Finance MC 1 2 3 4 17

Chapter 1:
1.The company officer who is responsible for budgeting, accounting, and auditing is called the
treasurer. a. True b. FalseThis question was not answered. The correct answer is b.
Reference: LO 2 - Chapter 1
Feedback: Refer to Section 1.3,
Who is the Financial Manager,
The controller is responsible for these.
2.Shareholders want the firm to maximize its profits. a. True b. FalseThis question was not
answered. The correct answer is b.
Feedback: Refer to Section 1.4, Goals of the Corporation
They want the firm to maximize its market price
3.In most large companies where managers are not major owners, a conflict of interest may
occur. This is known as an agency problem. a. True b. FalseThis question was not answered.
The correct answer is a.
4.As a financial analyst, you could work for a mutual fund, insurance company or a bank. a.
True b. FalseThis question was not answered. The correct answer is a.
Feedback: Refer to Section 1.5, Careers in Finance
5.There is/are always at least ____ general partner(s) who has/have unlimited liability for the
performance in every limited partnership: a. one b. two c. five d. ten e. undeterminedThis
question was not answered. The correct answer is a.
Feedback: Refer to Section 1.1
6.A plastic surgeon wants to start a new private clinic. Because of the possible malpractice
involved, this doctor is concerned about losing his personal wealth as a result of a lawsuit against
his business. If he will be the major owner of the business, how should he set up the
organization? a. A sole proprietorship b. A limited liability corporation c. A limited liability
partnership d. A professional corporation e. A general partnershipThis question was not
answered. The correct answer is c.
Feedback: All partners have limited liability in LLPs.
7.Which of the following is a real asset? a. A savings account balance b. A mortgage loan
agreement c. A personal IOU d. A trademark e. None of the answers are correctThis question
was not answered. The correct answer is d.
Feedback: The others are financial assets
8.For a capital budgeting decision, the financial manager is concerned with: a. The timing of the
net benefit b. The risk of the net benefit c. The size of the net benefit d. All of the answers are
correct e. None of the answers are correctThis question was not answered. The correct
answer is d.
Feedback: The value placed on uncertain future cash flows should account for the amounts,
timing, and risk of the future cash flows
9.The treasurer is responsible for all of the following except: a. cash management b.
accounting c. raising capital d. banking relationships e. disbursement of fundsThis question
was not answered. The correct answer is b.
Feedback: The controller is responsible for accounting
10.The primary goal of the corporation is to: a. maximize the firm"s profits. b. maximize the
firm"s net income. c. maximize the current market value of the shares. d. maximize market
share. e. minimize the firm"s costs.This question was not answered. The correct answer is c.
11.Which of the following is not a reason that maximizing profits is not a good corporate
goal? a. Management could increase current profits by undermining future profits b.
Management could increase future profits by investing at a low rate of return c. Profits may be
affected by the accounting method used d. Short-term profits can be increased by using cheap
materials that will undermine product quality and long-term profitability e. Maximizing profits
is a good corporate goalThis question was not answered. The correct answer is e.
12.A financial manager striving to maximize shareholder value will focus on all of the following
except: a. expected cash flows from investment. b. the timing of cash flows. c. the riskiness of
cash flows. d. the net income from investment. e. protecting the firm"s reputation.This
question was not answered. The correct answer is d.
Feedback: Net income depends on accounting method.
13.Which of the following is an example of an agency relationship? a. Employees setting up a

union organization b. Partners bring in a new associate c. Owners hiring a manager d. All of
the answers are correct e. None of the answers are correctThis question was not answered. The
correct answer is c.
14.Which of the following can be viewed as agency costs resulting from the separation of
management and ownership? a. Excessive managerial salaries b. Undue risk aversion of the
managers c. Resources for monitoring managerial actions d. Unethical behaviour from the
managers e. All of the answers are correctThis question was not answered. The correct
answer is e.
15.Which of the following does not help to ensure that shareholders and managers are working
toward common goals? a. Employee stock option plans b. The threat of takeover c. Large
salaries for management d. Specialist monitoring e. The board of directorsThis question was
not answered. The correct answer is c.
16.Key activities for financial managers are: a. investing b. raising funds c. managing risk d. All
of the answers are correct e. None of the answers are correctThis question was not answered.
The correct answer is d.
17.Which type of firm would employ a financial analyst? a. A large corporation b. A bank c. An
insurance company d. A mutual fund e. All of the answers are correctThis question was not
answered. The correct answer is e.
18.What type of firm should you work for if you want to help firms issue securities? a. An
investment dealer b. An insurance company c. A mutual fund d. A chartered bank e. A
corporationThis question was not answered. The correct answer is a.
Feedback: Investment dealers are financial firms involved in helping firms issue securities and in
the trading of securities
1.In a partnership, each partner has unlimited liability for only his or her share of the business's
debts. a. True b. FalseThis question was not answered. The correct answer is b.
Organizing a Business
Each partner has unlimited liability for all of the business's debts
2.The person in a company who is responsible for financing, cash management, and relationships
with financial markets and institutions is called the treasurer. a. True b. FalseThis question
was not answered. The correct answer is a.
Feedback: Refer to Section 1.3, Who is the Financial Manager?
3.The natural financial objective of the corporation is to maximize current market value. a.
4.Management compensation tied to company performance can help mitigate agency problems.
a. True b. FalseThis question was not answered. The correct answer is a.
5.Your only option for a career in finance is to work in the finance department of a
corporation. a. True b. FalseThis question was not answered. The correct answer is b.
Feedback: Refer to Section 1.5, Careers in Finance
There are a large variety of career paths available
6.Compared with a corporation, one major disadvantage of a partnership is: a. double taxation.
b. unlimited liability of partners. c. separation of ownership and management. d. perpetual life
of the partnership. e. All of the answers are correctThis question was not answered. The
correct answer is b.
7.A general partner in a limited partnership: a. manages the business and has unlimited
personal liability. b. manages the business and is liable only for the money they contribute to
the business. c. has unlimited personal liability but does not manage the business. d. is liable only
for the money they contribute and does not manage the business. e. None of the answers are
correctThis question was not answered. The correct answer is a.
8.Which of the following is not a financing decision? a. ABC Ground Tour sells $500 million of
new debt to upgrade its fleets b. XYZ Ltd. issues new shares to help finance the acquisition of
LMN Co. c. MCC Auto decides to raise $350 billion euros through a bank loan d. QRS Corp.
pays a $2 per share dividend to its shareholders e. None of the answers are correctThis
9.The controller is responsible for all of the following except: a. cash management. b.
preparation of financial statements. c. budgeting. d. taxes. e. auditing.This question was not
answered. The correct answer is a.
Feedback: The treasurer is responsible for cash management.
10.What is the natural financial objective of a corporation? a. Maximize current market

