a company engineer
b. the CEO of the firm
c. a shareholder
d. the board of directors

QN=2 (3766) (20258) Capital budgeting involves

a. how a firm's day-to-day financial matters should be managed.
b. how the firm should finance its assets.
c. which productive assets the firm should employ.
d. all of these.

QN=3 (3783) (20260) Capital budgeting decisions generally involve

a. the fixed asset portion of the balance sheet.
b. the short-term portion of the balance sheet.
c. the current liability portion of the balance sheet.
d. all of these.

QN=4 (3769) (20281) _____________occur(s) when one party in a business transaction has
information that is unavailable to the other parties in the transaction.
a. Profits
b. Information asymmetry
c. Information efficiency
d. None of these

QN=5 (3813) (20288) The assumption of arm's-length transaction states that

a. both parties to a transaction can act independently of each other and make economically
rational decisions.
b. both parties to a transaction must have had previous transactions.
c. one of the parties to the transaction is a bank that has full knowledge of the firm's
creditworthiness.
d. none of these

QN=6 (3805) (20310) The present value of multiple cash flows is ______
a. greater than the sum of the cash flows.
b. equal to the sum of all the cash flows.
c. less than the sum of the cash flows.
d. none of these.

QN=7 (3820) (20327) One of the following statements is NOT true of asset turnover ratios.
a. Asset turnover ratios measure the level of sales per dollar of assets that the firm has.
b. The fixed assets turnover ratio is less significant for equipment-intensive manufacturing
industry firms than the total assets turnover ratio.
c. The higher the total asset turnover, the more efficiently management is using total
assets.
d. All of these are true.

QN=8 (3817) (20304) Clarity Music Company has a marginal tax rate of 34 percent and an average
tax rate of 32 percent this year. It is planning to construct a new recording studio next
year. The appropriate tax rate to be applied on the income generated from the new
studio is
a. the average tax rate.
b. the marginal tax rate.
c. either one.
d. none of these.

QN=9 (3868) (20348) Which one of the following statements is true?

a. Individuals prefer to consume goods right away rather than in the future.
b. Individuals prefer to consume goods in the future rather than right away.
c. The time of consumption is irrelevant to individuals.
d. None of these.

QN=10 (3862) (20360) Which of the following statements is false with respect to the present value of a
future amount?
a. The higher the discount rate, the lower the present value of a single sum for a given
time period.
b. The relation between present value and time is exponential.
c. The greater the time period, the lower the present value of a single sum for a given
interest rate.
d. The lower the discount rate, the lower the present value of a single sum for a given time
period.

QN=11 (3855) (20344) The time value of money refers to the issue of
a. what the value of the stream of future cash flows is today.
b. why a dollar received tomorrow is worth more than a dollar received today.
c. why a dollar received tomorrow is worth the same as a dollar received today.
d. None of these.

QN=12 (3861) (20350) The process of converting future cash flows to what its present value is
a. time value of money.
b. discounting.
c. compounding.
d. none of these.

QN=13 (3894) (20390) Most of the risk-reduction benefits from diversification can be achieved in a
portfolio consisting of
a. 5 to 10 stocks
b. 10 to 15 stocks
c. 15 to 20 stocks
d. 20 to 25 stocks

QN=14 (3878) (20382) Which one of the following statements is NOT true?
a. The APR is the appropriate rate to do present and future value calculations.
b. The EAR is the appropriate rate to do present and future value calculations.
c. The EAR is the true cost of borrowing and lending.
d. The EAR takes compounding into account.

QN=15 (3906) (20417) Which ONE of the following statements is true?

a. Long-term bonds have lower price volatility than short-term bonds.
b. As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of
bonds decline.
c. All other things being equal, short-term bonds are more risky than long-term bonds.
d. Interest rate risk decreases as maturity increases.

QN=16 (3890) (20373) Which ONE of the following statements is true about amortization?
a. Amortization refers to the way the borrowed amount (principal) is paid down over the
life of the loan.
b. With an amortized loan, each loan payment contains some payment of principal and an
interest payment.
c. A loan amortization schedule is just a table that shows the loan balance at the beginning
and end of each period, the payment made during that period, and how much of that
payment represents interest and how much represents repayment of principal.
d. All of these are true.

