Finance Multiple Choice

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: a. internal return period b. discounted payback period c. payback period d. discounted profitability period e. net present value period

b. discounted payback period

Which on of the following statements related to liquidity is correct? a. liquid assets tend to earn a high rate of return b. liquid assets are valuable to a firm c. liquid assets are defined as assets that can be sold quickly regardless of the price obtained d. inventory is more liquid than accounts receivable because inventory is tangible e. any asset that can be sold is considered liquid

b. liquid assets are valuable to a firm

Which one of the following risks is irrelevant to a well-diversified investor? a. systematic portion of a surprise b. unsystematic risk c. systematic risk d. market risk e. non-diversifiable risk

b. unsystematic risk

The secondary market is best defined as the market a. where warrants are offered and sold b. where outstanding shares of stock are resold c. conducted solely by brokers d. dominated by dealers e. in which subordinated shares are issued and resold

b. where outstanding shares of stock are resold

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. yield to maturity = current yield b. yield to maturity < coupon rate c. market value < face value d. current yield > coupon rate e. market value = face value

b. yield to maturity < coupon rate

Suppose you are committed to owning a $202,000 Ferrari. If you believe your mutual fund can achieve a 12 percent annual rate of return and you want to buy the car in 9 years on the day you turn 30, how much must you invest today? a. $184,696.64 b. $71,818.01 c. $72,843.23 d. $6,742.34

c. $72,843.23

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? a. articles of incorporation b. corporate breakdown c. agency problem d. bylaws e. legal liability

c. agency problem

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: a. general partnership b. sole proprietor c. limited partner d. corporate shareholder e. zero partner

c. limited partner

If a stock portfolio is well diversified, then the portfolio variance: a. must be equal to or greater than the variance of the least risky stock in the portfolio b. will be an arithmetic average of the variances of the individual securities in the portfolio c. may be less than the variance of the least risky stock in the portfolio d. will be a weighted average of the variances of the individual securities in the portfolio e. will equal the variance of the most volatile stock in the portfolio

c. may be less than the variance of the least risky stock in the portfolio

Which one of the following statements concerning net working capital is correct? a. the lower the value of net working capital is, the greater is the ability of a firm to meet its current obligations b. an increase in net working capital must also increase current assets c. net working capital increases when inventory is sold for cash at a profit d. firms with equal amounts of net working capital are also equally liquid e. net working capital is part of the operating cash flow

c. net working capital increases when inventory is sold for cash at a profit

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? a. price-earnings ratio b. index value c. portfolio weight d. degree of risk e. portfolio return

c. portfolio weight

The expected risk premium on a stock is equal to the expected return on the stock minus the: a. variance b. inflation rate c. risk-free rate d. expected market rate of return e. standard deviation

c. risk-free rate

You expect to receive $39,000 at graduation in two years. You plan on investing it at 10 percent until you have $174,000. How long will you wait from now? a. 16.72 years b. 18.82 years c. 10 years d. 17.69 years

d. 17.69 years

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: a. redemption value b. dirty price c. redemption discount d. call premium e. original-issue discount

d. call premium

Which one of the following terms is defined as the management of a firm's long-term investments? a. working capital management b. financial allocation c. agency cost analysis d. capital budgeting e. capital structure

d. capital budgeting

Supernormal growth is a growth rate that: a. applies to a single, abnormal year b. is generally constant for an infinite period of time c. exceeds a firm's previous year's rate of growth d. is unsustainable over the long term e. is both positive and follows a year or more of negative growth

d. is unsustainable over the long term

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: a. coupon rate will also increase b. coupon payment will increase c. yield to maturity will be less than the coupon rate d. market price of the bond will decrease e. current yield will decrease

d. market price of the bond will decrease

Financial managers should primarily focus on the interests of: a. stakeholders b. the vice president of finance c. their immediate supervisor d. shareholders e. the board of directors

d. shareholders

Pro forma financial statements can best be described as financial statements: a. where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales b. expressed in a foreign currency c. where all accounts are expressed as a percentage of last year's values d. showing projected values for future time periods e. expressed in real dollars, given a stated base year

d. showing projected values for future time periods

The principle of diversification tells us that: a. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk b. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk c. spreading an investment across five diverse companies will not lower the total risk d. spreading an investment across many diverse assets will eliminate some of the total risk e. spreading an investment across many diverse assets will eliminate all the systematic risk

d. spreading an investment across many diverse assets will eliminate some of the total risk