value b. Increase market share c. Strive to make the company debt free d. Maximize the form's
profits e. Avoid takeover at all costsThis question was not answered. The correct answer is a.
11.Why don't shareholders want managers to maximize profits? a. Managers can increase profits
by their choice of accounting method b. Managers can increase profits by investing in projects
with a low rate of return c. Managers can increase current profits by cutting back on maintenance
expenses d. Profits do not represent the cash flows of the corporation e. All of the answers are
correctThis question was not answered. The correct answer is e.
12.Agency costs tend to: a. Ensure managers act in the best interest of owners b. Be a road
block for value maximization c. Be easily discovered d. Move positively with share prices e.
None of the answers are correctThis question was not answered. The correct answer is b.
13.Which component of a manager's compensation will ensure that he acts on behalf of

shareholders? a. A base salary of $1 million b. A bonus of 2 percent of net income above some
normal profitability c. Stock options d. An expense account e. Use of the corporate jetThis
question was not answered. The correct answer is c.
Feedback: Stock options will tie the fortune of the manager to the fortunes of the firm
14.Which of the following would a financial analyst do? a. Analyze a major new investment
project b. Arrange to lease the equipment for a new project c. Collect and invest the company's
cash d. Monitor and control risk e. All of the answers are correctThis question was not
15.What type of company could you work for if you were a financial analyst a. A corporation b.
A mutual fund c. An investment dealer d. An insurance company e. All of the answers are
correctThis question was not answered. The correct answer is e.
Feedback: All of these firms would employ financial analysts
Chapter 2:
1.The capital market includes the stock market and the bond market. a. True b. FalseThis
Feedback: Refer to Section 2.2, The Flow of Savings to Corporations
2.A firm may raise cash in the financial markets. a. True b. FalseThis question was not
3.A mutual fund offers investors low-cost diversification and professional management. a.
4.The interest rate is the highest for top-quality (AA) issuers. a. True b. FalseThis question
Feedback: Refer to Table 2.2
5.The cost of capital for corporate investment is set by the rates of return on investment
opportunities in financial markets. a. True b. FalseThis question was not answered. The
correct answer is a.
Feedback: Refer to Section 2.4, Value Maximization and the Cost of Capital
6.In terms of numbers, the fastest growing financial intermediaries in Canada over the last two
decades are: a. banks b. insurance companies c. pension funds d. mutual fundsThis question
7.A company can raise short-term financing in the: a. capital markets. b. money markets. c.
foreign-exchange markets. d. commodities markets. e. markets for options and other
derivatives.This question was not answered. The correct answer is b.
Feedback: The money market is the market for short-term financing
8.In Canada, the largest investors in corporate bonds are: a. insurance companies b. non-
residents c. banks d. mutual funds e. pension fundsThis question was not answered. The
Feedback: Refer to Figure 2.3
9.Which of the following cannot be a source of financing for corporations? a. Derivative

market b. Fixed-income market c. Stock market d. Foreign exchange marketThis question was
not answered. The correct answer is a.
Feedback: Derivative's payoffs depend on the prices of other securities and are not sources of
financing
10.Which of the following is an example of a fund saver in the economy? a. A business

obtaining capital from equity issues b. An employee contributing to a pension plan c. A
household repaying a mortgage loan d. None of the answers are correctThis question was not
11.Benefits under defined-contribution pension plans: a. are paid only by employers b. are
uncertain depending on the accumulated investment values c. Both (A) and (B) d. Neither
(A) nor (B)This question was not answered. The correct answer is b.
Feedback: Benefits depend on the contributions and the returns earned on those contributions
12.Schedule II banks tend to be: a. foreign, small, and niche oriented b. big, universal, and
domestic c. big, universal, and domestic d. widely heldThis question was not answered. The
Feedback: Schedule II banks are foreign bank subsidiaries
13.Which of the following is not a benefit of investing in a mutual fund? a. diversification b.

guaranteed to out-perform the market c. liquidity d. Professional managementThis question
Feedback: Performance of mutual funds is not guaranteed
14.In addition to its role of pooling and investing savings, financial institutions provide: a. risk
transfer, reduction, and monitoring b. financial information services c. payment services d. All
of the answers are correctThis question was not answered. The correct answer is d.
15.Which of the following is not a function of financial intermediaries? a. Raise money by taking
deposits or selling insurance policies b. Invest money in financial assets c. Invest money in
real estate d. Provide financing for individuals, corporations, or other organizationsThis
Feedback: Financial intermediaries do not engage in real investment
16.Information provided by financial markets can be used to determine: a. commodity prices. b.

