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1) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost? 
    A.
 
Sole proprietorship, general partnership, corporation, limited partnership
    B.
 
Corporation, limited partnership, general partnership, sole proprietorship
    C.
 
Sole proprietorship, general partnership, limited partnership, corporation
    D.
 
General partnership, sole proprietorship, limited partnership, corporation


2) Which of the following best describes the goal of the firm? 
    A.
 
The maximization of the total market value of the firm’s common stock]
    B.
 
Profit maximization
    C.
 
Risk minimization
    D.
 
None of the above


3) Which of the following categories of owners have limited liability? 
    A.
 
General partners
    B.
 
Sole proprietors
    C.
 
Shareholders of a corporation
    D.
 
Both a and b


4) Money market instruments include: 
    A.
 
preferred stock.
    B.
 
corporate bonds.
    C.
 
bankers’ acceptances.
    D.
 
common stock.


5) Which of the following would increase the need for external equity? 
    A.
 
A slow-down in economic growth
    B.
 
A reduction in corporate profits
    C.
 
Inadequate investment opportunities
    D.
 
A seasonal reduction in sales revenues


6) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored? 
    A.
 
Preferred stock
    B.
 
Common stock
    C.
 
Retained earnings
    D.
 
Corporate bonds


7) Which of the following is NOT a principle of basic financial management? 
    A.
 
Incremental cash flow counts
    B.
 
Efficient capital markets
    C.
 
Risk/return tradeoff
    D.
 
Profit is king


8) Difficulty in finding profitable projects is due to: 
    A.
 
competitive markets.
    B.
 
ethical dilemmas.
    C.
 
social responsibility.
    D.
 
opportunity costs.


9) According to the agency problem, _________ represent the principals of a corporation. 
    A.
 
managers
    B.
 
employees
    C.
 
shareholders
    D.
 
suppliers


10) The accounting rate of return on stockholders’ investments is measured by: 
    A.
 
return on equity.
    B.
 
operating income return on investment.
    C.
 
return on assets.
    D.
 
realized rate of inflation.


11) Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management? 
    A.
 
Gross profit margin
    B.
 
Quick ratio
    C.
 
Current ratio
    D.
 
Return on investment


12) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio. 
    A.
 
40%
    B.
 
50%
    C.
 
30%
    D.
 
60%

 

13) If you are an investor, which of the following would you prefer? 
    A.
 
Earnings on funds invested would compound daily.
    B.
 
Earnings on funds invested would compound monthly.
    C.
 
Earnings on funds invested would compound annually.
    D.
 
Earnings on funds invested would compound quarterly.


14) When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997? 
    A.
 
$954,719
    B.
 
$2,525,548
    C.
 
$4,085,920
    D.
 
$1,025,000
    E.
 
$3,489,097


15) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)? 
    A.
 
5.02%
    B.
 
3.61%
    C.
 
4.75%
    D.
 
4.86%


16) Which of the following is NOT a basic function of a budget? 
    A.
 
Budgets allow for performance evaluation.
    B.
 
Budgets compare historical costs of the firm with its current cost performance.
    C.
 
Budgets indicate the need for future financing.
    D.
 
Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.


17) The primary purpose of a cash budget is to: 
    A.
 
determine the estimated income tax for the year.
    B.
 
provide a detailed plan of future cash flows.
    C.
 
determine the level of investment in current and fixed assets.
    D.
 
determine accounts payable.


18) All of the following are found in the cash budget EXCEPT: 
    A.
 
new financing needed.
    B.
 
cash disbursements.
    C.
 
a net change in cash for the period.
    D.
 
inventory.


19) Which of the following is a non-cash expense? 
    A.
 
Administrative salaries
    B.
 
Packaging costs
    C.
 
Depreciation expenses
    D.
 
Interest expense


20) A plant can remain operating when sales are depressed: 
    A.
 
unless variable costs are zero when production is zero.
    B.
 
in an effort to cover at least some of the variable cost.
    C.
 
if the selling price per unit exceeds the variable cost per unit.
    D.
 
to help the local economy.


21) The break-even model enables the manager of a firm to: 
    A.
 
determine the optimal amount of debt financing to use.
    B.
 
determine the quantity of output that must be sold to cover all operating costs.
    C.
 
calculate the minimum price of common stock for certain situations.
    D.
 
set appropriate equilibrium thresholds.


22) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? 
    A.
 
8% 
    B.
 
7%
    C.
 
