1.(TCO 4) Which of the following is true regarding the evaluation of projects?(Points : 4)

sunk costs should be included
erosion effects should be considered
financing costs need to be included
opportunity costs are irrelevant

Question 2. 2.(TCO 4) Which of the following investment ranking methods does not consider the time value of money?(Points : 4)

net present value method
payback method
internal rate of return method
all of these are time-adjusted methods

Question 3. 3.(TCO 3 and 4) You can ensure that an investment is expected to create value for(Points : 4)

have a PI equal to zero.
produce negative rates of return.
have positive AARs.
have positive IRRs.
have positive NPVs.

Question 4. 4.(TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent







Cash flow






(Points : 4)


Question 5. 5.(TCO 4) Howard Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? (Points : 4)

5.81 years
6.05 years
6.96 years
7.90 years
This project never pays back

Question 6. 6.(TCO 4) The postponement of a project until conditions are more favorable:(Points : 4)

is a valuable option.
is referred to as the option to extend.
could not cause a negative net present value project to become a positive net present value project.
will generally cause the internal rate of return for a project to decline.

Question 7. 7.(TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4)

contingency planning.
hard rationing.
soft rationing.
capital constraint.
scenario analysis.

Question 8. 8.(TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)

The net present value of the project is approximately $1,011
This project should be accepted because it has a negative net present value
This project s payback period is 10 years or more
All of the above are true

Question 9. 9.(TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4)

None of the above

Question 10. 10.(TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?(Points : 4)

none of these

Question 11. 11.(TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)

is diversifiable
is the total risk associated with surprise events
it is measured by beta
it is measured by standard deviation

Question 12. 12.(TCO 8) Which statement is true regarding risk?(Points : 4)

the expected return is usually the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can always be decreased or mitigated by the financial manager
the higher the risk, the lower the return investors require for the investment

Question 13. 13.(TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy

Probability of State of Economy

Rate of Return










(Points : 4)

7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent

Question 14. 14.(TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? (Points : 4)

17.68 percent
17.91 percent
18.42 percent
19.07 percent
19.46 percent

Question 15. 15.(TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner such that the risk of the new portfolio matches that of the overall market. What does the beta of the new security have to be? (Points : 4)


1.(TCO 8) If the financial markets are strong form efficient, then: (Points : 4)

only the most talented analysts can determine the true value of a security.
only company insiders have a marketplace advantage.
technical analysis provides the best tool to gain a marketplace advantage.
no one person has an advantage in the marketplace.
every security offers the same rate of return.

Question 2. 2.(TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)

between 4.5% and 8%
more than 13%
between 12 and 13%
between 13 and 14%
none of the above

Question 3. 3.(TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price?(Points : 4)

none of these

Question 4. 4.(TCO 5, 6 and 7) Which of the following is not true regarding the cost of debt? (Points : 4)

It is the return that the firm s creditors demand on new borrowing.
It is the interest rate that the firm pays on current/existing borrowing.
An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.
It needs to be converted into an after-tax cost.

Question 5. 5.(TCO 5) Which of the following is not true regarding the cost of retained earnings? (Points : 4)

it is relevant to the WACC
does not require new funds to be raised
has associated flotation costs
has a cost, which is the opportunity cost associated with stockholder funds

Question 6. 6.(TCO 4) A project has the following cash flows. What is the internal rate of return






Cash flow





(Points : 4)

less than 5%
between 5 and 15%
between 15 and 18%
more than 21%

Question 7. 7.(TCO 5, 6 and 7) Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)? (Points : 4)

the WACC can be used as the required return for all new projects.
the WACC of a leveraged firm will decrease when the tax rate decreases.
an increase in the market risk premium will tend to decrease a firm’s WACC.
the WACC is a starting point for the subjective approach to setting discount rates.
a reduction in the risk level of a firm will tend to increase the firm’s WACC.

Question 8. 8.(TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm’s cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100? (Points : 4)


Question 9. 9.(TCO 2) Which one of the following occurs if a firm files for Chapter 7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy? (Points : 4)

a petition is filed in federal court
administrative fees are incurred
a list of creditors is compiled
pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm
a trustee-in-bankruptcy is elected by the creditors

Question 10. 10.(TCO 5) Which of the following statements is false regarding the cost of capital? (Points : 4)

The cost of capital should consider the flotation costs.
All other being equal, it is preferable to use market value weights than book value weights.
The WACC is the most appropriate discount rate for all projects.
Should include the cost of retained earnings.