interest rates. c. company and stock values. d. All of the answers are correctThis question
17.Which of the following is not an example of how to share risk? a. An insurance company
issuing thousands of policies b. An investor purchasing a mutual fund or ETF c. An investor
purchasing shares in 3 different pharmaceutical companies d. A farmer selling wheat futures
in the commodity marketsThis question was not answered. The correct answer is c.
Feedback: A small number of stocks in the same industry will not diversify risk
18.Capital investments by firms should offer rates of return: a. at least equal to the 3-month
treasury bill return. b. at least as high as those available in financial markets at the same
level of risk. c. at least as high as the return on the market. d. of at least 20%.This question was
not answered. The correct answer is b.
19.A firm is considering an investment in a risky project. Alternative investments with the same
level of risk offer a 15 percent rate or return. In order to increase firm value, the project must
offer a return of: a. 20 percent. b. 15 percent. c. 10 percent. d. (a) or (b) e. Any positive return
will increase company value.This question was not answered. The correct answer is a.
20.The opportunity cost of capital on a safe investment would be the rate of return that
shareholders could earn if they invested in: a. risk-free securities, such as Government
treasury bills. b. low risk, AAA rated corporate bonds. c. stocks with a similar risk to the
company as a whole. d. an exchange traded fund (ETF).This question was not answered. The
1.Long-term financing is available in the capital markets. a. True b. FalseThis question was
not answered. The correct answer is a.
2.The trading of existing securities among investors occurs in the primary market. a. True b.
FalseThis question was not answered. The correct answer is b.
Existing securities are traded in secondary markets
3.Pension funds pool contributions from employees and invest in securities or mutual funds. a.
4.Financial markets allow investors to reduce and reallocate risk. a. True b. FalseThis question
Feedback: Refer to Section 2.3, Functions of Financial Markets and Intermediaries
5.The cost of capital is the maximum acceptable rate of return on capital investment. a. True b.
Feedback: Refer to Section 2.4, Value Maximization and the Cost of Capital
The cost of capital is the minimum acceptable rate of return on capital investment.
6.A company can raise long-term financing in the: a. capital markets. b. money markets. c.
foreign-exchange markets d. commodities markets. e. markets for options and other
derivatives.This question was not answered. The correct answer is a.
Feedback: The capital market is the market for long-term financing
7.In Canada, the largest investors in corporate equities are: a. persons and non-financial
business b. non-residents c. banks d. mutual funds e. pension plansThis question was not
Feedback: Refer to Figure 2.4
8.____ invest in real assets. a. Banks b. Mutual funds c. Pension plans d. Insurance companies
e. CorporationsThis question was not answered. The correct answer is e.
Feedback: The other choices invest in financial assets
9.RRSP eligible mutual funds can be sold by: a. banks only b. mutual funds only c. life insurance
companies only d. Any of the answers are correctThis question was not answered. The
correct answer is d.
10.____ is the combination of operating expenses as a percentage of total assets in a mutual

fund: a. Trading expense ratio b. Maintenance expense ratio c. Management expense ratio d.
Fixed cost ratioThis question was not answered. The correct answer is c.
11.Which of the following is not an advantage of a defined contribution pension plan as a vehicle
for retirement savings? a. Professional management b. Low-cost diversification c. Tax-
deductible contributions d. Deferred taxes e. Guaranteed benefitsThis question was not
Feedback: A defined contribution plan does not guarantee benefits
12.Which of the following would be considered to be a liquid investment? a. Lending money for
six months to a real estate developer b. Purchasing shares in a mutual fund c. Buying a
house d. Buying a large number of shares in a small, thinly traded public company e. Purchasing
stock in a private placementThis question was not answered. The correct answer is b.
Feedback: With the other choices it may be difficult to recover cash quickly
13.Which of the following is not a function of financial markets and intermediaries? a.

