# 3. If Annual Interest Rates Are 10 Percent, Which of the Following Values Will Be the Lowest? 1. A current ratio is presently 2 : 1. Which of the following
statements about the ratio is not correct?
A. The current ratio is smaller than the quick ratio.
B. The current ratio is unaffected by exchanging bonds for
stock.
C. The current ratio is reduced by purchasing a plant with
cash.
D. The current ratio is increased by using cash to retire
accounts payable.
2. Accountants suggest that assets should be valued at
A. cost.
B. the lower of market or cost.
C. market.
D. the higher of market or cost.

3. If annual interest rates are 10 percent, which of the following values will be the lowest?
A. The future value of a \$100 investment after 3 years
B. The future value of an annuity after 4 years, if \$100 is deposited annually
C. The present value of an investment that will be worth \$100 after 2 years
D. The present value of an annuity that will pay \$200 a year, at the end of each of the
next 4 years
4. If \$800 is deposited in a savings account that pays an interest rate of 5 percent annually,
how much money will be in the account after 15 years?
A. \$1,663 C. \$384
B. \$1,609 D. \$238
5. Profitability ratios are used to measure
A. liquidity. C. performance.
B. leverage. D. turnover.
6. If the interest rate on an account is 8 percent annually, what is the present value of
\$40,000 to be received 5 years from today?
A. \$6,188 C. \$22,073
B. \$10,018 D. \$27,223

7. Which of the following is calculated by adding total liabilities plus equity?
A. Total assets C. Inventory
B. Hidden assets D. Operating income
8. What is the future value of an ordinary annuity if you deposit \$500 per year for the next
10 years in an account that earns an interest rate of 13 percent annually?
A. \$1,700 C. \$9,210
B. \$5,000 D. \$14,990
9. At an interest rate of 20 percent compounded annually, how many years will it take for an
investment of \$6,000 to grow to \$10,000?
A. 1 year C. 5 years
B. 3 years D. 7 years
10. Which of the following types of ratio is used to measure activity?
A. A leverage ratio C. A profitability ratio
B. A turnover ratio D. A liquidity ratio
11. If you deposit \$700 in an account today, and the money grows to \$1,800 in 14 years, what
rate of annual interest have you earned?
A. 4 percent C. 10 percent
B. 7 percent D. 50 percent
12. Which of the following is considered to be a current liability?
A. Work-in-process
B. Raw materials
C. Accounts payable
D. Short-term money market instruments
13. Which of the following would be the most likely cause of an increase in inventory turnover?
A. The faster collection of accounts receivable
B. Lowered sales
C. An increase in the inventory level
D. A reduction in the price of the product
14. What is the future value of an ordinary annuity if you deposit \$1,500 per year for the next
5 years into an account that earns an interest rate of 5 percent annually?
A. \$8,288 C. \$6,322
B. \$7,500 D. \$1,914
15. Which of the following is calculated by subtracting the cost of goods sold and administrative
expense from net sales?
A. Operating income C. Total liabilities
B. Accounts receivable D. Inventory cost
16. If an account has an annual interest rate of 12 percent, what is the present value of
\$1,000,000 to be received 10 years from today?
A. \$3,105,848 C. \$321,973
B. \$789,633 D. \$56,984
17. If an account has a current value of \$84,000 and earns an interest rate of 4 percent
annually, for how many years can you withdraw \$10,000 from the account?
A. 8 C. 12
B. 10 D. 20
18. If you deposit \$10,000 in an investment that yields 6 percent annually, how many years
will it take for your investment to double in value?
A. 12 years C. 18 years
B. 15 years D. 20 years
19. Discounting determines the worth of funds to be received in the future in terms of their
A. present value.
B. future value.
C. cost factor.
D. time factor.
20. If annual interest rates are 10 percent, which of the following values will be the greatest?
A. The future value of an annuity after 4 years, if \$100 is deposited annually
B. The future value of a \$100 investment after 3 years
C. The present value of an investment that will be worth \$100 after 2 years
D. The present value of an annuity that will pay \$200 a year, at the end of each of the
next 4 years
08188800
1. A financial intermediary transfers
A. savings to households.
B. savings to borrowers.
C. stocks to brokers.
D. new stock issues to buyers.
2. If an individual buys stock on margin and its price rises, the
investor
A. must put up additional collateral.
B. must pay tax on the unrealized gain.
C. must pay interest on the borrowed funds.
D. may take delivery of the stock.
3. Since commercial banks have a large amount of debt outstanding, they
A. are highly financially leveraged.
B. earn very little for their stockholders.
C. pay high interest rates on deposits.
D. pay dividends to their stockholders.
4. A stock is currently selling for \$10 a share. What is your gain/loss if you take a long
position and the stock price rises to \$14 a share?
