(TCO 4) There are several disadvantages to the payback method, among them:

2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4) payback ignores cash flows beyond the payback point. payback can be used in conjunction with time adjusted methods of evaluation. payback is easy to use and to understand. none of the above is a disadvantage.

Question 3.3. (TCO 3 and 4) You can ensure that an investment is expected to create value for (Points : 4) have a PI equal to zero. produce negative rates of return. have positive AARs. have positive IRRs. have positive NPVs.

Question 4.4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent? Year 0 1 2 3 4 Cash flow -$32,000 $9,000 $10,000 $15,200 $7,800 (Points : 4) $1,085.25 $1,193.77 $3,498.28 $4,102.86 $4,513.15

Question 5.5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4) 4.18 years 5.82 years 6.62 years 7.79 years This project never pays back

Question 6.6. (TCO 4) The situation that exists when the units within a business are allotted a fixed amount of money for capital budgeting, is referred to as: (Points : 4) soft rationing. hard rationing. unit capital rationing. allocated planning. strategic planning.

Question 7.7. (TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4) $12,000 $8,574 $19,800 None of the above

Question 8.8. (TCO 1 and 4) Assume a project has earnings before depreciation, and taxes of $110,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What is the after-tax cash flow for the project? (Points : 4) $47,000 $89,000 a loss of $21,000 none of these

Question 9.9. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4) is diversifiable is the total risk associated with surprise events it is measured by beta it is measured by standard deviation

Question 10.10. (TCO 8) Which statement is not true regarding risk? (Points : 4) the expected return is usually not the same as the actual return a key to assess risk is determining how much risk an investment adds to a portfolio some risks can not be decreased or mitigated by the financial manager. the higher the risk, the higher the return investors require for the investment all of the above are true statements

Question 11.11. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock? State of Economy Probability of State of Economy Rate of Return Recession .02 -.06 Normal .88 .11 Boom .10 .17 (Points : 4) 7.33 percent 9.82 percent 11.26 percent 11.33 percent 11.50 percent

Question 12.12. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock B? (Points : 4) 14.79 percent 15.91 percent 18.42 percent 19.07 percent 19.46 percent

1. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4) between 3 and 9% about 12% more than 14% about 11% none of the above

Question 2.2. (TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (Points : 4) $103.68 $36.92 $96.00 none of these

3. (TCO 4) A project has the following cash flows. What is the internal rate of return?






Cash flow





(Points : 4)

less than 10%
approximately 14%
more than 16%
more than 18% but less than 20%

Question 4.4. (TCO 5, 6 and 7) Which one of the following is a correct statement? (Points : 4)

Current tax laws favor debt financing.
A decrease in the dividend growth rate increases the cost of equity.
An increase in the systematic risk of a firm will decrease the firm’s cost of capital.
A decrease in a firm’s debt-equity ratio will usually decrease the firm’s cost of capital.
The cost of preferred stock decreases when the tax rate increases.

Question 5.5. (TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a share and sells for $54 a share. What is the firm’s cost of preferred stock? (Points : 4)

8.56 percent
9.32 percent
11.85 percent
13.43 percent
14.47 percent

Question 6.6. (TCO 2) Which one of the following decreases the cash account? (Points : 4)

A payment due is received from a client
Dividends are paid to shareholders
Raw materials are purchased and paid for with credit
A new machine is purchased and paid for with the business line of credit

Question 7.7. (TCO 2) Which one of the following statements is true? (Points : 4)

There is an opportunity cost associated with not offering credit.
The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit.
Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.
The optimal credit policy, is the policy that produces the largest amount of sales for a firm.

Question 8.8. (TCO 2) Delphinia’s has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.










(Points : 4)


Question 9.9. (TCO 1) Which one of the following statements is true regarding the goal of financial management? (Points : 4)

The goal of maximizing the value per share of existing stock is relevant to all organizations.
The ultimate goal of financial management is maximizing earnings and profits.
For a company considering international operations, the goal will be the same but the company will have to consider the local, social, economical, and political environment in the decision-making process.
None of the above are true statements.

1.(TCO 1) Which one of the following activities best exemplify working capital management? (Points : 4)

Sale long-term bonds to raise funds for a new machine.
Determine the return of a potential long-term project.
Calculate the cash flows for a long-term project.
Manage payments to suppliers.

Question 2.2. (TCO 1) Market values reflect which of the following: (Points : 4)

The amount someone is willing to pay today for an asset.
The value of the asset based on generally-accepted accounting principles.
The asset’s historical cost.
A and B only
None of the above

Question 3.3. (TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 20.10 percent for a new automobile loan. You should choose ______________ because its _______ is lower. (Points : 4)

Regional Bank, APR
Local Bank, EAR
Regional Bank, EAR
Local Bank, APR

Question 4.4. (TCO 3) Thirteen years from now, you will be inheriting $30,000. What is this inheritance worth to you today, if you can earn four percent interest compounded annually? (Points : 4)


Question 5.5. (TCO 3) Paper Pro needed a new store. The company spent $48,750 to refurbish an old shop and create the current facility. The firm borrowed the refurbishment cost at eight percent annual interest for 11 years, with payment of principal and interest due monthly. What is the amount of each monthly payment? (Points : 4)


Question 6.6. (TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does John have? (Points : 4)

pure discount

Question 7.7. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 16 percent? Assume annual interest payments. (Points : 4)


Question 8.8. (TCO 7) Which one of the following statements concerning financial leverage is correct? (Points : 4)

The benefits of leverage are unaffected by the amount of a firm’s earnings.
The use of leverage will always increase a firm’s earnings per share.
The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.
Earnings per share are unaffected by changes in a firm’s debt-equity ratio.
Financial leverage is beneficial to a firm only when the firm has minimal earnings.

Question 9.9. (TCO 3) SmithKline Company’s bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity? (Points : 4)


Question 10.10. (TCO 8) Which one of the following is correct regarding bonds? (Points : 4)

Most bonds do not carry default risk.
Municipal bonds are free of default risk.
Bonds are not sensitive to changes in the interest rates.
Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.
None of the above is true

1.(TCO 6 and 7) The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called (Points : 5)

an indenture.
a debenture.
secured debt.
protective covenants.

Question 2.2. (TCO 2) Which of the following does not reduce collection float? (Points : 5)

consolidate all lockboxes into one lockbox, located near the home office.
consolidate all lockboxes into one lockbox, located far from the home office.
make sure all checks it receives are properly dated and signed.
utilize the benefits of the Check Clearing Act for the 21st Century.

Question 3.3. (TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of: (Points : 6)

Inventory depletion costs
Sunk costs
Carrying costs
Shortage costs

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