Transporting cash across time b. Providing liquidity c. Providing a payment mechanism d.
Reducing risk e. All of these are functions of financial markets and intermediariesThis
question was not answered. The correct answer is e.
14.Which of the following project will increase firm value? a. Any project with a positive rate of
return b. A risky project offering a return equal to the treasury bill rate c. A project with an
expected return equal to the return investors could earn from alternative investments with the
same level of risk d. A project with an expected return higher than the return investors
could achieve from alternative investments with the same level of riskThis question was not
answered. The correct answer is d.
Feedback: Projects offering rates of return higher than the cost of capital add value to the firm
15.A firm is considering an investment in a risky project that offers a 10 percent rate of return.
Alternative investments with the same level of risk offer a 15 percent rate of return. Firm value
will: a. increase. b. decrease. c. stay the same. d. It cannot be determined what will happen to
firm value.This question was not answered. The correct answer is b.
Feedback: Projects offering rates of return less than the cost of capital lower firm value
Chapter 3:
1.The difference between assets and liabilities represents the amount of shareholders' equity. a.
The Balance Sheet
2.The market-value balance sheet is backward -looking. a. True b. FalseThis question was not
Feedback: Refer to Section 3. 1, The Balance Sheet
It is forward-looking
3.Treating interest as a financing flow decreases the firm's cash flow from assets. a. True b.
Feedback: Refer to Section 3.4, Cash Flow from Assets, Financing Flow, and Free Cash Flow
It increases the firm's cash flow from assets
4.Additional taxes owed per dollar of additional income are computed from the marginal tax rate.
Feedback: Refer to Section 3.6, Taxes
5.On the balance sheet, fixed assets are typically shown using their: a. Accrued value b.
Historical cost c. Replacement cost d. Appreciated book value e. Market valueThis question
6.Given the relevant interest rate is 10 percent, if a firm buys raw materials worth $2,000 with
cash payment, what happens to its net current assets? a. They increase by $1,800 b. They
decrease by $2,200 c. They increase by $2,000 d. They decrease by $2,000 e. They do not
changeThis question was not answered. The correct answer is e.
Feedback: Cash decreases by $2000 and inventory increases by $2000
7.Everything else being equal, a reduction of depreciation expense will: a. Decrease the market
value of the asset b. Increase free cash flow c. Increase net income d. Decrease the book value
of the asset e. Decrease net incomeThis question was not answered. The correct answer is c.
Feedback: After-tax depreciation reduces net income
8.When the market value of equity is higher than its book value: a. Investors have
expectations of excellent earning potential from the firm b. The firm is carrying too much
cash c. Firm's assets are fully depreciated d. Investors anticipate low earning potential of the
firm e. The firm goes bankruptThis question was not answered. The correct answer is a.
9.A hypothetical firm currently has $10 million market value of assets, and $5 million market
value of liabilities. With 500,000 shares of outstanding common stock, what of the following is
true? a. Market value per share equals $20 b. Book value per share equals $10 c. Market value
of equity equals $5 million d. Market value of equity exceeds book value of equity e. None of
the answers are correctThis question was not answered. The correct answer is c.
Feedback: MV Equity = MV Assets – MV Liabilities
10.A firm has $1 million of long-term debt on its balance sheet. If interest rates fall below the
interest rate on the debt, then the book value of the debt will a. be less than the market
value. b. be equal to the market value. c. be greater than the market value. d. have an
indeterminate relationship to the market value.This question was not answered. The correct
answer is a.
Feedback: When interest rates fall the market value of debt will increase
11.The difference between book value and market value is likely to be greatest for a. short-term
assets b. fixed assets c. short-term liabilities d. long-term liabilities e. shareholders' equityThis
question was not answered. The correct answer is e.
12.Which of the following may increase the firm's cash balance? a. A purchase of new
equipment b. An issue of long-term debt c. A reduction in accounts payable d. An increase in
inventories e. All of the answers are correctThis question was not answered. The correct
answer is b.
Feedback: The other choices are uses of cash
13.During a particular fiscal year, a small company has sold a product for $2,000 with a cost of
$1,000 to manufacture. However, this firm has not received payment for the sale. Its net profit
and cash flow in that period are: a. $1,000 and $1,000 b. $2,000 and $2,000 c. $1,000 and -
$1,000 d. $1,000 and -$2,000 e. -$1,000 and -$2,000This question was not answered. The
Feedback: Profit = 2,000 – 1,000 = $1,000. Cash Flow = -$1,000
14.Which of the following items that affect income is also a cash flow? a. Depreciation
expense b. Sales made on credit c. Cost of goods sold d. Interest expense e. None of the
answers are correctThis question was not answered. The correct answer is d.
15.During the last year of operations, accounts receivable increased by $5,000, accounts payable
increased by $10,000, and inventories increased by $2,000. What is the total impact of these
changes on the difference between profits and cash flow? a. Cash flow will be $3,000 less than
profits b. Cash flow will be $3,000 more than profits c. Cash flow will be $7,000 less than
profits d. Cash flow will be $7,000 more than profits e. Cash flow will be the same as profitsThis
question was not answered. The correct answer is b.
Feedback: Cash flow = profits – 5,000 + 10,000 – 2,000
16.Which of the following is not deducted from a corporation's taxable income? a. Interest
expense b. Depreciation expense c. Dividend expense d. Labour costs e. Material costsThis
Feedback: Dividends are paid out of after-tax income
17.Which of the following is taxed at the same personal tax rate as employment income? a.
Interest income b. Dividend income c. Capital gains income d. All of the answers are correct e.
None of the answers are correctThis question was not answered. The correct answer is a.
Feedback: Refer to section 3.6
18.Suppose you sell stock for $1,000 which you purchased 10 years ago for $400. Your
combined marginal federal and provincial tax rate is 40 percent. How much tax will you pay? a.
$400 b. $240 c. $200 d. $160 e. $120This question was not answered. The correct answer is
e.
Feedback: (.40)(.50)(1,000-400) = $120
1. The income statement shows the revenues, expenses, and net income of a firm over a
period of time.
a. True
b. False
This question was not answered. The correct answer is a.
Feedback: Refer to Section 3.2, The Income Statement
2. The difference between a company's current assets and its current liabilities is called its net
cash flow.
a. True
b. False
This question was not answered. The correct answer is b.
Feedback: Refer to Section 3.1, The Balance Sheet
It is the net working capital
3. If book values of equity exceed its market values, then profit potential is expected to be
low.
a. True
b. False
Feedback: Refer to section 3.1, The Balance Sheet
4. Profits are different from cash flows mainly because of appreciation.

a. True
b. False
Feedback: Refer to Section 3.3, The Statement of Cash Flows
They differ mainly because of depreciation
5. Interest paid by a firm is tax deductible.

a. True
b. False
Taxes
6. Which of the following is true about financial statements in Canada?

a. Statements of cash flow are considered obsolete
b. Income statements no longer report depreciation expense
c. Balance sheets record market values rather than historical costs
d. Dividends must be shown on the balance sheet
e. Different sets of accounts are allowed for taxation purposes
This question was not answered. The correct answer is c.
Feedback: In Canada firms often keep one set of accounts for investors and a different set
is used to calculate the tax bill
7. Which of the following statements about the balance sheet is false?

