1. Of the following alternative investments, which would be expected to have the highest return? A) U.S Treasury bonds B) Common stock of small firms C) U.S. Treasury bills D) Long-term corporate bonds 2. Style Corp. preferred stock pays $3.15. What is the value of the stock if your required rate of return is 8.5% rounded to the nearest $1? A) $33 B) $23 C) $27 D) $37 3. Which of the following is NOT an advantage of NPV? A) It can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years B) All positive NPVs will increase the value of the firm C) It allows the comparison of benefits and costs in a logical manner D) It recognizes the timing of the benefits resulting from the project 4. Which of the following is not part of a project's initial cash outflow? A) The asset's purchase price B) Funds committed to support increased inventory levels due to expected increased sales if the firm adopts the project C) A marketing survey completed last year to determine the project's feasibility D) Expenses incurred to install the asset 5. Which of the following is a significant disadvantage of a general partnership? A) The cost of forming it is high B) Each partner is fully responsible for the liabilities incurred by the partnership C) There is a risk associated with the industry in which it operates D) Forming the business is very complex 6. Which of the following reasons causes bonds to be a less expensive form of capital for a public firm than the issuance of common stock? Bondholders: A) bear less risk than common stockholders. B) have prior voting rights over common stockholders. C) receive greater returns than common stockholders. D) do not have a contractual claim on the firm. 7. The simulation approach provides us with: A) a single value for the risk-adjusted net present value. B) an approximation of the systematic risk level. C) a probability distribution of the project's net present value or internal rate of return. D) a graphical exposition of the year-by-year sequence of possible outcomes. 8. The most expensive source of capital is: A) preferred stock. B) new common stock. C) debt. D) retained earnings. 9. What is return on invested capital? A) The ratio of net operating income after tax for the period divided by the firm's invested capital at the end of the previous period B) The free cash flow for the period divided by the firm's equity capital at the end of the previous period C) The ratio of net sales for the period divided by the firm's total assets at the end of the previous period D) The ratio of gross profit for the period divided by the firm's equity capital at the end of the previous period 10. Foregoing the earning potential of a dollar today is referred to as the: A) time value of money. B) opportunity cost concept. C) risk/return tradeoff. D) creation of wealth. 11. The debt ratio is a measure of a firm's: A) leverage. B) profitability. C) liquidity. D) efficiency. 12. A $1,000 par value bond with a 12% coupon rate currently selling for $825 has a current yield of? A) 14.55% B) 12.44% C) 7.27% D) 5.61% 13. Which of the following is the best indicator of management's effectiveness at managing the firm's balance sheet? A) Debt Ratio B) Total asset turnover C) Times-interest earned D) Operating profit margin 14. Which is not a feature of preferred stock? A) Cumulative B) Convertibility C) Arbitrage D) Participating 15. Probability tree analysis: A) illustrates the impact of diversification. B) ignores the probability distribution of cash flows. C) can only measure one outcome at a time. D) graphically displays all possible outcomes of the investment. 16. At 8% compounded annually, how long will it take $750 to double? A) 6.5 years B) 48 months C) 12 years D) 9 years 17. The present value of the expected future cash flows of an asset represents the asset's: A) liquidation value. B) book value. C) intrinsic value. D) par value. 18. The average cost associated with each additional dollar of financing for investment projects is: A) the incremental return. B) the marginal cost of capital. C) risk-free rate. D) beta. 19. Which of the following goals is in the best long-term interest of stockholders? A) Profit maximization B) Risk minimization C) Maximizing of the market value of the existing shareholder's common stock D) Maximizing sales revenues 20. A firm is conducting an analysis of trends over time and discovers that its inventory turnover has declined. This may be due to: A) an increase in sales. B) an increase in cost of goods sold. C) an increase in inventory purchases. D) a decrease in inventory purchases. 21. What is a series of equal payments received at the beginning of each period, for a finite period of time, called? A) A perpetuity B) An annuity due C) A cash cow D) A deferred annuity 22. Which investor incurs the greatest risk? A) Mortgage bondholder B) Preferred stockholder C) Common stockholder D) Debenture bondholder 23. A stock's beta is a measure of its: A) systematic risk. B) unsystematic risk. C) company-specific risk. D) diversifiable risk. 24. All of the following affect the value of a bond EXCEPT: A) investor's required rate of return. B) the recorded value of the firm's assets. C) the coupon rate of interest. D) the maturity date of the bond. 25. The preparation of a cash budget serves which of the following purposes? A) To estimate the amount and timing of cash flows to optimize the price of the firm's common stock B) To calculate the amount of future cash flows to achieve the optimal level of financing during the forecast period C) To determine the amount and timing of short-term financing for the operation of a business during the forecast period D) To estimate the amount of sales volume to achieve the break-even point 26. In general, what effect does capital rationing have on firm value? A) It increases firm value B) It decreases firm value C) It can increase or decrease firm value D) It has no impact on firm value 27. Common stockholders are most concerned with: A) the spread between the return generated on new investments and the investor's required rate of return. B) the percentage of profits retained. C) the size of the firm's beginning earnings per share. D) the risk of the investment. 