A. You would lose \$4 per share. C. You would gain \$24 per share.
B. You would gain \$4 per share. D. You would lose \$6 per share.
5. Which of the following assets is the most liquid?
A. Money and antiques
B. Bonds and real estate
C. Savings accounts and checking accounts
D. Stocks and bonds
6. When investing in securities, an investor may place a limit order that
A. limits the amount of commissions.
B. specifies when the stock will be purchased.
C. establishes the exchange on which the security is to be bought or sold.
D. states a price at which the investor seeks to buy or sell the stock.
7. Terry buys 100 shares of XYZ stock on margin at \$20 per share. If the margin requirement
is 45 percent, the interest rate is 10 percent, and he holds the security for 1 year, how
much interest must he pay?
A. \$2,000 C. \$110
B. \$200 D. \$90
8. The reserves of commercial banks must be held against
A. the bank as equity. C. savings deposits.
B. losses. D. commercial loans.
9. Which of the following statements about specialists is correct?
A. A specialist stresses one type of investment.
B. A specialist only buys stock.
C. A specialist analyzes corporate securities.
D. A specialist makes a market in securities.
10. The term structure of interest rates involves the relationship between
A. risk and yields. C. term and yields.
B. yields and bond ratings. D. stock and bond yields.
11. A stock is currently selling for \$36 a share. What is your gain/loss if you sell the stock short
and the price rises to \$62?
A. You would lose \$26 per share. C. You would gain \$13 per share.
B. You would gain \$26 per share. D. You would lose \$6 per share.
12. Which of the following is indicated by an upward sloping yield curve?
A. Lower prices for short-term maturity
B. Higher prices for long-term maturity
C. Lower interest rates for long-term maturity
D. Higher interest rates for long-term maturity
13. A stock is currently selling for \$40 per share. What is your gain/loss if you buy a round lot
and the price declines to \$28?
A. You would lose \$600. C. You would gain \$1,200.
B. You would lose \$1,200. D. You would gain \$6,000.
14. Which of the following statements about pension plans is correct?
A. A pension plan that grants mortgage loans is an example of a financial intermediary.
B. A pension plan that grants mortgage loans can’t suffer losses.
C. A pension plan that grants mortgage loans is called a savings and loan association.
D. A pension plan that grants mortgage loans isn’t an example of a financial intermediary.
15. Money market mutual funds invest in
A. corporate bonds.
B. corporate stock.
C. federal government treasury bills.
D. federal government bonds.
16. Entering an order to sell stock at \$17 when the bid is \$18–\$19 is an example of a
A. market order. C. margin payment.
B. short sale. D. limit order.
17. Which of the following statements about organized security markets is correct?
A. Organized security markets are examples of financial intermediaries.
B. Organized security markets transfer resources from savers to borrowers.
C. Organized security markets are secondary markets.
D. Organized security markets aren’t subject to regulation.
18. The minimum margin requirement is established by
A. brokerage firms. C. the SEC.
B. Congress. D. the Federal Reserve.
19. If an investor sells short, then he or she
A. buys an odd lot of a security. C. anticipates a price increase.
B. sells securities from his or her portfolio. D. anticipates a price decrease.
20. Which of the following is a federally insured investment?
A. A savings account in a national commercial bank
B. A certificate of deposit in excess of \$100,000
C. A life insurance policy
D. Commercial bank assets
08188900
1. What is the value of a common stock if the growth rate is
8 percent, the most recent dividend was \$2, and investors
require a 15 percent return on similar investments?
A. \$25.78 C. \$28.57
B. \$27.34 D. \$30.85
2. The price of a preferred stock will be less volatile if the
A. preferred stock is perpetual.
B. firm’s operating income declines.
C. firm’s use of debt increases.
D. preferred stock has a mandatory sinking fund.
3. If a company fails to meet the terms of indenture, the company is
A. bankrupt. C. profitable.
B. in default. D. in registration.
4. In which of the following situations does the value of preferred stock rise?
A. When interest rates and common stock prices rise
B. When interest rates and common stock prices decline
C. When interest rates rise
D. When interest rates decline
5. A 20-year \$1,000 bond has a coupon of 8 percent. What would be the price if the coupon
is paid semiannually and comparable bonds yield 10 percent?