a. The values are based on historical costs
b. The balance sheet shows the value of the firm’s assets and liabilities at a particular

time
c. The shareholders’ equity portion represents the market value of the shares
d. Long-term assets can include both tangible and intangible assets
e. Net working capital is the difference between current assets and current liabilities
8. The income statement

a. Shows the value of a firm’s assets and liabilities at a particular time
b. Shows the revenues, expenses, and net income of a firm over a period of time
c. Shows the firm’s cash receipts and cash payments over a period of time
d. Shows the firm’s free cash flow
e. Resembles a snapshot of the firm at a particular time
9. Which of the following statements is true for a corporation with $3 million market value of
equity, $5 million market value of assets, and 100,000 shares of outstanding stock?
a. Market value of liabilities exceeds book value of liabilities
b. Market value of liabilities equals $2 million
c. Market value of liabilities is less than book value of liabilities
d. The market value of a share is $50
e. The book value of a share is $30
Feedback: MV liabilities = MV assets – MV equity = $5 mil - $3 mil = $2 million
10. A firm’s balance sheet shows its debt to be $6 million. The debt was issued with an interest
rate of 8 percent and the current interest rate is 12 percent. Based on this information, the
market value of this debt would be:
a. less than $6 million.
b. equal to $6 million.
c. more than $6 million.
d. unknown without knowing the maturity of the debt.
Feedback: When interest rates rise the market value of the debt will decrease
11. Which of the following adjustments to net income is necessary in order to get cash flow?
a. Add accounts receivable
b. Subtract accounts payable
c. Add inventory
d. Add depreciation expense
e. Subtract dividends paid
This question was not answered. The correct answer is d.
Feedback: Depreciation is a non-cash expense
12. While a manufacturing firm generates $2,000 in sales, there is a $500 increase in accounts
receivable during the same accounting period. Based on such information, operating cash
inflow will increase by:
a. $2,500
b. $2,000
c. $1,500
d. $500
e. $0
Feedback: 2,000 – 500 = $1,500
13. A firm spends $1,500 to buy inputs in March. It produces goods and sell to distributors in
April for $2,000, but does not receive payment until May. What are the net income and
cash flow in April?
a. Net income = $0, Cash Flow = -$1,500
b. Net income = $500, Cash Flow = $0
c. Net income = 0, Cash Flow = $2,000
d. Net income = $500, Cash Flow = $500
e. Net income = $500, Cash Flow = $2,000
Feedback: Net income = Sales – COGS = 2,000 – 1,500 = $500, Cash Flow = $0
14. If a corporation pays 20% tax on its first $50,000 of income and 30% on any additional
income, then a firm with $100,000 income has
a. A marginal tax rate of 20%
b. An average tax rate of 30%
c. A marginal tax rate of 25%
d. An average tax rate of 25%
This question was not answered. The correct answer is d.
Feedback: [.2(50,000) + .3(100,000-50,000)]/100,000 = .25
15. If a corporation with a 35% marginal tax rate has incremental revenues of $500, while
incurring increased expenses of $150 and depreciation expense of $50, then tax liability
will increase by
a. $105
b. $122.50
c. $140
d. $157.50
e. $175
Feedback: .35(500 – 150 – 50) = $105
Chapter 4:
1.The amount of principal repayment from a typical home mortgage gradually decreases over the
life of the loan. a. True b. FalseThis question was not answered. The correct answer is b.
Feedback: Refer to Section 4.4, Level Cash Flows: Perpetuities and Annuities
The principal repayment increases over the life of the loan
2.If an investment takes 9 years to double in value then the interest rate is approximately 8
percent. a. True b. FalseThis question was not answered. The correct answer is a.
Feedback: Refer to Section 4.2, Present Value
By the rule of 72, time to double is approximately 72/r
3.Discounting nominal cash flows at a real interest rate overstates the present value. a. True b.
FalseThis question was not answered. The correct answer is a.
Feedback: Refer to Section 4.5, Inflation and the Time Value of Money
4.The shorter the compounding period, the lower will be the effective annual rate. a. True b.
Feedback: Refer to Section 4.1, Future Values and Compound Interest
More frequent compounding leads to a higher effective annual rate
5.In 10 years, how much would a deposit of $100 grow to in a bank that pays compound interest
at a 5 percent rate? How much of the ending balance would be interest earned on the interest
paid? a. $150, $0 b. $150, $50 c. $162.89, $0 d. $162.89, $12.89 e. $162.89, $62.89This
Feedback: $100(1.10)10 = $162.89. With simple interest the earnings would be 5(.05)(100) =
$50, so the interest earned on interest is 62.89-50=12.89
6.Pat and Nancy have a target of $100,000 in 10 years for their daughter Elena's university
education fund. How much do they need to deposit in a bank account today if they could earn 5
percent per year? a. $50,000 b. $61,391 c. $62,092 d. $66,667 e. $162,889This question was
not answered. The correct answer is b.
Feedback: 100,000/(1.05)10 = $61,391
7.The present value of an annuity rises when: a. The interest rate decreases b. The number of
payments increases c. The amount of each payment increases d. All of the answers are
correct e. None of the answers are correctThis question was not answered. The correct
answer is d.
8.Regarding a mortgage loan: a. the amortization decreases with each payment b. the
amortization is constant through the loan c. the amortization varies monthly with changes in
interest rates d. the accrued interest must be paid semiannually e. both (B) and (D)This question
Feedback: Principle increases and interest decreases over the life of the loan
9.Find the present value of a five year annuity of $100 per year using a 7 percent discount rate
with the first payment coming one year from today. a. $383 b. $410 c. $439 d. $500 e.
$579This question was not answered. The correct answer is b.
Feedback: $100 x PVA(7%, 5 years) = $410
10.A zero-coupon bond that will pay $10,000 in 5 years is selling today for $6500. What interest
rate does the bond offer? a. 7% b. 9% c. 10.8% d. 11.6% e. 13%This question was not
Feedback: (10,000/6,500)1/5 – 1 = .09
11.If you can find the rate of return by dividing the cash flow by the present value, then the
investment a. provides a single cash flow one year from now. b. is an annuity. c. is a
perpetuity. d. could be any of the these things. e. is none of these things.This question was not
