31. Which of the following is not true about ratio analysis? A. Ratio analysis tells us what we need to do to make the firm better. B. Ratio analysis may be done across firms or through time. C. Ratio analysis may require us to consider interrelationships between ratios. D. Ratio analysis can be used to compare small and large firms.
32. Which of the following statements is correct? A. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible. B. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity. C. An extremely low average collection period will maximize net income. D. All of the statements above are correct.
33. Common-size financial statements: A. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. B. Allow for an easy comparison of balance sheets and income statements across firms in the industry. C. Provide quantitative clues about the direction that the firm is moving. D. All of the above.
34. The main two sources of the time value of money are:
A. Interest Rates and Risk, B. Inflation and Interest Rates, C. Risk and timing of Consumption.
D. Inflation and timing of Consumption, 35. Which of the following will decrease a present value? A. Increasing the future value. B. Decreasing the interest rate. C. Decreasing the number of periods. D. None of the above will decrease a present value.
36. Compounding is _______. A. the process of adding interest earned every period on both the original investment and the reinvested earnings B. the process of adding interest earned every period on both the original investment and additional deposits C. the process of using time-value equations to compute the number of years
D. the process of finding a present value
37. Which of the following will increase the present value of an annuity? A. The discount rate increases. B. The discount rate decreases. C. The number of periods the annuity is received increases. D. Statements B and C are correct.
38. When there is deflation (falling prices), with the real interest rate held constant, the present value of a future cash flow will A. be higher than when there is inflation. B. be lower than when there is inflation. C. be the same as when there is inflation. D. will be higher than the future value.
39. In theory, a perpetuity’s value will be infinite A. always, B. if the interest rate is zero,
C. if the interest rate is 100%, D. when payments go on forever.
40. You just bought a new home and have a 30-year mortgage with monthly payments. Which statement regarding your mortgage is correct? A. The dollar amount of interest expense you pay each year will remain the same each year. B. The dollar amount of principal paid increases each month. C. Your monthly payments will decrease over time. D. All of these statements are correct.
41. Which of the following statements is incorrect? A. A negative free cash flow means that the firm’s operations are not producing any cash flows for investors and always indicates that the firm is mismanaged. B. A positive free cash flow means that the firm’s operations are producing cash flows for investors—both bondholders and shareholders. C. Free cash flows are the cash flows available to investors after the firm has made the necessary investments in the firm’s operations. D. All of these statements are correct.
42. Which of the following statements is correct? A. The use of debt in the capital structure results in tax benefits to the firm. B. Debt is referred to as “financial leverage” because it magnifies returns to shareholders. C. Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing. D. All of these statements are correct.
43. Which of the following is NOT a factor that the sustainable growth rate is dependent upon? A. Current ratio
B. Profit margin C. Total asset turnover D. Average payment period
44. All the following are cautions managers and investors should consider when evaluating a firm using ratio analysis EXCEPT: A. The financial statement is historical and may not reflect future performance. B. Firms often window-dress their financial statements. C. Firms use different accounting procedures.
D. Many firms operate in only one industry.
45. Which of the following statements is correct? A. Performing cross-sectional analysis is easy since industries are usually clustered with firms that are identical. B. Time-series analysis is useless in assessing improvement or deterioration of ratios since the data is historical. C. Performing cross-sectional ratio analysis refers to assessing how a firm performed over a certain section of time. D. To interpret financial ratios, users should analyze the performance of the firm over time and the performance of the firm against one or more companies in the same industry.
46. A strong liquidity position means that ______________. A. the firm pays out a large portion of its net income in the form of dividends B. the firm is able to meet its short-term obligations C. the firm uses little debt in its capital structure D. the firm pays its creditors on-time