28. Difficulty in finding profitable projects is due to: A) social responsibility. B) ethical dilemmas. C) opportunity costs. D) competitive markets. 29. If current market interest rates rise, what will happen to the value of outstanding bonds? A) It will rise B) It will fall C) It will remain unchanged D) There is no connection between current market interest rates and the value of outstanding bonds 30. Investment risk is: A) the probability of achieving a return greater than expected. B) the probability of achieving a beta coefficient less than expected. C) the probability of achieving a return less than expected. D) the probability of achieving a standard deviation less thanexpected. 31. Spontaneous sources of financing include: A) accounts payable and accrued expenses. B) notes payable and mortgages payable. C) long-term debt and capital leases. D) common stock and paid-in capital. 32. The primary purpose of a cash budget is to: A) determine the level of investment in current and fixed assets. B) determine accounts payable. C) provide a detailed plan of future cash flows. D) determine the estimated income tax for the year. 33. The shareholder can cast all votes for a single candidate or split them among various candidates through: A) proxy fights. B) cumulative voting. C) call provisions. D) majority voting. 34. What does the free cash flow method of business valuation focus on? A) Discount market value added to the present B) Discount current year earnings to the present C) Discount current year cash flows to the present D) Discount projected future cash flows to the present 35. What is the payback period for a $20,000 project expected to return $6,000 for the first two years and $3,000 for Years 3 through 5? A) 3 1/2 B) 4 1/2 C) 4 2/3 D) 5 36. When calculating the average cost of capital, which of the following has to be adjusted for taxes? A) Common stock B) Retained earnings C) Debt D) Preferred stock 37. Which method of evaluating capital-budgeting decisions has the superior reinvestment assumption? A) The payback B) The NPV C) The IRR D) The accounting rate of return 38. Which of the following best represents operating income? A) Earnings before interest and taxes B) Income after financing activities C) Income from capital gains D) Income from discontinued operations 39. Which of the following would not be included as a liability in a corporate balance sheet? A) Notes payable B) Accounts payable C) Bonds D) Depreciation 40. Which of the following best represents the stream of income that is available to common stockholders? A) Net profit after tax and after preferred dividend payments B) Earnings before interest and taxes C) Gross profit D) Operating profit 41. Which of the following is a source of external capital? A) Retained earnings B) Inventory C) Long-term debt D) Operating income (earnings before interest and taxes) 42. Which of the following is a good measure of the relationship between an investment's returns and the market's returns? A) The beta coefficient B) The standard deviation C) The CPI D) The S&P 500 Index 43. Which of the following techniques may not consider ALL cash flows of a project? A) Internal rate of return B) Net present value C) Modified internal rate of return D) Payback period 44. Which of the following is an example of a sunk cost? A) Market study expenses incurred in order to decide if a firm should accept a project B) Income taxes associated with a project C) Overhead costs that are associated with a project D) Depreciation expenses associated with a project 45. Which of the following is not an important consideration in measuring risk for a capital budgeting project for a well diversified firm? A) Systematic risk B) Contribution-to-firm risk C) Total project risk D) Project stand alone risk 46. Which of the following would be considered a value-enhancing strategy? A) Negotiate stricter credit terms from suppliers B) Develop indirect sources of financing C) Initiate inventory control policies D) All of the above 47. Which of the following statements is false? A) Ignoring risk in capital budgeting can lead to loss of firm value B) Risk occurs in capital budgeting when there is some question as to the certainty of future cash flows C) Several methods of accounting for risk in capital budgeting assume although future cash flows of a project are not known with certainty, the probability distribution can be estimated D) Project standing alone risk is the relevant measure of risk for capital budgeting purposes 48. Which of the following would increase the net working capital for a project? An increase in: A) Accounts receivable B) Fixed assets C) Accounts payable D) Common stock 49. Which of the following is considered to be a deficiency of the IRR? A) It fails to properly rank capital projects. B) It could produce more than one rate of return. C) It fails to utilize the time value of money. D) It is not useful in accounting for risk in capital budgeting. 50. Which type of value is shown on the firm's balance sheet? A) Book value. B) Liquidation value C) Market value D) Intrinsic value.