Feedback: The rate of return for a perpetuity is r = C/PV
12.A car loan for a $50,000 car has monthly payments of $2,354 at the end of each of the next 24
months. What is the monthly interest rate? a. 1% b. 1.5% c. 2% d. 2.5% e. 3%This question
was not answered. The correct answer is c.
Feedback: 50,000 = 2,354 x PVA(r, 24 months). PVA(r, 24) = 50,000/2,354 = 21.24, so r = 1%.
13.Which of the following is true? a. Real interest rates usually exceed nominal rates b. Real
interest rates must exceed inflation rates c. Real interest rates can be negative, zero or
positive d. Real interest rates can decline only to zero e. None of the answers are correctThis
14.Suppose the nominal interest rate is 7% and the inflation rate is 3%. Then the real rate of
interest is a. -3.7% b. .43% c. 2.3% d. 3.9% e. 10.2%This question was not answered. The
Feedback: 1 + real rate = (1 + nominal rate)/(1 + inflation rate)
15.Tim puts $10,000 into a bank account that promises a real return of 5 percent per year. If
inflation is expected to be 2 percent per year, how much will he have in his account at the end of
10 years? a. $12,190 b. $13,363 c. $16,289 d. $17,000 e. $19,856This question was not
Feedback: 10,000 x (1.05)10 x (1.02)10 = $19,856
16.When will the annual percentage rate (APR) and the effective annual interest rate (EAR) be
equal? a. They cannot be equal b. No inflation arises c. Apply continuous compounding d.
Simple interest is used e. Compounding occurs annuallyThis question was not answered.
The correct answer is e.
17.Which of the following is the best deal to a consumer loan borrower? a. Plan X asks for 5.85
percent per year continuously compounded b. Plan Y asks for 5.9 percent per year
compounded semiannually c. Plan Z asks for 6.0 percent per year compounded annually d.
They are equally attractiveThis question was not answered. The correct answer is b.
Feedback: The EAR for Plan X is e.0585 – 1 = .0602. The EAR for Plan Y is (1 + .059/2)2 – 1
= .0599.
18.A bank account offers 9 percent interest per year, compounded monthly. What is the effective
annual interest rate (EAR)? a. 8.25% b. 8.65% c. 9% d. 9.38% e. 17.23%This question was
not answered. The correct answer is d.
Feedback: EAR = (1 + (.09/12))12 – 1= .0938
1.The higher the discount rate, the higher the present value of $1. a. True b. FalseThis question
Feedback: Refer to Section 4.2, Present Values
A higher discount rate will lead to a lower present value
2.The amount of interest from a typical home mortgage gradually decreases over the life of the
loan. a. True b. FalseThis question was not answered. The correct answer is a.
3.The interest rate on a perpetuity is found by dividing the payment by the present value. a.
4.Interest rates are usually quoted as real rates. a. True b. FalseThis question was not
Feedback: Refer to Section 4.5, Inflation and the Time Value of Money
Nominal rates are usually quoted
5.The effective annual rate is annualized using simple interest a. True b. FalseThis question
Feedback: Refer to Section 4.6, Effective Annual Interest Rates
The EAR is annualized using compound interest
6.When interest rates increase, the future value of a single cash flow a. increases. b.
decreases. c. doesn’t change. d. could increase or decrease.This question was not answered.
7.How much do you need to invest today in order to have $50,000 to buy a car in 4 years if you
can earn 8 percent on your savings? a. $34,000 b. $36,535 c. $36,751 d. $37,879 e. $68,024This
Feedback: 50,000/(1.08)4 = $36,751
8.The present value of an annuity due of t payments of $1 per period is the same as a. the
present value of an ordinary annuity of t payments. b. $1 plus the present value of an ordinary
annuity with t -1 payments. c. (1 + r) times the present value of an equivalent ordinary annuity.
d. (B) and (C). e. None of the answers are correct.This question was not answered. The
9.Calculate the present value of a perpetuity of $5,000 per year with the first payment 3 years
from now if the interest rate is 10 percent a. $3,757 b. $13,678 c. $36,566 d. $41,322 e.
$50,000This question was not answered. The correct answer is d.
Feedback: PV = (5,000/.10)/(1.10)2 = $41,322
10.You purchased a house for $100,000 and sold it 10 years later for $310,585. What is return
did you earn on your investment? a. 2.4% b. 3.2% c. 7.7% d. 12% e. 21%This question was
Feedback: (310,585/100,000)1/10 – 1 = .12
11.Peter has 433,550 in his savings account. If he withdraws $5,000 at the end of each year, he
will have no money left at the end of 10 years. What interest rate is he earning on his account? a.
7% b. 8% c. 10% d. 12% e. 15%This question was not answered. The correct answer is b.
Feedback: 33,550 = 5,000 × PVA(r, 10 years). PVA(r, 10) = 33,550/5,000 = 6.71, so r = 8%.
12.If investors are to earn a real interest rate of 5 percent, what nominal interest rate must they
earn if the inflation rate is 1.5 percent? a. -3.3% b. 0.3% c. 3.4% d. 6.6% e. 7.5%This question
Feedback: (1 + nominal rate) = (1 + real rate) × (1 + inflation rate) = 1.05 × 1.015 – 1 = .066
13.A university graduate earns a starting salary of $40,000 per year, and expects to receive a 6%
increase in salary in each of the next 5 years. If the inflation rate is 2.5%, what will be her real
income in terms of today’s dollars at the end of five years? a. $33,818 b. $45,356 c. $47,312 d.
$53,529 e. $60,563This question was not answered. The correct answer is c.
Feedback: 40,000 × (1.06)5/(1.025)5 = $47,312
14.If the effective annual rate of interest (EAR) is known to be 17.23 percent on a debt that has
monthly payments, what is the annual percentage rate? a. 7.20% b. 16.00% c. 17.23% d.
18.66% e. 26.77%This question was not answered. The correct answer is b.
Feedback: [(1.1723)1/12 - 1] × 12 = .160
15.Which of the following will not cause the effective annual rate of interest (EAR) to
increase? a. An increase in the annual percentage rate (APR) b. An increase in the frequency of
compounding c. A decrease in the compounding interval d. An increase in the number of
years of the investment e. All of the choices cause the EAR to increaseThis question was not
answered. The correct answer is d.
Feedback: A change in the length of the investment does not affect the EAR
Chapter 17:
1.Financial leverage increases the riskiness of the rate of return on equity. a. True b. FalseThis
2.Free cash flow is the cash generated by the firm's operations after all of the necessary
investments in net working capital and fixed assets. a. True b. FalseThis question was not
3.Profitability of companies with very different levels of expenditure on research and