QN=17 (3926) (20406) Which ONE of the following statements is true?

a. To secure the conversion option on a bond, bondholders would be willing to pay a
premium.
b. The conversion ratio is set so that the firm's stock price must appreciate 15 to 20 percent
before it is profitable to convert bonds into equity.
c. Convertible bonds can be converted into shares of common stock at some
predetermined ratio at the discretion of the bondholder.
d. All of these are true.

QN=18 (3956) (20456) Which of the following statements is true about the general dividend valuation
model?
a. It implies that the underlying value of a share of stock is determined by the market's
expectations of the future dividends that the firm will generate.
b. It implies that the value of a firm's common stock can be determined only if the
expected future dividends are infinite.
c. It implies that the value of a growth stock can be determined by forecasting the future
price of the stock.
d. The model cannot be used to calculate the value of a common stock unless the
dividends exceed the firm's expected growth rate.
QN=19 (3923) (20418) Marketability is the ability of an investor
a. to sell a security quickly, at a low transaction cost, and at a price close to its fair market
value.
b. to sell at a profit under all circumstances.
c. to sell the security above its par value.
d. None of these.

QN=20 (3949) (20454) The constant-growth dividend model will provide invalid solutions when
a. the growth rate of the stock exceeds the required rate of return for the stock.
b. the growth rate of the stock is less than the required rate of return for the stock.
c. the growth rate of the stock is smaller than 10%.
d. None of these.

QN=21 (3995) (20498) If a firm has the option of leasing some factory space to another firm or
utilizing it for another product line, then if the firm chose the product line how should it
handle the lost lease payments on the factory space?
a. Ignore it.
b. Include it as an opportunity cost.
c. Include half of it as additional revenue for the project.
d. None of these.

QN=22 (3976) (20477) Advantages of the payback method include the following.
a. (i) The technique is simple for managers to compute and interpret.
b. (ii) It is a good measure of liquidity risk.
c. Both (i) and (ii).
d. None of these.

QN=23 (3997) (20505) Which of the following should not be included in a schedule of cash flows from
operations when evaluating a capital project?
a. Fixed costs.
b. Sunk costs.
c. Depreciation and amortization.
d. Variable costs.

QN=24 (3994) (20488) The term ___________ refers to the fact that these cash flows reflect the
amount by which the firm's total after-tax free cash flows will change if the project is
adopted.
a. periodic
b. ending cash flows
c. incremental
d. none of these

QN=25 (3965) (20430) The largest holders of equity securities are

a. mutual funds.
b. pension funds.
c. foreign investors.
d. households.

QN=26 (4227) (20714) Yield to maturity: Shawna Carter wants to invest her recent bonus in a four-
year bond that pays a coupon of 11 percent semiannually. The bonds are selling at
$962.13 today. If she buys this bond and holds it to maturity, what would be her yield?
(Round to the closest answer.)
a. 11.5%
b. 11.8%
c. 12.5%
d. 12.2%

QN=27 (4261) (20767) Internal rate of return: Casa Del Sol Property Development Company is
refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that
this will lead to expected annual cash flows of $415,350 for the next seven years. What
internal rate of return can the firm earn from this project? (Round to the nearest
percent.)
a. 10%
b. 12%
c. 14%
d. 16%

QN=28 (4019) (20523) Capital constraints can occur due to

a. difficulties in accurately assessing the risks and returns associated with a firm's projects.
b. the capital market's inability to fund all of a firm's projects due to a lack of funds.
c. the capital market's policy of not funding all of a firm's projects.
d. none of these.

QN=29 (4003) (20493) Additions to tangible assets, intangible assets ,and current assets can be
described as
a. cash flows associated with investments.
b. operating cash flows.
c. free cash flows.
d. none of these.

QN=30 (4241) (20730) Zero growth: Metasteel Limited Co. has a stable sales track record but does not
expect to grow in the next several years. Its last annual dividend was $5.75. If the
required rate of return on similar investments is 18 percent, what is the current stock
price?
a. $103.50
b. $13.50
c. $39.30
d. $31.94

QN=31 (4042) (20530) Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of
 $2.3 million, and the machinery is being depreciated annually at an amount of $230,000
for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's
accountant is preparing its financial statement for the fiscal year end on December 31,
2008. The asset's value should be recognized on the balance sheet at
a. $2.3 million.
b. $1.61 million.
c. $230,000.
d. $1.75 million.

