Erickson’s is considering a project with an initial cost of $623,000. The project will produce cash inflows of $33,500 monthly for 21 months. What is the annual rate of return on this project?

1.  Short-term finance:  

 

A.   ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.

 

B.   ensures that long-term debt is acquired at the lowest possible cost.

 

C.   ensures that dividends are paid to all stockholders on an annual basis.

 

D.   balances the amount of company debt to the amount of available equity.

 

E.   is concerned with managing net working capital.

 

2.  The process of planning and managing a firm’s long-term investments is referred to as:

  

A.   capital budgeting.

 

B.   agency cost analysis.

 

C.   financial depreciation.

 

D.   working capital management.

 

E.   capital structure.

 

3.  Capital structure refers to:

  

A.   the determination of the ideal mix of current versus long-term assets.

 

B.   the methods by which fixed assets are used to produce a tangible product.

 

C.   the mix of current assets and current liabilities.

 

D.   the acquisition or disposition of a building or other long-term asset.

 

E.   decisions related to long-term debt and equity financing.

 

4.  Net working capital is best defined as:

  

A.   excess cash on hand.

 

B.   a firm’s current assets.

 

C.   current assets minus current liabilities.

 

D.   total assets minus total liabilities.

 

E.   cash and near-cash assets.

 

5.  The treasurer and the controller of a corporation generally report to the:

  

A.   president.

 

B.   board of directors.

 

C.   chief executive officer.

 

D.   chief financial officer.

 

E.   chairman of the board.

 

6.  Which one of these best describes the key difference between the duties of the controller and those of the treasurer?

  

A.   Separation of duties related to assets versus those related to debt and equity

 

B.   Separation of authority over tax records versus accounting records

 

C.   Separation of internal versus external responsibilities

 

D.   Separation of duties related to production versus marketing

 

E.   Separation of cash control from accounting records

 

7.  Which position is generally directly responsible for financial planning and capital expenditures?  

 

A.   Controller

 

B.   Treasurer

 

C.   Director

 

D.   Chairman of the board

 

E.   Chief operations officer

 

8.  The division of profits and losses among the members of a partnership is formalized in the:  

  

A.   indemnity clause.

 

B.   partnership agreement.

 

C.   statement of purpose.

 

D.   indenture contract.

 

E.   group charter.

 

9.  Sole proprietorships:

  

A.   are expensive to setup.

 

B.   are limited to the business owner’s life.

 

C.   are faced with double taxation of profits.

 

D.   can have multiple owners.

 

E.   provide limited liability to owners.

 

10.  Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?  

 

A.   No potential financial loss

 

B.   Entitlement to a larger portion of the partnership’s income

 

C.   Liability for firm debts limited to the capital invested

 

D.   Greater management responsibility

 

E.   Ability to manage the day-to-day affairs of the business

11.  Which of the following are disadvantages of a general partnership?  

 

I.     Limited life of the firm

II.   Personal liability for firm debt

III.  Greater ability to raise capital than a sole proprietorship

IV.  Lack of ability to transfer partnership interest  

 

A.   I and II only

 

B.   III and IV only

 

C.   II and III only

 

D.   I, II, and IV only

 

E.   I, III, and IV only

 

12.  Art purchased 2,500 shares of Delta stock. His purchase represents ten percent ownership in the firm. His shares have increased in value from the $12 a share he originally paid to today’s market value of $23 share. Assume Delta goes bankrupt and owes $450,000 more in debts than the firm can pay after liquidating all of its assets. What is the maximum loss per share Art will incur on this investment?  

 

A.   $0 a share

 

B.   $12 a share

 

C.   $17.50 a share, computed as ($12 + 23)/2

 

D.   $23 a share

 

E.   $18 share, computed as (10% × $450,000)/2,500 shares

 

13.  The articles of incorporation:

 

A.   establish the rights of the shareholders.

 

B.   are rules which apply only to limited liability companies.

 

C.   address only those issues related to a corporation’s managers and directors.

 

D.   establish the compensation to be granted to senior managers.

 

E.   include only the name, purpose, and intended life of the corporation.

 

14.  Which type of business organization has all the respective rights and privileges of a legal person?  

 

A.   Sole proprietorship

 

B.   Corporation

 

C.   General partnership

 

D.   Limited partnership

 

E.   Limited liability company

 

15.  A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a:  

 

A.   limited liability company.

 

B.   general partnership.

 

C.   limited proprietorship.

 