development can be compared easily. a. True b. FalseThis question was not answered. The
Feedback: R&D is treated as a current expense, so profitability is difficult to compare
4.Economic value added is the net profit of a firm after deducting the cost of capital employed.
5.A firm has EBIT of $100,000 and debt of $548,775 subject to 4.5 percent annual interest
charges. What is its times interest earned (TIE)? a. 5.08 b. 3.94 c. 4.05 d. 2.27This question
Feedback: TIE = EBIT/(interest payments)
= 100,000/(548,775 x 0.045)
= 4.05
6.A firm with zero net working capital has: a. insufficient inventories. b. too much current
liabilities. c. a quick ratio of less than one. d. no cash at hand.This question was not
Feedback: With zero net working capital, current assets must be equal to current liabilities so the
current ratio will be equal to one and the quick ratio will be less than one
7.Return on assets is the product of: a. the leverage ratio and asset turnover. b. the leverage ratio
and net profit margin. c. the leverage ratio, asset turnover, and net profit margin. d. asset
turnover and net profit margin. e. net income and assets.This question was not answered.
The correct answer is d.
8.A firm has a profit margin on sales of 4 percent and a return on equity of 18 percent. If its
debt/equity ratio is 0.8, what is the asset turnover ratio? a. 2.5 b. 1.25 c. 5.0 d. 3.5This question
Feedback: ROE = (Assets/Equity) x asset turnover x net profit margin
Asset turnover = 0.18/(1.8 x 0.04) = 2.5
9.Which of the following actions would increase a company's return on equity? a. Increasing
operating costs b. Increasing volume of sales generated by existing assets c. Decreasing the
amount of debt financing d. Increase the plowback ratio e. Increase the day's sales in
inventoriesThis question was not answered. The correct answer is b.
Feedback: Increasing volume of sales will increase the asset turnover and thus the ROE
10.The free cash flow to investors represents: a. the cash flow left after meeting all needs. b.
the cash flow on which the firm does not pay interest. c. the sum of the capital spending minus
cash dividends. d. the cash flow paid out to equity holders.This question was not answered.
11.Patton Corp. had net income of $21 million last year, with depreciation expense of $5 million.
Its net capital expenditure was $10 million. What was the cash flow from assets (free cash
flow)? a. $6 million b. $11 million c. $16 million d. $26 million e. $31 millionThis question
Feedback: Cash flow from operations = 21 + 5 = 26
Cash flow from investment = (10)
= Cash flows from assets = $16 million
12.If a firm has a negative free cash flow, then: a. it will need to declare bankruptcy. b. it may
be making large investments. c. it must also have a negative net income. d. the net effect of its
financing activities must be a deficit. e. All of the answers are correct.This question was not
13.The comparison with the industry group may be misleading because: a. size differences most
likely exist. b. no two companies are identical. c. some firms do business in more than one
industry. d. All of the answers are correct.This question was not answered. The correct
answer is d.
14.Which of the following statements is true about ratio analysis? a. Financial ratios should be
maintained at specific levels b. Financial ratios reflect market values c. Financial ratios provide
an absolute basis for evaluating a firm d. Since all firms follow the same accounting principles,
ratios for different firms are easily compared e. Financial ratios help you to ask the right
questions about a firmThis question was not answered. The correct answer is e.
Feedback: Financial ratios seldom provide answers, but they do help you to ask the right
questions.
15.A drawback of standard handling of the average collection period for accounts receivable is
that the measure: a. ignores the growth in sales. b. does not incorporate the change in collection
pattern. c. fails to include seasonal sales. d. All of the answers are correct.This question was
Feedback: Calculations are done using balance sheet figures from a particular point in time.
16.A firm has $45 million debt and $55 million equity on its books. The return and cost of
invested capital are 9.5 percent and 15 percent, respectively. What is the residual income for this
firm? a. $4.275 million b. -$5.500 million c. -$3.025 million d. $8.945 millionThis question
Feedback: Residual income = (ROIC – cost of capital) x invested capital
= (0.095 - 0.15) x (45 + 55)
= -5.5 million
17.Market value added is measured by: a. the difference between the market value of the
firm's equity and its book value. b. the ratio of the market value of the firm's equity to its book
value. c. the difference between the net profit of a firm and the cost of the capital employed. d.
the ratio between the net profit of a firm and the cost of the capital employed. e. the difference
between the company's return on assets and the cost of capital.This question was not answered.
18.Which of the following is an advantage of using market value added as a measure of company
performance? a. The market value of the company's shares reflects investors' expectations b. It is
a measure that works well for judging privately owned companies c. It is useful for comparing
divisions that are part of a large company d. It indicates the number of dollars of value that
the company has addedThis question was not answered. The correct answer is d.
1.Liquidity refers to the ability to convert assets to cash quickly and at low cost. a. True b.
FalseThis question was not answered. The correct answer is a.
2.Incorporating a liquidity ratio in the Du Pont system allows one to analyze how financing