6%
    D.
 
5%


23) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years? 
    A.
 
$2,465.78
    B.
 
$3,408.88
    C.
 
$3,525.62
    D.
 
$5,008.76


24) How long will it take $750 to double at 8% compounded annually? 
    A.
 
12 years
    B.
 
9 years
    C.
 
6.5 years
    D.
 
48 months

25) Which of the following is considered to be a spontaneous source of financing? 
    A.
 
Accounts payable
    B.
 
Inventory
    C.
 
Operating leases
    D.
 
Accounts receivable


26) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with: 
    A.
 
preferred stock.
    B.
 
trade credit.
    C.
 
common stock.
    D.
 
selling equipment.


27) Which of the following is NOT considered a permanent source of financing? 
    A.
 
Commercial paper
    B.
 
Preferred stock
    C.
 
Corporate bonds
    D.
 
Common stock


28) We compute the profitability index of a capital-budgeting proposal by: 
    A.
 
dividing the present value of the annual after-tax cash flows by the cost of capital.
    B.
 
dividing the present value of the annual after-tax cash flows by the cost of the project.
    C.
 
multiplying the IRR by the cost of capital.
    D.
 
multiplying the cash inflow by the IRR.


29) Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000 
Cash flows:    Year 1    =    $5,000
    Year 2    =    $3,000
    Year 3    =    $9,000
If the appropriate discount rate is 15%, compute the NPV of this project. 
    A.
 
-$466
    B.
 
$27,534
    C.
 
$4,000
    D.
 
$8,891


30) Compute the payback period for a project with the following cash flows, if the company’s discount rate is 12%. Initial outlay = $450 
Cash flows:    Year 1    =    $325
    Year 2    =    $ 65
    Year 3    =    $100

    A.
 
3.17 years
    B.
 
2.88 years
    C.
 
3.43 years
    D.
 
2.6 years


31) Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk. 
    A.
 
True
    B.
 
False


32) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk. 
    A.
 
True
    B.
 
False


33) You have been asked to analyze a capital investment proposal. The project’s cost is $2,775,000. Cash inflows are projected to be $925,000 in Year 1; $1,000,000 in Year 2; $1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your firm discounts capital projects at 15.5%. What is the project’s MIRR? 
    A.
 
10.44%
    B.
 
16.73%
    C.
 
12.62%
    D.
 
19.99%


34) The firm should accept independent projects if: 
    A.
 
the profitability index is greater than 1.0.
    B.
 
the IRR is positive.
    C.
 
the payback is less than the IRR.
    D.
 
the NPV is greater than the discounted payback.


35) The NPV assumes cash flows are reinvested at the: 
    A.
 
NPV.
    B.
 
real rate of return.
    C.
 
IRR.
    D.
 
cost of capital.


36) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) 
    A.
 
$4,568
    B.
 
$7,621
    C.
 
$1,056
    D.
 
$6,577

37) PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because: 
    A.
 
these bonds are essentially free of business risk.
    B.
 
they capture the long-term inflation expectations of investors associated with investments in long-term assets.
    C.
 
these bonds are essentially free of interest rate risk.
    D.
 
none of the above.


38) The most expensive source of capital is: 
    A.
 
new common stock.
    B.
 
debt.
    C.
 
preferred stock.
    D.
 
retained earnings.


39) The average cost associated with each additional dollar of financing for investment projects is: 
    A.
 
the marginal cost of capital.
    B.
 
risk-free rate.
    C.
 
the incremental return.
    D.
 
beta.


40) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged? 
    A.
 
13.0%
    B.
 
10.0%
    C.
 
18.0%
    D.
 
14.2%


41) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital? 
    A.
 
9.0%
    B.
 
10.6%
     C.     
14.0%
     D.     
11.5%


42) Given the following information, determine the risk-free rate. 
Cost of equity    =    12%
Beta    =    1.50
Market risk premium    =    3%

     A.     
8.0%
     B.     
7.5%
     C.     
6.5%
     D.     
7.0%


43) Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year? 
     A.     
$2.10
     B.     
$2.96
     C.     
$1.67
     D.     
$2.33

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    1) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost? A. Sole proprietorship, general partnership, corporation, limited partnership B. Corporation, limited partnership, general partnership, sole proprietorship C. Sole proprietorship, general partnership, limited partnership, corporation D. General partnership, sole proprietorship, limited partnership, corporation 2) Which of the following best describes the goal of the firm? A. The maximizati

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