D.   sole proprietorship.

 

E.   corporation.

 

16.  The issuance of new equity shares is a cash flow from:

 

A.   long-term creditors to a firm.

 

B.   a firm to its shareholders.

 

C.   a firm’s suppliers to the firm.

 

D.   the financial markets to a firm.

 

E.   any one of a firm’s stakeholders to the firm.

 

17.  Agency costs refer to:  

 

A.   corporate income subject to double taxation.

 

B.   the total dividends paid to stockholders over the lifetime of a firm.

 

C.   the costs of any conflicts of interest between stockholders and management.

 

D.   the costs that result from default and bankruptcy of a firm.

 

E.   the total interest paid to creditors over the lifetime of the firm.

 

18.  Which of the following are key requirements of the Sarbanes-Oxley Act?  

 

I.     Officers of the corporation must now own more than 5 percent of the firm’s stock.

II.   Officers of the corporation must review and sign annual reports.

III.  Annual reports must list deficiencies in internal controls.

IV.  Annual reports must be filed with the SEC within 30 days of year end.  

 

A.   I only

 

B.   II only

 

C.   I and III only

 

D.   II and III only

 

E.   II and IV only

 

19.  The decisions made by financial managers should all be ones which increase the:  

 

A.   size of the firm.

 

B.   growth rate of the firm.

 

C.   market value of the existing owners’ equity.

 

D.   marketability of the managers.

 

E.   financial distress of the firm.

 

20.  Which one of the following actions by a financial manager least meets the goal of financial management?  

 

A.   Increasing current costs in order to increase the market value of the stockholders’ equity

 

B.   Agreeing to expand the company at the expense of stockholders’ value

 

C.   Refusing to lower selling prices if doing so will reduce the net profits

 

D.   Agreeing to pay bonuses based on the market value of the company stock

 

E.   Refusing to borrow money when doing so will create losses for the firm

 

21.  Which of the following help convince managers to work in the best interest of the stockholders?

 

I.     Compensation based on the value of the stock

II.   Stock option plans

III.  Threat of a proxy fight

IV.  Threat of conversion to a partnership  

 

A.   I and II only

 

B.   II and III only

 

C.   I, II, and III only

 

D.   I and III only

 

E.   I, II, III, and IV

 

22.  A proxy fight occurs when:  

 

A.   the board of directors solicits renewal of current members.

 

B.   a firm files for bankruptcy.

 

C.   a shareholder sells shares in the open market.

 

D.   a group solicits votes to replace the board of directors.

 

E.   a firm is declared insolvent.

 

23.  Which one of the following parties is considered a stakeholder of a firm?  

 

A.   Long-term creditor

 

B.   Short-term creditor

 

C.   Employee

 

D.   Preferred stockholder

 

E.   Common stockholder

 

24.  Which one of the following is least apt to encourage managers to act in the best interest of shareholders?  

 

A.   Shareholder election of the board of directors, who in turn select managers

 

B.   Threat of a takeover by another firm

 

C.   Linking manager compensation to share value

 

D.   Compensating managers with fixed salaries

 

E.   Granting stock options to key managers

 

 

25.  You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

 

A.   Option A is preferable because it is an annuity due.

 

B.   Option A is the better choice of the two given any positive rate of return.

 

C.   Option B has a higher present value than option A given a positive rate of return.

 

D.   Option B has a lower future value at Year 5 than option A given a zero rate of return.

 

E.   Both options are of equal value given that they both provide $20,000 of income.

 

26.  Which one of the following will increase the future value of a finite stream of uneven cash flows?

Assume a positive rate of return.

 

A.   Moving every cash flow one time period further into the future

 

B.   Decreasing the amount of each cash flow

 

C.   Increasing the first cash flow by $100 and lowering the last cash flow by $100

 

D.   Moving the Time 0 cash inflow to Time 1

 

E.   Decreasing the total number of cash flows

 

27.  The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:  

 

A.   .09e – 1.

 

B.   e.09 × q.

 

C.   e.09 – 1.

 

D.   e × (1 + .09).

 

E.   (1 + .09)q.

 

28.  You will be receiving $8,769 one year from now. What is the present value of this amount at a discount rate of 11.65 percent?

 

A.   $7,854.01

 

B.   $7,747.41

 

C.   $8,201.16

 

D.   $8,414.32

 

E.   $10,215.89

               This morning you invested your tax refund of $2,220 at an interest rate of 4.8 percent,

29.   

compounded annually. How much will this investment be worth 15 years from now?