QN=32 (4070) (20561) Leverage ratio: What will be a firm's equity multiplier given a debt ratio of
0.45?
a. 1.82
b. 1.28
c. 2.22
d. None of these

QN=33 (4050) (20541) Simplex Healthcare had net income of $5,411,623 after paying taxes at 34
percent. The firm had revenues of $20,433,770. Their interest expense for the year was
$1,122,376, while depreciation expense was $2,079,112. What was the firm's operating
expenses excluding depreciation?
a. $8,199,429
b. $9,032,853
c. $9,321,805
d. none of these

QN=34 (4075) (20549) Liquidity ratio: Ronaldinho Trading Co. is required by its bank to maintain a
current ratio of at least 1.75, and its current ratio now is 2.1. The firm plans to acquire
additional inventory to meet an unexpected surge in the demand for its products and
will pay for the inventory with short-term debt. How much inventory can the firm
purchase without violating its debt agreement if their total current assets equal $3.5
million?
a. $0
b. $777,777
c. $1 million
d. None of these

QN=35 (4060) (20555) Efficiency ratio: Ellicott City Manufacturers, Inc., has sales of $6,344,210, and
a gross profit margin of 67.3 percent. What is the firm's cost of goods sold?
a. $2,074,557
b. $2,745,640
c. $274,560
d. None of these

QN=36 (4099) (20583) Compounding: Trish Harris has deposited $2,500 today in an account paying 6
percent interest annually. What would be the simple interest earned on this investment
in five years? If the account paid compound interest, what would be the interest-on-
 interest in five years?
a. $750; $95.56
b. $150; $845.56
c. $150; $95.56
d. $95.56; $845.56

QN=37 (4114) (20574) Future value: Ning Gao is planning to buy a house in five years. She is looking
to invest $25,000 today in an index mutual fund that will provide her a return of 12
percent annually. How much will she have at the end of five years? (Round to the
nearest dollar.)
a. $45,000
b. $28,000
c. $44,059
d. None of these

QN=38 (4080) (20588) Present value: Tommie Harris is considering an investment that pays 6.5
percent annually. How much must he invest today such that he will have $25,000 in
seven years? (Round to the nearest dollar.)
a. $23,474
b. $38,850
c. $26,625
d. $16,088

QN=39 (4117) (20610) Time to attain goal: Franklin Foods announced that its sales were $1,233,450
this year. The company forecasts a growth rate of 16 percent for the foreseeable future.
How long will it take the firm to produce earnings of $3 million? (Round off to the
nearest year.)
a. 7 years
b. 6 years
c. 8 years
d. 10 years

QN=40 (4085) (20601) Interest rate: Pedro Martinez wants to invest $25,000 in a spa that his sister is
starting. He will triple his investment in six years. What is the rate of return that Pedro
is being promised? (Rounded to the nearest percent.)
a. 18%
b. 20%
c. 12%
d. 25%

QN=41 (4134) (20637) Perpetuity: Roger Barkley wants to set up a scholarship at his alma mater. He is
willing to invest $500,000 in an account earning 10 percent. What will be the annual
scholarship that can be given from this investment? (Round to the nearest dollar.)
a. $5,000
b. $500,000
c. $50,000
d. None of these

QN=42 (4118) (20611) Time to attain goal: Ryan Holmes wants to deposit $4,500 in a bank account
that pays 8.25 percent annually. How many years will it take for his investment to grow
to $10,000? (Round off to the nearest year.)
a. 8 years
b. 11 years
c. 10 years
d. 12 years

QN=43 (4146) (20633) Computing annuity payment: John Harper has borrowed $17,400 to pay for his
new truck. The annual interest rate on the loan is 9.4 percent, and the loan needs to be
repaid in four payments. What will be his annual payment if he begins his payment
beginning now? (Round to the nearest dollar.)
a. $5,229
b. $5,450
c. $4,850
d. $4,953