47. A firm has an average collection period of 13 days. The industry average ACP is 27 days. Which of the following statements is true given this information? A. The firm could probably increase its sales by relaxing its strict accounts receivable policy. B. The firm is maximizing its net income by minimizing its losses in accounts receivable. C. The firm has an excellent accounts receivable policy. D. Both statements b and c are correct.
48. Which of the following activities will increase a firm’s current ratio? A. Purchase inventory using cash. B. Accrued wages and taxes increase. C. Accounts receivable are paid in cash. D. Buy equipment with a short-term bank loan. E. None of these statements will increase a firm’s current ratio.
49. A firm may not want to strive to match industry average ratios when:
A. Firms in the industry are shifting into different directions.
B. Many of the competitor firms are foreign.
C. They are a leader in the industry.
D. All of the above.
50. Which of the following will increase a firm’s quick ratio assuming no other accounts change? A. An increase in inventory. B. A reduction in accounts payable. C. An increase in accounts receivable. D. All of these statements will increase a firm’s quick ratio.
51. Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%? A. 30-year, 10% coupon bond B. 2-year, 5% coupon bond C. 10-year, zero coupon D. 30-year, zero coupon
52. If a bond is selling at a discount, which of the following statements is correct? A. The coupon rate must be greater than the yield to maturity. B. The current yield must be greater than the coupon rate. C. The bond must have a low bond rating. D. All of the statements are correct.
53. Which statement is true? A. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets
B. The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress. C. The lower the liquidity ratios, the less liquidity risk a firm has. D. Liquid assets generate profits for the firm.
54. Under what conditions is a bond likely to be called? A. The firm is in financial duress. B. The firm wants to increase its debt ratio.
C. Interest rates have significantly declined. D. The firm is planning a massive expansion and needs to raise a lot of capital.
55. Which of the following statements is correct? A. Long-term bonds have more reinvestment rate risk than short-term bonds. B. Long-term bonds have more interest rate risk than short-term bonds. C. Short-term bonds with high coupons have high interest rate risk. D. A zero coupon bonds do not have interest rate risk.
56. Under which conditions will an investor demand a larger return (yield) on a bond? A. The bond issue is upgraded from A to AA. B. The bond issue is downgraded from A to BBB. C. Interest rates decrease due to decline in inflation. D. None of these conditions will cause an increase in the bond’s yield.
57. Laura is considering two investments: Stock A and B. Both stocks have a P/E ratio of 19. Stock A has an expected growth rate of 5% and stock B has an expected growth rate of 13%. Which is the better stock to invest in and why? A. Stock A is better because it is expected to grow at a slower rate and therefore will be less risky than Stock B. B. Since the P/E ratios are the same, Laura would be indifferent between the two stocks. C. Stock B is better because it is considered to be cheaper than Stock A. D. None of these statements is correct.
58. Which of the following is an electronic stock market without a physical trading floor? A. Mercantile Exchange B. Nasdaq Stock Market C. American Stock Exchange
D. New York Stock Exchange 59. To list a stock on the NYSE, a company must meet minimum requirements that include all of the following except ____________________. A. Firm size B. P/E Ratio C. Level of trading volume D. Total number of stockholders
60. Which of the following indices best reflects the ten sectors of the economy? A. Dow Jones Industrial Average B. Standard & Poor’s 500 C. Nasdaq Composite D. None of the above
61. Which of the following is incorrect with respect to preferred stock? A. Preferred stock is largely owned by other companies rather than individual investors. B. Preferred stock takes preference over common stock in bankruptcy proceedings. C. Preferred stock dividends do not grow. D. None of these statements is incorrect.
62. Which of the following statements is incorrect? A. Trading at the New York Stock Exchange and the American Stock Exchange are done by open outcry. B. The Dow Jones Industrial Average includes 35 of the largest companies in the U.S. C. Dealers create market liquidity in the Nasdaq’s electronic market. D. The Nasdaq contains many very large technology firms.
63. Which of the following statements is incorrect? A. Preferred stockholders have higher precedence for payment in the event of firm liquidation from bankruptcy. B. Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices. C. Common stock price changes with the value of the company’s underlying business. D. None of these statements is incorrect.
64. Sally has researched GLE and wants to pay no more than $50 for the stock. Currently, GLE is trading in the market for $54. Sally would be best served to: A. use the bid-ask spread to her advantage. B. buy using a market order. C. buy using a limit order. D. None of the above.