Question 11. 11.(TCO 2) Select any actions that do not affect the cash account. (Points : 4)

Goods are sold cash
An interest payment on a notes payable is made
A payment due is received from a client
Dividends are paid to shareholders
Inventory is purchased and paid for with credit

Question 12. 12.(TCO 2) Which of the following statements is true (Points : 4)

There is an opportunity cost associated with not offering credit.
The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.

Question 13. 13.(TCO 2) Which one of the following industries is most apt to have the shortest cash cycle? (Points : 4)

electric utility company
airplane manufacturer
fast-food restaurant
furniture store
clothing manufacturer

Question 14. 14.(TCO 2) Delphinia’s has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.










(Points : 4)


Question 15. 15.(TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization? (Points : 4)

Because by maximizing the current stock value, you also maximize the company s profit for the year.
Because this criterion is non-ambiguous.
Because financial managers always act in the best interest of shareholders.
Because it creates short-term gains in the financial statements.

6.(TCO 1) Provide three examples of recent well-known unethical behavior cases. Explain the situation in one or two paragraphs. How do you believe that this behavior affected the firm s value? (Points : 10)

7.(TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale. (Points : 10)

8.(TCO 8) What is the difference between business risk and financial risk? If Company A has a higher business risk than Company B, should its cost of capital be higher? Why or why not? Explain your rationale.(Points : 10)

9.(TCO 2) What are some important factors to consider when conducting a credit evaluation and scoring?(Points : 10)

0. Do you believe that it is appropriate for some industries to be more leveraged than others? Explain your rationale. (Points : 10)

1.(TCO 1) Which of the following are capital structure concerns?

I. how to obtain short-term financing
II. the company’s financing mix
III. the cost of funds
IV. how and where to raise money (Points : 4)

I and II
I, II and III
II, III and IV
I, III and IV
All of the above

Question 2. 2.(TCO 1) Book values are different from market values because: (Points : 4)

Book values reflect the value of the asset based on generally-accepted accounting principles.
Book values are used in the company s balance sheet.
Book values do not reflect the amount someone is willing to pay today for an asset.
All of the above
None of the above

Question 3. 3.(TCO 1) Use the following tax table to answer this question:

Taxable Income

Tax Rate
















John has taxable income of $389,745. What is John s average tax rate? (Points : 4)


Question 4. 4.(TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)

Regional Bank, APR
Local Bank, EAR
Regional Bank, EAR
Local Bank, APR

Question 5. 5.(TCO 3) You deposited $11,000 in your bank account today. Which of the following will decrease the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply:(Points : 4)

a decrease in the interest rate
increasing the initial amount of your deposit
increasing the frequency of the interest payments
decreasing the length of the investment period

Question 6. 6.(TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today. She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need to deposit today, if this is the only money she saves for this purpose? (Points : 4)


Question 7. 7.(TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment? (Points : 4)


Question 8. 8.(TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does John have? (Points : 4)

pure discount

Question 9. 9.(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond, if the YTM is 11 percent? Assume annual payments. (Points : 4)


Question 10. 10.(TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market. (Points : 4)


Question 11. 11.(TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4)

Financial leverage increases profits and decreases losses.
Financial leverage has no effect on a firm’s return on equity.
Financial leverage, refers to the use of common stock.
Financial leverage magnifies both profits and losses.
Increasing financial leverage will always increase the earnings per share.

Question 12. 12.(TCO 3) What is the approximate yield to maturity for a seven-year bond that pays 11 percent interest on a $1000 face value annually if the bond sells for $952? (Points : 4)


Question 13. 13.(TCO 8) Which of the following is true regarding bonds? (Points : 4)

Most bonds do not carry default risk.
Municipal bonds are free of default risk.
Bonds are not sensitive to changes in the interest rates.
Moody s and Standard and Poor s provide information regarding a bond s interest rate risk.
None of the above is true

Question 14. 14.(TCO 8) Which one of the following bonds is the most sensitive to interest rate movements (Points : 4)

zero-coupon, five year
seven percent annual coupon, five year
zero-coupon, 10 year
five percent semi-annual coupon, 10 year
five percent annual coupon, 10 year

Question 15. 15.(TCO 6) A sinking fund is an account managed by a bond trustee for the sole purpose of: (Points : 4)

paying interest payments on a semi-annual basis.
redeeming bonds early.
repaying the face value at maturity.
paying the expenses required to reissue outstanding bonds.
paying the “balloon payment” at maturity.