1. Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
A. working capital
B. debt
C. investment capital
D. net capital
E. capital structure
2. A business created as a distinct legal entity and treated as a legal "person" is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. unlimited liability company.
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. Which of the following accounts are included in working capital management?
I. accounts payable
II. accounts receivable
III. fixed assets
IV. inventory
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and IV only
E. II, III, and IV only
5. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?
A. tax-free income
B. active participation in the firm's activities
C. no potential financial loss
D. greater control over the business affairs of the partnership
E. maximum loss limited to the capital invested
6. Which of the following apply to a partnership that consists solely of general partners?
I. double taxation of partnership profits
II. limited partnership life
III. active involvement in the firm by all the partners
IV. unlimited personal liability for all partnership debts
A. II only
B. I and II only
C. II and III only
D. I, II, and IV only
E. II, III, and IV only
7. Net working capital is defined as:
A. total liabilities minus shareholders' equity.
B. current liabilities minus shareholders' equity.
C. fixed assets minus long-term liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
8. The cash flow related to interest payments less any net new borrowing is called the:
A. operating cash flow.
B. capital spending cash flow.
C. net working capital.
D. cash flow from assets.
E. cash flow to creditors.
9. Which of the following are current assets?
I. patent
II. Inventory
III. accounts payable
IV. cash
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II and III only
E. II, III, and IV only
10. Which of the following are included in current liabilities?
I. note payable to a supplier in eight months
II. amount due from a customer next month
III. account payable to a supplier that is due next week
IV. loan payable to the bank in fourteen months
A. I and III only
B. II and III only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
11. Which one of the following will increase the value of a firm's net working capital?
A. using cash to pay a supplier
B. depreciating an asset
C. collecting an accounts receivable
D. purchasing inventory on credit
E. selling inventory at a profit
12. Which one of the following accounts is the most liquid?
A. inventory
B. building
C. accounts receivable
D. equipment
E. land
13. Shareholders' equity:
A. increases in value anytime total assets increases.
B. is equal to total assets plus total liabilities.
C. decreases whenever new shares of stock are issued.
D. includes long-term debt, preferred stock, and common stock.
E. represents the residual value of a firm.
14. You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?
A. a sudden and unexpected increase in inflation
B. the replacement of old inventory items with more desirable products
C. improvements to the surrounding area by other store owners
D. construction of a new restricted access highway located between the store and the surrounding residential areas
E. addition of a stop light at the main entrance to the store's parking lot
15. A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of:
A. total assets.
B. total equity.
C. net income.
D. taxable income.
E. sales.
16. 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.
17. The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:
A. NASDAQ 100.
B. Standard & Poor's 500.
C. Standard Industrial Classification code.
D. Governmental ID code.
E. Government Engineered Coding System.
18. Which one of the following is a use of cash?
A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock
19. On the Statement of Cash Flows, which of the following are considered financing activities?
I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and IV only
B. III and IV only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV
20. On a common-base year financial statement, accounts receivables will be expressed relative to which one of the following?
A. current year sales
B. current year total assets
C. base-year sales
D. base-year total assets
E. base-year accounts receivables
21. Which one of the following terms is defined as dividends paid expressed as a percentage of net income?
A. dividend retention ratio
B. dividend yield
C. dividend payout ratio
D. dividend portion
E. dividend section
22. The internal growth rate of a firm is best described as the:
A. minimum growth rate achievable assuming a 100 percent retention ratio.
B. minimum growth rate achievable if the firm maintains a constant equity multiplier.
C. maximum growth rate achievable excluding external financing of any kind.
D. maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio.
E. maximum growth rate achievable with unlimited debt financing.
23. Financial planning:
A. focuses solely on the short-term outlook for a firm.
B. is a process that firms employ only when major changes to a firm's operations are anticipated.
C. is a process that firms undergo once every five years.
D. considers multiple options and scenarios for the next two to five years.
E. provides minimal benefits for firms that are highly responsive to economic changes.
24. Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
25. Which one of the following statements is correct?
A. Pro forma statements must assume that no new equity is issued.
B. Pro forma statements are projections, not guarantees.
C. Pro forma statements are limited to a balance sheet and income statement.
D. Pro forma financial statements must assume that no dividends will be paid.
E. Net working capital needs are excluded from pro forma computations.
26. Which one of the following is correct in relation to pro forma statements?
A. Fixed assets must increase if sales are projected to increase.
B. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity.