choices affect returns to shareholders. a. True b. FalseThis question was not answered. The
Feedback: A leverage ratio looks at financing choices
3.Cash flow-based ratios provide an excellent basis for comparing firms. a. True b. FalseThis
question was not answered. The correct answer is b.
Feedback: Cash flow-based ratios are not standardized
4.In analyzing financial statements for a company it is important to compare the ratios calculated
with averages for the same industry. a. True b. FalseThis question was not answered. The
5.Market value added is the difference between the market value of the firm’s equity and its
book value. a. True b. FalseThis question was not answered. The correct answer is a.
6.Ratio analysis is useful mainly because: a. the computation has been standardized so that
information is readily comparable. b. the measure effectively avoids the size problem
involved in comparing firms. c. the information is reported with market values. d. All of the
answers are correct.This question was not answered. The correct answer is b.
7. JJ Corp. had $100 million in sales last year, with a total cost of $44 million. Its inventory rose
from $17 million to $21 million during the year. What was its inventory turnover? a. 2.32 b.
2.95 c. 5.26 d. 69.4 e. 157.6This question was not answered. The correct answer is a.
Feedback: Inventory turnover = COGS/inventory
= $44,000/[(17,000 + 21,000)/2]
= 2.32
8.Return on equity is the product of: a. the leverage ratio and asset turnover. b. the leverage ratio
and net profit margin. c. the leverage ratio, asset turnover, and net profit margin. d. asset
turnover and net profit margin. e. net income and assets.This question was not answered. The
9.A firm has an asset turnover ratio of 1.3 and a return on equity of 20.0 percent. If its capital
structure is 40 percent debt, what is the net profit margin? a. 6.2% b. 9.2% c. 11.0% d. 15.4% e.
43.3%This question was not answered. The correct answer is b.
Feedback: ROE = (Assets/Equity) × asset turnover × net profit margin
Net profit margin = (0.20 × 0.6)/1.3 = .092 or 9.2%
10.Denny Corp. had net income of $8 million last year, with depreciation expense of $3 million.
Its net capital expenditure was $15 million. What was the cash flow from assets (free cash
flow)? a. - $10 million b. - $7 million c. - $4 million d. $23 million e. $26 millionThis question
Feedback: Cash flow from operations = 8 + 3 = 11
Cash flow from investment = (15)
= Cash flows from assets = - $4 million
11.A difficulty with using free cash flow is: a. there is no standard definition of free cash
flow. b. it is calculated using accrual accounting. c. it is easier to manipulate with different
accounting practices than net income. d. the values required are difficult to obtain.This question
12.Which of the following can make simple comparisons of financial ratios misleading? a.
Substantial differences in goodwill b. R&D expenditures are treated as a current expense c.
Pensions are treated differently by different companies d. All of the answers are correct.This
13.Which of the following statements is not true about financial ratios? a. Judgment must be
used in financial ratio analysis b. Financial ratios reflect market values c. Financial ratios can
be judged by comparing with the same company in earlier years d. Financial ratios seldom
provide answers, but they do help you to ask the right questions e. Financial ratios can be judged
by comparing with other companies in the same industryThis question was not answered. The
Feedback: Financial ratios are based on accounting data and do not necessarily reflect market
values properly
14.A firm has $30 million debt and $50 million equity on its books. The return and cost of
invested capital are 14 percent and 9 percent, respectively. What is the residual income for this
firm? a. -$1.6 million b. $1.6 million c. $2.5 million d. $4.0 million e. $8.5 millionThis
Feedback: Residual income = (ROIC – cost of capital) × invested capital
= (0.14 - 0.09) × (30 + 50)
= 4 million
15.Residual income or economic value added is measured by: a. the difference between the
market value of the firm’s equity and its book value. b. the ratio of the market value of the firm’s
equity to its book value. c. the difference between the net profit of a firm and the cost of the
capital employed. d. the ratio between the net profit of a firm and the cost of the capital
employed. e. the difference between the company’s return on assets and the cost of capital.This

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Chapter 1:

13.Which of the following is an example of an agency relationship? a. Employees setting up a

10.What is the natural financial objective of a corporation? a. Maximize current market

13.Which component of a manager's compensation will ensure that he acts on behalf of

9.Which of the following cannot be a source of financing for corporations? a. Derivative

10.Which of the following is an example of a fund saver in the economy? a. A business

13.Which of the following is not a benefit of investing in a mutual fund? a. diversification b.

16.Information provided by financial markets can be used to determine: a. commodity prices. b.

10.____ is the combination of operating expenses as a percentage of total assets in a mutual

13.Which of the following is not a function of financial markets and intermediaries? a.

4. Profits are different from cash flows mainly because of appreciation.

5. Interest paid by a firm is tax deductible.

6. Which of the following is true about financial statements in Canada?

7. Which of the following statements about the balance sheet is false?

8. The income statement

3.Profitability of companies with very different levels of expenditure on research and

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