The sources and uses of cash over a stated period of time are reflected on the: a. income statement b. balance sheet c. tax reconciliation d. statement of cash flows e. statement of operating position

d. statement of cash flows

The internal rate of return is: a. a better methodology than net present value when dealing with unconventional cash flows b. the discount rate that makes the net present value c. equivalent to the discount rate that makes the net present value equal to one d. tedious to compute without the use of a financial calculator or a computer e. highly dependent upon the current interest rates offered in the marketplace

d. tedious to compute without the use of a financial calculator or a computer

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? a. working capital management b. cash management c. cost analysis d. capital budgeting e. capital structure

e, capital structure

Which one of the following is an example of a sunk cost? a. $4500 reduction in current shoe sales if a store commences selling sandals b. $20,000 project that must be forfeited if another project is accepted c.$1500 of lost sales because an item was out of stock d. $1800 increases in comic book sales if a store ceases selling puzzles e. $1200 paid to repair a machine last year

e. $1200 paid to repair a machine last year

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? a. EBIT( 1 + Taxes) b. EBIT + Dep. c. (Sales -Costs)(1 - Taxes) d. (Sales - Costs)(1 - Dep.) (1-Taxes) e. Net Income + Dep.

e. Net Income + Dep.

What is the model that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? a. capital pricing model b. realized-growth model c. maximal-growth model d. realized-earnings model e. constant-growth model

e. constant-growth model

Net present value: a. is less useful than the internal rate of return when comparing different sized products b. is very similar in its methodology to the average accounting return c. cannot be applied when comparing mutually exclusive projects d. is the easiest method of evaluation for nonfinancial managers e. is the best method of analyzing mutually exclusive projects

e. is the best method of analyzing mutually exclusive projects

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: a. time to maturity and coupon rate both decrease b. coupon rate decreases and the time to maturity increases c. coupon rate and time to maturity both increase d. coupon rate increases e. time to maturity decreases

e. time to maturity decreases

Two years ago, you invested $2,500.00. Today, it is worth $3,300.00. What rate of interest did you earn? a. 14.89 % b. 3.13 % c. 1.24 % d. 4.13 % e. 7.45 %

a. 14.89 %

Which one of the following statements correctly defines a time value of money relationship? a. Time and present value are inversely related, all else held constant b. An increase in a positive discount rate increases the present value c. An increase in the time increases the future value given a zero rate of interest d. Time and future values are inversely related, all else held constant e. Interest rates and time are positively related, all else held constant

a. Time and present value are inversely related, all else held constant

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? a. callable b. subordinated c. unsecured d. par value e. senior

a. callable

Unsystematic risk: a. can be effectively eliminated by portfolio diversification b. is related to the overall economy c. is measured by standard deviation d. is measured by beta e. is compensated for by the risk premium

a. can be effectively eliminated

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now? a. future value b. present value c. principal amounts d. discounted value e. invested principal

a. future value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? a. net present value b. profitability index c. discounted payback d. internal rate of return e. payback

a. net present value

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price. a. next year's b. the past 5-year average c. this year's d. last year's e. the next 5-year average

a. next year's

You have just made your first $4,200 contribution to your retirement account. Assume you earn a return of 13 percent per year and make no additional contributions. What will your account be worth when you retire in 27 years? a. $93,906.93 b. $113,858.97 c. $187.85 d. $4,349.94

b. $113,858.97

Which one of the following statements is correct concerning a corporation with taxable income of $125,000? a. net income minus dividends paid will equal the ending retained earnings for the year b. an increase in depreciation will increase the operating cash flow c. net income divided by the number of shares outstanding will equal the dividends per share d. interest paid will be included in both net income and operating cash flow e. an increase in the tax rate will increase both net income and operating cash flow

b. an increase in depreciation will increase the operating cash flow

The book value of a firm is: a. equivalent to the firm's market value provided that the firm has some fixed assets b. based on historical cost c. generally greater than the market value when fixed assets are included d. more of a financial than an accounting valuation e. adjusted to the market value whenever the market value exceeds the stated book value

b. based on historical cost