C. The addition to retained earnings is equal to net income plus dividends paid.
D. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity.
E. Inventory changes are directly proportional to sales changes.
27. A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:
A. accounts payable.
B. long-term debt.
C. fixed assets.
D. retained earnings.
E. common stock.
28. You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true?
A. The projected net income is equal to the current year's net income.
B. The tax rate will increase at the same rate as sales.
C. Retained earnings will increase by four percent over its current level.
D. Total assets will increase by less than four percent.
E. Total liabilities and owners' equity will increase by four percent.
29. Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:
A. free interest.
B. bonus income.
C. simple interest.
D. interest on interest.
E. present value interest.
30. Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
A. growth analysis.
B. discounting.
C. accumulating.
D. compounding.
E. reducing.
31. Samantha opened a savings account this morning. Her money will earn 5 percent interest, compounded annually. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha's account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five years if she could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next five years.
32. Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
A. remains constant
B. increases
C. decreases
D. becomes negative
E. cannot be determined from the information provided
33. You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only
34. What is the relationship between present value and future value interest factors?
A. The present value and future value factors are equal to each other.
B. The present value factor is the exponent of the future value factor.
C. The future value factor is the exponent of the present value factor.
D. The factors are reciprocals of each other.
E. There is no relationship between these two factors.
35. Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
A. Barb will earn more interest the first year than Andy will.
B. Andy will earn more interest in year three than Barb will.
C. Barb will earn interest on interest.
D. After five years, Andy and Barb will both have earned the same amount of interest.
E. Andy will earn compound interest.
36. 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
37. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?
A. amortized loan
B. modified loan
C. balloon loan
D. pure discount loan
E. interest-only loan
38. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?
A. These two annuities have equal present values but unequal futures values at the end of year five.
B. These two annuities have equal present values as of today and equal future values at the end of year five.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.
39. Which one of the following statements is correct given the following two sets of project cash flows?
A. The cash flows for Project B are an annuity, but those of Project A are not.
B. Both sets of cash flows have equal present values as of time zero given a positive discount rate.
C. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.
D. The present value of Project A cannot be computed because the second cash flow is equal to zero.
E. As long as the discount rate is positive, Project B will always be worth less today than will Project A.
40. Which one of the following statements related to annuities and perpetuities is correct?
A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
C. Most loans are a form of a perpetuity.
D. The present value of a perpetuity cannot be computed, but the future value can.
E. Perpetuities are finite but annuities are not.
41. Which of the following statements related to interest rates are correct?
I. Annual interest rates consider the effect of interest earned on reinvested interest payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers.
IV. Annual and effective interest rates are equal when interest is compounded annually.
A. I and II only
B. II and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only
42. Which one of the following statements correctly states a relationship?
A. Time and future values are inversely related, all else held constant.
B. Interest rates and time are positively related, all else held constant.
C. An increase in the discount rate increases the present value, given positive rates.
D. An increase in time increases the future value given a zero rate of interest.
E. Time and present value are inversely related, all else held constant.
43. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
A. coupon rate
B. face rate
C. call rate
D. yield to maturity
E. coupon rate
44. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
A. note
B. discounted
C. zero-coupon
D. callable
E. debenture
45. A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?
A. zero coupon
B. callable
C. senior
D. collateralized
E. unsecured
46. The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:
A. trustee relationships.
B. bylaws.
C. legal bounds.
D. "plain vanilla" conditions.
E. protective covenants.
47. The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
A. equilibrium.
B. premium.
C. discount.
D. call price.
E. spread.
48. The Fisher effect is defined as the relationship between which of the following variables?
A. default risk premium, inflation risk premium, and real rates
B. nominal rates, real rates, and interest rate risk premium
C. interest rate risk premium, real rates, and default risk premium
D. real rates, inflation rates, and nominal rates
E. real rates, interest rate risk premium, and nominal rates
49. Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk
50. An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent?
I. a structure as an interest-only loan
II. a current yield that equals the coupon rate
III. a yield-to-maturity equal to the coupon rate
IV. a market price that differs from the face value
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only
51. A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?
A. $2,050
B. $2,690
C. $4,130
D. $5,590
E. $5,860
52. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?