 

A.   $3,818.40

 

B.   $2,175.57

 

C.   $4,094.15

 

D.   $4,485.10

 

E.   $5,121.60

 

 

30.  Cast Out Co. invested $16,200 in a project. At the end of two years, the company sold the project for

$23,800. What annual rate of return did the firm earn on this project?

 

A.   46.91%

 

B.   38.20%

 

C.   21.21%

 

D.   18.67%

 

E.   31.93%

 

31.  Angela expects to save $4,000 a year and earn an average annual return of 7.5 percent. How much will her savings be worth 25 years from now?

 

A.   $259,317.82

 

B.   $260,702.57

 

C.   $271,911.45

 

D.   $274,868.92

 

E.   $286,063.66

 

32.  Your grandmother has promised to give you $100 every three months for four years, with the first payment occurring three months from today. How much is this gift worth to you today at a discount rate of

3.8 percent, compounded quarterly?

 

A.   $1,129.07

 

B.   $1,633.25

 

C.   $1,660.80

 

D.   $1,477.84

 

E.   $1,479.32

 

33.  You just won the lottery! As your prize you will receive $1,500 a month for 100 months starting at the end of this month. If you can earn 8 percent, compounded monthly, what is this prize worth to you today?

 

A.   $64,647.53

 

B.   $65,940.48

 

C.   $109,953.46

 

D.   $109,225.29

 

E.   $118,741.48

 

34.  Walt can afford monthly car payments of $175 for five years, starting one month from now. The interest rate is 4.9 percent, compounded monthly. How much can he afford to borrow to buy a car?

 

A.   $6,961.36

 

B.   $8,499.13

 

C.   $8,533.8

 

D.   $9,333.88

 

E.   $9,295.92

 

35.  Rodget’s is saving for an expansion project and has decided to save $2,500 a month, starting today and continuing for four years. The firm expects to earn 7.9 percent, compounded monthly. If the company had wanted to deposit an equivalent lump sum today, how much would it have had to deposit?

 

A.   $104,964.59

 

B.   $102,601.95

 

C.   $105,330.60

 

D.   $103,277.41

 

E.   $101,998.01

 

36.  You desperately need some money and only your ‘miserly’ friend has any. He agrees to loan you the money you need, if you make payments of $20 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you borrowing?

 

A.   $115.65

 

B.   $116.56

 

C.   $113.94

 

D.   $126.46

 

E.   $114.96

 

37.  Theo just won a prize that will pay him $12,000 a year for 12 years, starting at the end of Year 12.

What is the current value of this prize if the discount rate is 9 percent, compounded annually?

 

A.   $34,282.98

 

B.   $30,550.64

 

C.   $33,300.20

 

D.   $86,191.91

 

E.   $85,928.70

 

38.  Clint just won a prize that will pay him $30,000 a year for 30 years, starting at the end of Year 10.

What is the current value of this prize if the discount rate is 12 percent, compounded annually?

 

A.   $241,655.52

 

B.   $240,550.64

 

C.   $87,143.40

 

D.   $86,191.91

 

E.   $77,806.61

 

39.  You are comparing two annuities with equal present values. The applicable discount rate is 7.25 percent, compounded annually. One annuity pays $6,500 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year?

 

A.   $5,581.40

 

B.   $6,060.61

 

C.   $6,028.75

 

D.   $6,971.25

 

E.   $7,086.50

40.  Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. The discount rate is 8 percent, compounded monthly. What is the difference in the present value of these two sets of payments?

 

A.   $32.88

 

B.   $34.29

 

C.   $92.60

 

D.   $108.00

 

E.   $112.50

41.  An investment will pay $6,300 every three years for the next 30 years. The annual rate of interest is

11.4 percent. What is the value of this investment at the end of Year 30?

 

A.   $330,590.34

 

B.   $396,222.20

 

C.   $1,206,504.11

 

D.   $1,353,997.81

 

E.   $403,576.58

42.  Rowynn just signed loan papers to buy a new car. The loan is for $26,700 for four years at an interest rate of 5.8 percent, compounded monthly. What is the amount of each monthly loan payment?

  

A.   $627.62

 

B.   $621.60

 

C.   $630.62

 

D.   $624.60

 

E.   $633.04

 

 

43.  You borrow $150,000 to buy a house. The mortgage rate is 8.5 percent and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay? (Round the payment to two decimal places when computing the total interest.)  