A. \$1,000 C. \$828
B. \$895 D. \$624
6. What is the value of a preferred stock that pays an annual dividend of \$4 a share if
competitive yields are 5 percent?
A. \$80 C. \$40
B. \$60 D. \$20
7. Which of the following bonds is supported by collateral?
A. Convertible bonds C. Equipment trust certificates
B. Income bonds D. Debentures
8. If a perpetual preferred stock pays a dividend of \$5 a year, and yields rise from 10 percent
to 12 percent, the price of the stock will
A. rise from \$50 to \$60. C. rise from \$41.67 to \$50.
B. fall from \$50 to \$41.67. D. fall from \$60 to \$50.
9. Interest is exempt from federal income taxation on
A. equipment trust certificates.
B. zero coupon bonds.
C. federal bonds such as savings bonds.
D. state of Florida bonds.
10. A 30-year \$1,000 bond has an annual coupon of 6 percent. What would be the current
yield if the bond sells for \$622?
A. 9.6 percent C. 5.6 percent
B. 6 percent D. 5 percent
11. Dividends come at the expense of
A. interest. C. liabilities.
B. retained earnings. D. stock.
12. A 10-year \$1,000 bond has a coupon of 9 percent. What would be the price if the coupon
is paid annually and comparable bonds yield 10 percent?
A. \$1,900 C. \$1,000
B. \$1,159 D. \$938
13. An increase in investors’ required return will cause the value of a common stock to
A. rise. C. remain unchanged.
B. fall. D. remain stable or rise slightly.
14. If investors require a rate of return of 8 percent, what is the value of a perpetual preferred
stock that pays a fixed dividend of \$2?
A. \$16 C. \$32
B. \$25 D. \$50
15. A \$1,000 bond has an annual coupon of 5 percent and a price of \$692. Find the number
of years to maturity if comparable bonds yield 10 percent.
A. 5 years C. 20 years
B. 10 years D. 30 years
16. A common stock costs \$40.50, the current dividend is \$1.50, and the growth in the value
of the shares and the dividend is 8 percent. What is the annual rate of return on an
investment in this stock?
A. 4.5 percent C. 10 percent
B. 8 percent D. 12 percent
17. Preferred stock and bonds are similar because
A. they both have voting power.
B. interest and dividend payments are legal obligations.
C. neither interest nor dividends are tax deductible.
D. both are a source of financial leverage.
18. What is the value of a \$100 par preferred stock that must be retired after 10 years if it pays
a dividend of \$5 annually and the investor requires a 6 percent rate of return?
A. \$92 C. \$110
B. \$100 D. \$122
19. A perpetual preferred stock pays a fixed dividend of \$9 and sells for \$100. What is the
stock’s rate of return?
A. 6.5 percent C. 11 percent
B. 9 percent D. 12.5 percent
20. The value of common stock depends on the
A. price of the stock. C. investors’ required rate of return.
B. retirement date. D. coupon rate.
08189000
1. A firm’s sales increase by 50 percent and inventory was
\$100,000. According to the percent of sales method of
forecasting, what will the new inventory be?
A. \$100,000 C. \$150,000
B. \$120,000 D. \$175,000
2. If a firm produces 50,000 widgets and sells each unit for \$20.50,
what is the total revenue generated by this production?
A. \$100,250 C. \$10,250
B. \$1,025,000 D. \$10,250,000
3. If investors want to reinvest funds in a firm so that it can grow,
which of the following business forms would they prefer?
A. A sole proprietorship C. A corporation
B. A limited partnership D. An S corporation
4. Break-even analysis is concerned with the relationship between
A. financial leverage and risk. C. debt and equity.
B. total costs and revenues. D. dividends and retained earnings.
5. A union contract suggests that labor costs may be
A. variable. C. a noncash expense.
B. fixed. D. undetermined.
6. A product sells for \$5 per unit. If fixed costs are \$1,000 and variable costs are \$2 per unit,
what is the degree of operating leverage at 2,000 units?