A. $6,900
B. $15,300
C. $18,700
D. $23,700
E. $35,500
53. Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital?
A. $25,300
B. $30,300
C. $75,600
D. $86,300
E. $111,500
54. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?
A. $589.46
B. $1,269.46
C. $1,331.54
D. $1,951.54
E. $1,949.46
55. Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate?
A. 32.83 percent
B. 33.33 percent
C. 38.17 percent
D. 43.39 percent
E. 48.87 percent
56. Wise's Corner Grocer had the following current account values. What effect did the change in net working capital have on the firm's cash flows for 2009?
A. net use of cash of $37
B. net use of cash of $83
C. net source of cash of $83
D. net source of cash of $111
E. net source of cash of $135
57. A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
A. 0.30
B. 0.36
C. 0.44
D. 1.58
E. 2.38
58. 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
59. The Corner Store has $219,000 of sales and $187,000 of total assets. The firm is operating at 87 percent of capacity. What is the capital intensity ratio at full capacity?
A. 0.62
B. 0.68
C. 0.74
D. 1.35
E. 1.47
60. Miller Bros. Hardware is operating at full capacity with a sales level of $689,700 and fixed assets of $468,000. The profit margin is 7 percent. What is the required addition to fixed assets if sales are to increase by 10 percent?
A. $3,276
B. $4,680
C. $28,400
D. $32,760
E. $46,800
61. Stop and Go has a 4.5 percent profit margin and a 15 percent dividend payout ratio. The total asset turnover is 1.6 and the debt-equity ratio is 0.60. What is the sustainable rate of growth?
A. 9.13 percent
B. 9.54 percent
C. 9.89 percent
D. 10.26 percent
E. 10.85 percent
62. Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing. The firm maintains a constant debt-equity ratio of .0.55, a total asset turnover ratio of 1.30, and a profit margin of 9.0 percent. What must the dividend payout ratio be?
A. 26.26 percent
B. 38.87 percent
C. 49.29 percent
D. 61.13 percent
E. 73.74 percent
63. You invested $1,650 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. $849.22
B. $930.11
C. $982.19
D. $1,021.15
E. $1,077.94
64. Travis invested $9,250 in an account that pays 6 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?
A. $741.41
B. $773.58
C. $802.16
D. $833.33
E. $858.09
65. This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?
A. $2,940.09
B. $3,651.82
C. $4,008.17
D. $4,219.68
E. $4,711.08
66. 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
67. 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. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
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.
68. Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today?
A. $40,384.69
B. $42,618.46
C. $44,211.11
D. $44,306.16
E. $44,987.74
69. You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $25 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you borrowing?
A. $134.09
B. $138.22
C. $139.50
D. $142.68
E. $144.57
70. You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?
A. $1,999
B. $2,013
C. $2,221
D. $2,227
E. $2,304
71. Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?
A. $118.63
B. $121.06
C. $124.30
D. $129.08
E. $132.50
72. Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What is the yield to maturity?
A. 8.36 percent
B. 8.42 percent
C. 8.61 percent
D. 8.74 percent
E. 8.90 percent
73. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 6.69 percent?
A. $999.80
B. $999.85
C. $1,003.42
D. $1,004.47
E. $1,007.52
74. Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
E. 25.05 years
75. The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 6.5 percent?
A. The bond price will increase by $57.14.
B. The bond price will increase by 5.29 percent.
C. The bond price will decrease by $53.62.
D. The bond price will decrease by 5.43 percent.
E. The bond price will decrease by 5.36 percent.