1. You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years you will sell the stock for $30.00. If you want to earn 10% on this investment what is a fair price for this stock if you buy it today?
2. _______ provides financial advice helps design bond terms makes sure that new bonds meet listing requirements and then markets new bond issues.
An investment banker
The Federal Reserve
A stock broker
The Securities and Exchange Commission
3. An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?
The interest earned in year one is $8.64 and the interest earned in year two is $8.00.
There is not enough information to solve this problem.
The interest earned in year one is $8.00 and the interest earned in year two is $8.64.
The interest earned in year one is $8.32 and the interest earned in year two is $8.32.
4. The ________ is/are critical to business decisions business growth and ultimately business success.
currency denomination of profits
timing and amount of cash flow
risk and timing but not the amount of cash flow
risk and profits but not the amount of cash flow
5. ________ is a financial term for “free money” that is the opportunity to make a profit without risk.
Trading in perfect markets
Trading in imperfect markets
6. An aspect of short-term financial planning is forecasting operating cash flow and ultimately the profitability of the company in the coming period. This type of financial planning typically uses forecasted ________.
working capital statements
All of these
7. Which of the following will result in a future value greater than $100?
PV = $50, r = an annual interest rate of 10%, and n = 8 years.
PV = $90, r = an annual interest rate of 14%, and n = 1 year.
PV = $75, r = an annual interest rate of 12%, and n = 3 years.
All of the future values are greater than $100.
8. Which of the statements below is FALSE?
An equity claim is a claim to all the assets and cash flows of a company once debt claimants have been paid.
Bond ownership gives the right to participate in the management of the company.
For common stock, there is no maturity date and the promised cash flow is not stated on the asset, but is determined at a later date by the board of directors.
Like a bond, common stock entitles the owner to some of the cash flow of a company.
9. Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project?
Dweller rejects the project because the NPV is less than -$4,000.
Dweller accepts the project because the NPV is greater than $30,000.
Dweller rejects the project because the NPV is -$3,021.
Dweller accepts the project because it has a positive NPV of over $28,000.
10. From the financial statements, we can look at specific performance areas of a company by selecting key pieces of information and analyzing this information ________.
at a point in time
at a point in time or over a specific time horizon
over a specific time horizon
All of these
11. Which of the statements below is FALSE?
When cross rates are out of line, there can be an arbitrage opportunity.
The opportunity to make a profit without risk by exchanging three currencies is known as triple arbitrage.
Exchange rates vary from one day to the next.
Even if you could not do a direct exchange between pounds and yen, you could convert pounds to dollars and then dollars to yen and ultimately end up changing pounds into yen.
12. When there are conflicts among managerial goals in U.S. markets, the most important priority is to ________.
increase the current market value of equity
keep all of the company’s customers happy
foster good relationships with the community
maintain a safe and happy work place
13. A ________ has limited liability, is a legal entity, and has the greatest potential to raise capital.
14. Extending credit to a customer has three major components:
a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy on accounting for depreciation.
a policy on how customers will qualify for credit, a policy on paying commissions on sales, and a policy for collecting overdue bills.
a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy for collecting overdue bills.
a policy on how customers will qualify for credit, a policy on accounting for depreciation, and a policy on paying commissions on sales.
15. Which of the following is NOT true regarding the total payment in an equal payment amortization table?
The total payment for any period is equal to the principal plus interest payments for that same period.
The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate.
The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment.
All of the above are true.
16. Which of the statements below is TRUE?
The increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project.
An increase in working capital can be brought about by an increase in inventory.
Decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases.
Decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations.
17. Which of the following is NOT a generally accepted way to remove ineffective management of a publicly traded firm?
Outside management teams can “take over” the company.
Each of the above are recognized methods for the removal of ineffective management.
The Board of Directors can vote to remove management.
The shareholders can vote out directors who won’t discipline managers.
18. A major issue with venture capitalists and angel investors is the rate at which their funds will be used up. This is called the ________.
burn rate or bleed rate
consumption or constriction rate
19. Which of the statements below is TRUE?
Investors want to minimize return and minimize risk.
Investors want to maximize return and maximize risk.
Investors want to minimize return and maximize risk.
Investors want to maximize return and minimize risk.
20. Of the following, which is the most recent example of legislation passed by the federal government to deal with a major economic or highly visible corporate event?
The Federal Deposit Insurance Corporation Improvement Act
The Securities and Exchange Act
The Sarbanes-Oxley Act
The Securities Act of 1933
21. Which of the following statements is TRUE if you increase your monthly payment above the required loan payment?
The extra portion of the payment increases the principal.
You can significantly increase the number of payments needed to pay off the loan.
You can significantly reduce the number of payments needed to pay off the loan.
The extra portion of the payment does not go to the principal.
22. In their first venture into the optimal capital structure question, Nobel laureates Franco Modigliani and Merton Miller began with a very simple model and a hypothetical world of ________.
no taxes and no bankruptcy
taxes but no bankruptcy
bankruptcy costs but no taxes
both taxes and bankruptcy
23. The company offering a discount on accounts payable is trying to ________ and the firm that pays on time rather than taking a discount is attempting to ________.
speed up cash outflow; slow down cash inflow
speed up cash inflow; slow down cash outflow
speed up cash inflow; slow down cash inflow
speed up cash outflow; slow down cash outflow
24. ________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings
Working capital management
Cost of capital
25. There are four primary financial statements that are used to measure the performance of a firm. Which of the choices below are included among these four?
The income sheet and statement of retained earnings
The balance sheet and statement of cash flows
The balance statement and income statement
The statement of cash flows and statement of balance
26. Acme Supply Co. has a new project that will require the company to borrow $3,000,000. Acme has made an agreement with three lenders for the needed financing. First National Bank will give $1,500,000 and wants 10% interest on the loan. Lockup Bank will give $1,000,000 and wants 12% interest on the loan. Southern National Bank will give $500,000 and wants 13% interest on the loan. What is the weighted average cost of capital for this $3,000,000?
27. Which of the following statements is TRUE?
The current ratio is current assets divided by current liabilities.
Total asset turnover is net income divided by total assets.
The quick ratio equals current assets – current liabilities divided by current liabilities.
The cash coverage ratio equals cash divided by current liabilities.
28. Which of the statements below is FALSE?
There are three basic defensive mechanisms that can guard against the extreme case of nationalized assets. These include keeping critical operations private, financing operations and assets with local money, and receiving primary inputs outside the local economy.
One way that a multinational firm can minimize the potential of nationalization of assets by a foreign government is to share key elements of operations with the government.
Political risk involves changes in a foreign government. At one extreme is the case in which a local government “takes over” the assets of the company and nationalizes it.
Political risk involves changes in a foreign government. An extreme example is the case in which a government encourages foreign investment and gives breaks to companies willing to move operations locally.
29. The current indirect exchange rate is 12 pesos per dollar. The anticipated annual inflation rate is 6% in the United States and 14% in Mexico. If the cash inflow in pesos is 50,000 in one year, what are the 50,000 pesos worth in U.S. dollars after conversion from pesos to dollars using the forward exchange rate?
30. ________ is the area of finance concerned with activities such as repayment of borrowed funds through dividends or interest payments.