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Question 1
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

E.

legal liability 
Question 2
Which one of the following is a capital budgeting decision?
A.

determining how many shares of stock to issue

B.

deciding whether or not to purchase a new machine for the production line

C.

deciding how to refinance a debt issue that is maturing

D.

determining how much inventory to keep on hand

E.

determining how much money should be kept in the checking account 
Question 3
Decisions made by financial managers should primarily focus on increasing which one of the following?
A.

size of the firm

B.

growth rate of the firm

C.

gross profit per unit produced

D.

market value per share of outstanding stock

Question 4
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. 
Question 5
A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?
Question 6
List and briefly describe the three general areas of responsibility for a financial manager.
The three basic areas are:
1. capital budgeting: the identification of investment opportunities that have a positive net value
2. capital structure: the mix of longterm debt and equity used to finance a firm’s operations
3. working capital management: the daily control of a firm’s shortterm assets and shortterm liabilities
Question 7
Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?
A.

$129,152

B. 
$171,852 
C.

$179,924

D . 
$281,417

E.

$309,076 
Question 8
Relationships determined from a firm’s financial information and used for comparison purposes are known as:
A.

financial ratios.

C.

dimensional analysis.

D.

scenario analysis.

Question 9
According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash flow from _____ activities.
Increase; Operating
A.

decrease; operating

B.

decrease; financing

E.

increase; investment 
Question 10
The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm’s financial ratios in which one of the following ways?
A.

decrease in the inventory turnover rate

B.

decrease in the net working capital turnover rate

C.

no change in the fixed asset turnover rate

D.

decrease in the day’s sales in inventory

E.

no change in the total asset turnover rate 
Question 11
Shareholders probably have the most interest in which one of the following sets of ratios?
A.

return on assets and profit margin

B.

longterm debt and times interest earned

C.

priceearnings and debtequity

D.

markettobook and times interest earned

E.

return on equity and priceearnings 
Question 12
Al’s Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?
Question 13
You need to analyze a firm’s performance in relation to its peers. You can do this either by comparing the firms’ balance sheets and income statements or by comparing the firms’ ratios. If you only had time to use one means of comparison which method would you use and why?
Financial ratios are one of the most common tools of managerial decision making. A ratio is a comparison of one number to another thematically, a simple division problem. Financial ratios involve the comparison of various figures from the financial statements in order to gain information about a company’s performance. It is the interpretation, rather than the calculation, that makes financial ratios a useful tool for business managers. Another common usage of ratios is to make relative performance comparisons. For example, comparing a firm’s profitability to that of a major competitor or observing how the firm stacks up versus industry averages enables the user to form judgments concerning key areas such as profitability or management effectiveness.
Question 14
The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?
A.

compound interest valuation

B.

interest on interest computation

C.

discounted cash flow valuation

D.

present value interest factoring

E.

complex factoring 
Question 15
You invested $1,400 in an account that pays 5 percent simple interest. How much more could you have earned over a 20year period if the interest had compounded annually?
A.

$749.22

B.

$830.11

C.

$882.19


D.

$901.15


E.

$914.62 

Question 16
You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?
A.

$417,137

Question 17
When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit?
C.

$2,891.11

Question 18
An ordinary annuity is best defined by which one of the following?
A. 
increasing payments paid for a definitive period of time

B.

increasing payments paid forever

C.

equal payments paid at regular intervals over a stated time period

D.

equal payments paid at regular intervals of time on an ongoing basis

E.

unequal payments that occur at set intervals for a limited period of time 
Question 19
You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.
The present value of option A is 10,000 and Present value of Option B is 20,000/(1+.06)^{10} or 11,168
As the present value of the Option B is higher than the present value of option A so I will choose the Option B on the present value basis.
The future value of Option A is 10,000*1+.06)^{10} or 17,908 and the future value of the option B is 20,000 I will choose the Option B in the future value basis.
The answer is same for both bases.
Question 20
You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments?
A.

8.94 percent

B.

9.23 percent

C.

9.36 percent

D.

9.41 percent

E.

9.78 percent 
Question 21
Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?
Question 22
Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?
Question 23
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?
C.

noncumulative

Question 24
What are the distributions to shareholders by a corporation called?
A.

retained earnings

D.

capital payments

E.

diluted profits 
Question 25
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
A.

net present value

B.

internal return

C.

payback value

D.

profitability index

E.

discounted payback 
Question 26
The length of time a firm must wait to recoup the money it has invested in a project is called the:
A.

internal return period.


B.

payback period.


C.

profitability period.


D.

discounted cash period.


E.

valuation period. 

Question 27 
How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders? 

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