  

A.   $138,086.67

 

B.   $228,161.08

 

C.   $265,213.20

 

D.   $277,086.67

 

E.   $382,500.00

44.  Westover Ridge has a management contract with its president that requires a lump sum payment of $20 million to be paid upon the completion of the president’s first ten years of service. The company can earn 5.5 percent on its investments and wants to set aside an equal amount of money each year over the next ten years to fund this obligation. How much money must the firm save each year?

  

A.   $1,895,734.60

 

B.   $1,398,346.17

 

C.   $1,401,033.67

 

D.   $1,553,355.37

 

E.   $1,848,018.22

 

45.  You retire at age 65 and expect to live another 30 years. On the day you retire, you have $564,500 saved. You expect to earn 3.5 percent, compounded monthly. How much can you withdraw from your savings each month if you plan to die on the day you spend your last penny?  

  

A.   $2,001.96

 

B.   $2,192.05

 

C.   $2,298.17

 

D.   $2,372.00

 

E.   $2,534.86

 

46.  Wings and More purchased a piece of property for $1.4 million. It paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.60 percent, compounded monthly. What is the amount of each mortgage payment?  

  

A.   $12,440.01

 

B.   $11,029.33

 

C.   $10,236.25

 

D.   $10,799.18

 

E.   $11,099.18

 

47.  You estimate that you will have $44,500 in student loans by the time you graduate. The interest rate is 6.5 percent, compounded monthly. If you want to have this debt paid in full within five years, how much must you pay each month?  

  

A.   $745.69

 

B.   $873.65

 

C.   $870.69

 

D.   $741.67

 

E.   $880.40

 

48.  You are buying a previously owned car today at a price of $8,125. You are paying $600 down in cash and financing the balance for 36 months at 7.9 percent, compounded monthly. What is the amount of each loan payment?  

  

A.   $198.64

 

B.   $199.94

 

C.   $202.02

 

D.   $214.78

 

E.   $235.46

 

49.  Charley wants to sell you an investment that will pay $1,000 per quarter for 25 years. You desire an annual rate of return of 5.5 percent, compounded quarterly. What is the most you would be willing to pay as a lump sum today for this investment?

A.   $54,165.88

 

B.   $57,082.94

 

C.   $51,152.59

 

D.   $212,232.81

 

E.   $218,806.30

 

 50.  You have $100,000 saved today and plan to withdraw $8,000 a year. How long can you make these withdrawals if you earn an annual percentage rate of 3.5 percent?

A.   14.96 years

 

B.   15.48 years

 

C.   16.73 years

 

D.   18.08 years

 

E.   19.00 years

 

51.  Today, the Corner Store borrowed $5,250 at 7.2 percent, compounded monthly. The loan payment is $114.11 a month. How many loan payments must the firm make before the loan is paid in full?  

A.   36 months

 

B.   42 months

 

C.   48 months

 

D.   54 months

 

E.   60 months

  

 

52.  Jensen’s Shipping wants to expand as soon as it can save $142 million. Towards that goal, the firm started saving three years ago and currently has $19.6 million saved. Starting today, the firm will add $12,000 a month to this savings account. The rate of return is 13.1 percent, compounded monthly. How long will it be from now before the company can expand?

  

A.   178.03 months

 

B.   178.07 months

 

C.   191.23 months

 

D.   191.27 months

 

E.   191.30 months

53.  Erickson’s is considering a project with an initial cost of $623,000. The project will produce cash inflows of $33,500 monthly for 21 months. What is the annual rate of return on this project?

  

A.   11.57%

 

B.   13.59%

 

C.   16.59%

 

D.   17.47%

 

E.   18.44%

 

54.  A project is expected to produce cash flows of $5,000, $8,000, and $16,000 over the next three years, respectively. After three years, the project will be discontinued. What is this project worth today at a discount rate of 15 percent?

A.   $19,201.76

 

B.   $19,435.74

 

C.   $20,917.24

 

D.   $21,808.17

 

E.   $22,758.00

 

55.        Rita plans to save $1,200, $1,500, and $2,200 a year over the next three years, respectively. How much would you need to deposit in one lump sum today to have the same amount as Rita three years from now if you both earn 5 percent, compounded annually?

  

A.   $4,403.84

 

B.   $4,491.42

 

C.   $4,551.78

 

D.   $4,607.23

 

E.   $4,857.92

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