Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which one of these is a correct definition? A) Long-term debt is defined as a residual claim on a firm’s assets. B) Tangible assets are fixed assets such as patents. C) Net working capital equals current assets plus current liabilities. D) Current assets are assets with short lives, such as inventory. E) Current liabilities are debts that must be repaid in 18 months or less.
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2) Which one of these accounts is included in net working capital? A) inventory B) long-term debt C) copyright D) manufacturing equipment E) common stock
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3) The ultimate control of a corporation lies in the hands of the corporate: A) president. B) stockholders. C) chairman of the board. D) board of directors. E) chief executive officer.
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4) Net working capital is defined as: A) fixed assets minus long-term liabilities. B) current assets plus stockholders’ equity. C) current assets minus current liabilities. D) total assets minus total liabilities. E) current assets plus fixed assets.
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5) An asset that can be quickly converted into cash without significant loss in value is referred to as being:
A) liquid. B) tangible. C) intangible. D) fixed. E) marketable.
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6) Noncash items refer to: A) expenses charged against revenues that do not directly affect cash flow. B) the costs incurred for the purchase of intangible fixed assets. C) all accounts on the balance sheet other than cash on hand. D) the credit sales of a firm. E) the accounts payable of a firm.
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7) The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:
A) cash flow to investors. B) net capital spending. C) additions to net working capital. D) operating cash flow. E) cash flow to retained earnings.
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8) Projected future financial statements are called: A) plug statements. B) comparative statements. C) reconciled statements. D) aggregated statements. E) pro forma statements.
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9) Which statement expresses all accounts as a percentage of total assets? A) common-size income statement B) common-size balance sheet C) pro forma balance sheet D) pro forma income statement E) statement of cash flows
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10) The quick ratio is measured as: A) current assets minus inventory minus current liabilities. B) current liabilities divided by current assets, plus inventory. C) current assets minus inventory, divided by current liabilities. D) current assets divided by current liabilities. E) cash on hand plus current liabilities, divided by current assets.
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11) Ratios that measure a firm’s financial leverage are known as ________ ratios. A) asset management B) profitability C) long-term solvency D) market value E) short-term solvency
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12) The debt-equity ratio is measured as: A) long-term debt divided by total equity. B) total equity divided by total debt. C) total debt divided by total equity. D) total equity divided by long-term debt. E) total assets minus total debt, divided by total equity.
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13) The financial ratio measured as net income divided by sales is known as the firm’s: A) return on assets. B) earnings before interest and taxes. C) asset turnover. D) profit margin. E) return on equity.
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14) A perpetuity differs from an annuity because: A) perpetuity payments vary with the rate of inflation. B) annuity payments occur at irregular intervals of time. C) perpetuity payments vary with the market rate of interest. D) perpetuity payments never cease. E) perpetuity payments are variable while annuity payments are constant.
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15) The difference between the present value of an investment’s future cash flows and its initial cost is the:
A) profitability index. B) discounted payback period. C) net present value. D) payback period. E) internal rate of return.
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16) Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
A) Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
B) An investment project that has positive cash flows for every time period after the initial investment should be accepted.
C) A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
D) An investment project should be accepted only if the NPV is equal to the initial cash flow.
E) Any type of project should be accepted if the NPV is positive and rejected if it is negative.
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17) The discount rate that makes the net present value of an investment exactly equal to zero is called the:
A) external rate of return. B) profitability index. C) equalizer. D) average accounting return. E) internal rate of return.
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18) A situation in which accepting one investment prevents the acceptance of another investment is called the:
A) operational ambiguity decision. B) net present value profile. C) issues of scale problem. D) multiple rates of return decision. E) mutually exclusive investment decision.
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19) All else constant, the net present value of a typical investment project increases when: A) the initial cost of a project increases. B) the discount rate increases. C) all cash inflows occur during the last year instead of periodically throughout a
project’s life. D) each cash inflow is delayed by one year. E) the rate of return decreases.
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20) The primary reason that company projects with positive net present values are considered acceptable is that:
A) they return the initial cash outlay within three years or less. B) they create value for the owners of the firm. C) the required cash inflows exceed the actual cash inflows. D) the investment’s cost exceeds the present value of the cash inflows. E) the project’s rate of return exceeds the rate of inflation.
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21) A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.
A) municipal B) zero coupon C) Treasury D) junk E) floating-rate
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22) The stated interest payment, in dollars, made on a bond each period is called the bond’s: A) maturity. B) yield to maturity. C) coupon rate. D) coupon. E) face value.
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23) The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.
A) liquidity B) interest rate risk C) default risk D) inflation E) taxability
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24) The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.
A) taxability B) liquidity C) default risk D) inflation E) interest rate risk
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25) The market price of a bond increases when the: A) face value decreases. B) coupon rate decreases. C) coupon is paid annually rather than semiannually. D) par value decreases. E) discount rate decreases.
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26) Next year’s annual dividend divided by the current stock price is called the: A) capital gains yield. B) yield to maturity. C) dividend yield. D) earnings yield. E) total yield.
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27) The rate at which a stock’s price is expected to appreciate (or depreciate) is called the _____ yield.
A) capital gains B) earnings C) total D) current E) dividend
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28) The underlying assumption of the dividend growth model is that a stock is worth: A) the present value of the future income that the stock is expected to generate. B) the same amount to every investor regardless of their desired rate of return. C) an amount computed as the next annual dividend divided by the required rate of
return. D) the same amount as any other stock that pays the same current dividend and has
the same required rate of return. E) an amount computed as the next annual dividend divided by the market rate of
return.
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29) For a firm with a constant payout ratio, the dividend growth rate can be estimated as: A) Payout ratio × Return on equity. B) Return on retained earnings × Retention ratio. C) Payout ratio × Return on assets. D) Return on equity × (1 + Retention ratio). E) Return on assets × Retention ratio.
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30) The total return on a stock is equal to the: A) dividend growth rate minus the dividend yield. B) dividend yield minus the capital gains yield. C) growth rate of the dividends. D) dividend divided by the sum of the dividend yield and capital gains yield. E) dividend yield plus the dividend growth rate.
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31) Which one of these factors generally has the greatest impact on a firm’s PE ratio? A) depreciation method used by the firm B) required rate of return C) the overall risk level of the current firm D) future opportunities E) current dividends
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32) A forward PE is generally based on the projected: A) average earnings for the next five years. B) average earnings for the next three years. C) stock price in one year. D) earnings for the upcoming quarter. E) earnings for the next year.
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33) The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
A) inflation premium. B) time premium. C) geometric average return. D) risk premium. E) arithmetic average return.
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