Q1. An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project.
Q2. Capital budgeting is concerned with
a. whether a company's assets should be financed with debt or equity.
b. managing a firms cash budgeting procedures.
c. what long-term investments a firm should undertake.
d. planning sales of a corporation's equity capital.
Q3. Which of the following forms of business organizations provide limited liability to all its owners?
a. general partnership
b. limited partnership
d. both B and C
Q4. The principle of risk-return tradeoff means that
a. higher risk investments must earn higher returns.
b. an investor who takes more risk will earn a higher return.
c. a rational investor will only take on higher risk if he expects a higher return.
d. an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.
Q5. The financial manager most directly responsible for producing the company's financial statements and directing its cost accounting functions is the
a. chief financial officer.
d. vice president - financer.
Q6. A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project
a. the cost of the lot is zero since the corporation already owns it.
b. the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.
c. the cost of the lot for valuation purposes is $50,000 because land does not depreciate.
d. the incremental cash flow should be the $50,000 original cost less accumulated amortization.
Q7. Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock. According to one of the principles of finance, what would induce the investor to purchase the corporate stock?
a. a return that is substantially lower than 3.5%
b. cash dividends
c. a return that is substantially higher than 3.5%
d. none of the above
Q8. If two companies have the same net income and the same level of risk, they must also have the same stock price or the market is not in equilibrium.
Q9. Working capital management is concerned with
a. how a firm can best manage its cash flows as they arise in its day-to-day operations.
b. how a firm should raise money to fund its investments.
c. what long-term investments a firm should undertake.
d. managing a firms capital stock.
Q10. When making financial decisions, managers should always look at marginal, or incremental cash flows.
Q11. Money market instruments include
a. common stock.
b. preferred stock.
Q12. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
Q13. Bill is a public accountant auditing Expo Corporation. Based on information in Expo's confidential records, Bill recommends the purchase of Expo stock to his brother.
a. Bill is involved in insider trading prohibited by the SEC.
b. Bill's brother has no direct connection to Expo Corporation and therefore his purchase of the stock is not prohibited by insider trading laws.
c. Bill is not an insider because he is not an officer or employee of Expo Corporation
d. If Bill told a non-relative who purchases Expo stock, no insider trading laws would be violated.
Q14. A wealthy private investor providing a direct transfer of funds is called
a. a venture capitalist.
b. an investment banker.
c. a financial intermediary.
d. an angel investor.
Q15. An example of a primary market transaction involving a money market security is
a. a new issue of a security with a very short maturity.
b. a new issue of a security with a very long maturity.
c. the transfer of a previously-issued security with a very short maturity.
d. the transfer of a previously-issued security with a very long maturity.
Q16. A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore
a. the corporate bonds are indirect securities and the life insurance policies are direct securities.
b. the corporate bonds are indirect securities and the life insurance policies are indirect securities.
c. the corporate bonds are direct securities and the life insurance policies are indirect securities.
d. the corporate bonds are direct securities and the life insurance policies are direct securities.
Q17. The prime lending rate is the base rate on
a. mortgage loans.
b. home equity loans.
c. auto loans.
d. corporate loans.
Q18. The investment banker performs what three basic functions?
a. underwriting, distributing, and regulating
b. underwriting, advising, and price-pegging
c. underwriting, distributing, and advising
d. underwriting, distributing, and negotiating
Q19. The real rate of return is the return earned above the
a. default risk premium.
b. risk-adjusted return.
c. inflation risk premium.
d. variability of returns measured by standard deviation.
Q20. An example of a primary market transaction is
a. a new issue of common stock by AT&T.
b. a sale of some outstanding common stock of AT&T by an investor.
c. AT&T repurchasing its own stock from a stockholder.
d. all of the above
Q21. The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.
Q22. Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to
Q23. Racing Horse Corporation reported net income for 2010 of $200,000, sales of $540,000, expenses (excluding depreciation) of $180,000, and depreciation expense of $60,000. The company's accounts receivable balance increased by $40,000 during the year and its accounts payable balance remained the same. The company's change in cash for the year is estimated to be
Q24. Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Therefore
a. Corporation A's operating income will decrease due to higher interest expense.
b. Corporation A's net income will increase due to the tax deductibility of interest expense.
c. Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
d. Corporation A's gross profit will decrease.
Q25. Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?
Q26. Two companies have identical assets and operating activities. Which of the follow statements is true?
a. Both companies have the same net income.
b. The company with more debt will have lower operating income due to interest expense.
c. The company with more debt will have higher operating income due to leverage.
d. The company with more debt will have lower net income due to interest expense.
Q27. Inventories are considered fixed assets because inventory levels remain fairly constant throughout the year.
Q28. Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense.
Q29. Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's gross profit is equal to
Q30. Which of the following accounts belong in the liability section of a balance sheet?
a. interest expense
b. accumulated depreciation
c. accounts payable
d. preferred stock
Q31. Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio?
a. The company collects $500,000 of its accounts receivable.
b. The company sells $1 million of inventory on credit.
c. The company pays back $50,000 of its long-term debt.
d. The company writes a $30,000 check to pay off some existing accounts payable.
Q32. Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading.
Q33. Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit?
a. return on equity
b. the acid-test (or quick) ratio
c. the operating profit margin
d. the fixed asset turnover
Q34. A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?
Q35. An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that
a. the firm has higher sales than the industry average.
b. the firm is selling a product mix that includes more high margin items.
c. the firm is managing its inventory inefficiently.
d. the firm's products are in inventory for fewer days before they are sold than is average for the industry.
Q36. Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from
a. Company B has more common stock.
b. Company A has a lower debt ratio.
c. Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
d. Company A has lower cost of goods sold, resulting in a higher net profit margin.
Q37. Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that
a. the risk free rate of interest is 3%.
b. the corporation's inventory turnover is high.
c. investors' required rate of return is 8%.
d. investors' required rate of return is 12%.
Q38. Financial analysis
a. uses historical financial statements and is thus useful only to assess past performance.
b. relies on generally accepted accounting principles to make comparisons between companies valid.
c. uses historical financial statements to measure a company's performance and in making financial projections of future performance.
d. is accounting record-keeping using generally accepted accounting principles.
Q39. RBW Corp. has cash of $48,000; short-term notes payable of $35,000, accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000. What is RBW's current ratio?
Q40. In an ideal world, which of the following would be used to evaluate firm performance?
a. book value of assets
b. corporate retained earnings from the day of incorporation
c. accounting assets and profits
d. market value of assets