QN=44 (4149) (20634) Computing annuity payment: Trevor Smith wants to have a million dollars at
retirement, which is 15 years away. He already has $200,000 in an IRA earning 8
percent annually. How much does he need to save each year, beginning at the end of
this year to reach his target? Assume he could earn 8 percent on any investment he
makes. (Round to the nearest dollar.)
a. $13,464
b. $14,273
c. $10,900
d. $16,110

QN=45 (4153) (20629) Terri Garner will invest $3,000 in an IRA for the next 30 years starting at the
end of this year. The investment will earn 13 percent annually. How much will she have
at the end of 30 years? (Round to the nearest dollar.)
a. $879,598
b. $912,334
c. $748,212
d. $1,233,450

QN=46 (4169) (20658) The expected return for Stock V is 24.5 percent. If we know the following
information about Stock Z, then what is the probability of the Dynamite state of the
world occurring?
a. 5%
b. 10%
c. 15%
d. 20%

QN=47 (4193) (20661) Francis purchased a stock one year ago for $20, and it is now worth $24. The
stock paid a dividend of $3 during the year. What was the stock's rate of return from
capital appreciation during the year? (Round your answer to the nearest percent.)
a. 17%
b. 20%
c. 29%
d. 35%

QN=48 (4172) (20676) Braniff Ground Services stock has an expected return of 9 percent and a
variance of 0.25 percent. What is the coefficient of variation for Braniff?
a. 0.0278
b. 0.5556
c. 1.800
d. 36.00

QN=49 (4187) (20665) Babs purchased a piece of real estate last year for $85,000. The real estate is
now worth $102,000. If Babs needs to have a total return of 25 percent during the year,
then what is the dollar amount of income that she needed to have to reach her objective?
a. $3,750
b. $4,250
c. $4,750
d. $5,250

QN=50 (4186) (20681) Given the returns for two stocks with the following information, calculate the
covariance of the returns for the two stocks. Assume the expected return is 10.8 percent
for Stock 1 and 9.7 percent for Stock 2.

Prob Stock 1 Stock 2

0.4 0.09 0.11

0.5 0.11 0.08
0.1 0.17 0.13
a. 0.000094
b. 0.00051600
c. 0.00032100
d. 0.71750786
[id=3767, Mark=1]1. C
[id=3766, Mark=1]2. C
[id=3783, Mark=1]3. A
[id=3769, Mark=1]4. B
[id=3813, Mark=1]5. A
[id=3805, Mark=1]6. C
[id=3820, Mark=1]7. B
[id=3817, Mark=1]8. B
[id=3868, Mark=1]9. A
[id=3862, Mark=1]10. D
[id=3855, Mark=1]11. A
[id=3861, Mark=1]12. B
[id=3894, Mark=1]13. C
[id=3878, Mark=1]14. A
[id=3906, Mark=1]15. B
[id=3890, Mark=1]16. D
[id=3926, Mark=1]17. D
[id=3956, Mark=1]18. A
[id=3923, Mark=1]19. A
[id=3949, Mark=1]20. A
[id=3995, Mark=1]21. B
[id=3976, Mark=1]22. C
[id=3997, Mark=1]23. B
[id=3994, Mark=1]24. C
[id=3965, Mark=1]25. D
[id=4227, Mark=1]26. D
[id=4261, Mark=1]27. B
[id=4019, Mark=1]28. A
[id=4003, Mark=1]29. A
[id=4241, Mark=1]30. D
[id=4042, Mark=1]31. B
[id=4070, Mark=1]32. A
[id=4050, Mark=1]33. B
[id=4075, Mark=1]34. B
[id=4060, Mark=1]35. A
[id=4099, Mark=1]36. A
[id=4114, Mark=1]37. C
[id=4080, Mark=1]38. D
[id=4117, Mark=1]39. B
[id=4085, Mark=1]40. B
[id=4134, Mark=1]41. C
[id=4118, Mark=1]42. C
[id=4146, Mark=1]43. D
[id=4149, Mark=1]44. A
[id=4153, Mark=1]45. A
[id=4169, Mark=1]46. B
[id=4193, Mark=1]47. B
[id=4172, Mark=1]48. B
[id=4187, Mark=1]49. B
[id=4186, Mark=1]50. A