1. The biggest disadvantage of the sole proprietorship is _________________. A. Total control
B. Double taxation C. Unlimited liability D. Limited access to capital
2. All of the following are advantages to organizing as a corporation except ____. A. Limited liability B. Double taxation C. Easy access to capital D. Easy to transfer ownership
3. From the perspective of access to capital, the best form of business organization is the _______. A. Corporation B. Partnership C. S Corporation
D. Sole proprietorship
4. From the perspective of ownership risk, the best form of business organization is the ______. A. Partnership B. Corporation C. S Corporation
D. Sole proprietorship
5. From the perspective of control, the best form of business organization is the __________. A. Partnership B. Corporation C. S Corporation
D. Sole proprietorship
6. The overall goal of the financial manager is to _________________. A. Minimize total costs B. Maximize net income C. Maximize earnings per share D. Maximize shareholder wealth
7. All of the following are an example of a fiduciary relationship except: A. a CEO manages the firm B. a bank employee manages deposits C. a financial advisor advises her clients D. the shareholder elects a board member
8. Which of the following statements is correct? A. Accountants are focused on what happened in the past. B. Financial managers are focused on what happened in the past. C. Financial managers double-check the accountant’s statements.
D. Both accountants and financial managers use total quality management systems to standardize data.
9. Maximizing owners’ equity value means carefully considering all of the following except _______. A. Which projects to invest in B. How best to increase the firm’s risk C. How to best bring additional funds into the firm
D. How best to return the profits from those projects to the owners over time
10. The most common type of business in the United States is the __________. A. Corporation B. Partnership C. Sole Proprietorship D. Hybrid organization such as a limited liability company
11. Attempting to maximizing shareholder value can lead to A. less pollution worldwide. B. minimizing bondholders’ wealth.
C. disasters, like the BP oil spill in the Gulf. D. a long-term outlook by a firm’s managers.
12. Which of the following statements is correct? A. Shareholder wealth maximization is achieved by minimizing costs or maximizing net profit. B. Shareholder wealth maximization may actually be beneficial for society in the long-run. C. Shareholder wealth maximization is achieved by maximizing market share. D. All of these statements are correct.
13. Unethical behavior by an organization may be from all of the following except; A. Agency costs between stockholders and the public B. poor personal ethics C. a low risk of getting caught D. A focus on long-term success.
14. An employee stock option plan is ________________. A. A plan that only partnerships can use to defer compensation to partners B. A perk usually only given to the board of directors as compensation C. A way to align the interests of employees with those of the owners D. None of these answers are correct
15. A legal duty between two parties where one party must act in the interest of the other party is known as a(n) ______________. A. Fiduciary B. Venture capitalist C. Restricted investor
D. Restricted capitalist

Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm’s cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC?

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9.2%
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8.4%
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9.6%
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10.4%
Multiple Choice Question 50
Gangland Water Guns, Inc. has a debt-to-equity ratio of 0.5. If the firm’s cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC?

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9%
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10%
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11%
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None of the above.
Multiple Choice Question 66
The use of debt financing

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causes a manager to take on riskier projects in order to make interest payments.
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limits the ability of managers to waste stockholders’ money.
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allows managers to make discretionary interest payments.
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is more expensive than issuing equity due to the use of covenants.
Multiple Choice Question 69
The use of debt financing

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increases agency costs between the stockholders and management by limiting the amount of risk the managers take.
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increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.
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both increases agency costs between the stockholders and management by limiting the amount of risk the managers take and increases agency costs since managers prefer to keep more retained earnings rather than paying dividend.
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reduces agency costs between the stockholders and management by increasing the amount of risk the managers take.
Multiple Choice Question 70
The asset substitution problem occurs when

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managers substitute less risky assets for riskier ones to the detriment of equity holders.
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managers substitute more risky assets for less risky ones to the detriment of bondholders.
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managers substitute less risky assets for more risky ones to the detriment of bondholders.
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managers substitute more risky assets for less risky ones to the detriment of equity holders.
Multiple Choice Question 72
Packman Corporation has a reported EBIT of $500, which is expected to remain constant in perpetuity. The firm borrows $2,000, and its coupon rate is 8%. If the company’s marginal tax rate is 30% and its average tax rate is 20%, what are its after-tax earnings?

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$238
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$272
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$259
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None of the above
Multiple Choice Question 80
Which of the following supports the trade-off theory of capital structure?

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Firms use cash on hand first, since issuing equity and debt is expensive.
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A firm’s capital structure is the result of past equity and debt issuance decisions.
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Firms have a target capital structure.
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Both firms use cash on hand first, since issuing equity and debt is expensive and a firm’s capital structure is the result of past equity and debt issuance decisions.

Multiple Choice Question 39
Which of the following statements is true of S-corporation?

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An S-corporation can have more than 100 stockholders.
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An S-corporation is a variation of the LLC (limited liability company).
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All profits of an S-corporation pass directly to the stockholders as they would pass to the partners in a partnership.
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Only foreign investors can own the shares of an S-corporation.
Multiple Choice Question 43
Which of the following statements is true about business plans?

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A well-prepared business plan makes it easier for an entrepreneur to communicate to potential investors precisely what returns an investor might expect to receive.
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A well-prepared business plan always avoids contingent liabilities as the plan helps to predict and change the occurrence of a contingent liability.
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A business plan is useful only in case of exigency in the business environment otherwise a business plan is not important.
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A business plan is a trivial part in the overall strategy formulation and its impact on business operations in the long run is miniscule.

Multiple Choice Question 49
Which of the following statements is true of business valuation principle?

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The value of a business is solely affected by managers’ financing decisions.
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As per first valuation principle, the value of business does not change over time.
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Estimating the fair market value of a business includes the value of synergies or the effects of any investor-specific management style.
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The fair market value of a business is the value of that business to a hypothetical person who is knowledgeable about the business.
Multiple Choice Question 52
When using the multiples analysis approach to valuing a business, one must be aware:

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of the presence of a marketability premium that can be sizable.
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of the adjusted book value of a business which is the cost of duplicating the assets of the business in their present form as of the valuation date.
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of the presence of a marketability discount that can be sizable.
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of the stock value of similar companies whose shares are not publicly traded.
Multiple Choice Question 53
The transaction approach is difficult to use because:

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transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense.
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transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm.
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the terms of the transactions can be easy to assess.
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the terms of the transactions can be difficult to assess.
Multiple Choice Question 54
Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

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The costs associated with noninterest-bearing current liabilities, which are included in the firm’s cost of sales and other operating expenses, are added in the calculation of FCFF.
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We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.
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The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm’s weighted average cost of capital,WACC.
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The present value of these cash flows exceeds the total value of the firm, or its enterprise value.
Multiple Choice Question 61
Sonicmony Soft, makes designer gold bracelets. Its annual costs include shop rent of $15,000, salaries for two jewelers of $125,000, design software costs of $12,000, and other overhead costs of $15,000. An average bracelet is priced at $6,500. It costs $2,200 in raw material, $1,500 in labor, and $400 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit? (Round to nearest whole unit.)

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18 bracelets
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47 bracelets
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70 bracelets
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14 bracelets
Multiple Choice Question 66
Settetocol, Inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management has also told you that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)

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$139,695
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$138,695
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$174,866
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$162,070
Multiple Choice Question 69
Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the enterprise value of Cervil? (Round to the nearest million dollars.)

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$453 million
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$1,334 million
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$1,315 million
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$1,787 million