A. 0.83 C. 1.2
B. 1.0 D. 2.0
7. The federal corporate income tax is
A. decreased by the distribution of earnings. C. decreased by depreciation.
B. increased by the distribution of earnings. D. increased by depreciation.
8. In which of the following business forms do owners have unlimited liability?
A. An S corporation C. A sole proprietorship
B. A corporation D. A limited partnership
9. Airlines have a high degree of operating leverage because of
A. a large investment in fixed assets.
B. small fixed expenses.
C. insufficient government regulation.
D. a large use of debt financing.
10. Currently, a firm’s accounts payable is 5 percent of sales. If the level of sales is anticipated
to increase from \$10,000 to \$20,000, what is the level of accounts payable forecasted by
the percent of sales method?
A. \$250 C. \$750
B. \$500 D. \$1,000
11. Which of the following statements about fixed costs is correct?
A. Fixed costs are greater than variable costs.
B. Fixed costs are paid before variable costs.
C. Fixed costs don’t change with the level of output.
D. Fixed costs don’t change with the size of the firm.
12. If ABC, Inc. has \$650,000 in sales and \$230,000 in expenses, what are the firm’s earnings
before interest and taxes (EBIT)?
A. \$850,000 C. \$325,000
B. \$650,000 D. \$420,000
13. Which of the following is an advantage of the sole proprietorship?
A. Ease of formation C. Limited liability
B. Joint ownership D. Ease of transfer of ownership
14. A product sells for \$2 per unit. If fixed costs are \$200 and variable costs are \$1 per unit,
what is the break-even level of output?
A. 200 units C. 100 units
B. 150 units D. 50 units
15. Which of the following tends to vary spontaneously with changes in the level of sales?
A. Long-term debt C. Accounts payable
B. Plant D. Paid-in capital
16. If Sam’s Diner has an EBIT of \$350,000, what are the diner’s net earnings after paying
\$50,000 in taxes and \$34,000 in interest?
A. \$434,000 C. \$311,000
B. \$334,000 D. \$266,000
17. Which of the following is usually a variable expense?
A. Salaries C. Wages
18. If a firm substitutes fixed for variable costs, which of the following will occur?
A. The use of financial leverage will be increased.
B. The degree of operating leverage will be increased.
C. The break-even level of output will be reduced.
D. The profits will always be higher.
19. What is the break-even point for the XYZ Company if fixed costs are \$1,000, the per-unit
variable cost is \$1.00, and each unit sells for \$2.00?
A. \$2,000 C. \$5,000
B. \$1,000 D. \$500
20. Which of the following is an advantage of a corporation?
A. Permanence C. Elimination of double taxation
B. Ease of formation D. Dilution of ownership
08189100
1. Which of the following statements about equity is correct?
A. If equity is negative, debt exceeds total assets.
B. If equity is negative, total assets exceed debt.
C. If equity is negative, equity exceeds assets.
D. If equity is negative, equity exceeds debt.
2. The flotation costs of issuing new securities
A. decrease the cost of capital.
B. encourage the retention of earnings.
C. encourage external financing.
D. don’t affect the cost of capital.
3. If the net present values of two mutually exclusive investments are positive, a firm should
select
A. both investments.
B. neither investment.
C. the investment with the higher present value.
D. the investment with the higher net present value.
4. Which of the following statements about the cost of debt is correct?
A. The cost of debt is less than the cost of equity.
B. The cost of debt is greater than the cost of equity.
C. The cost of debt is equal to the firm’s interest rate.
D. The cost of debt is greater than the cost of preferred stock.
5. The internal rate of return and net present value methods of capital budgeting assume that
the cash flows are reinvested at the
A. cost of capital.
B. internal rate of return.
C. cost of capital for IRR and the internal rate of return for NPV.
D. cost of capital for NPV and the internal rate of return for IRR.
6. The optimal capital structure involves
A. minimizing the cost of all funds.
B. maximizing the cost of all funds.
C. minimizing the weighted average of the cost of funds.
D. maximizing the weighted average of the cost of funds.
Use the information in the following table to answer Questions 7, 8, 9, 10, and 11.
Coupon rate = 7 percent Marginal tax rate = 35 percent
Average tax rate = 32 percent Common stock dividend (D0 ) = \$6
Price of common stock = \$80 Preferred stock dividend = \$4
Price of preferred stock = \$50 Growth rate of common stock
dividend = 6 percent
Bond yield risk premium = 7 percent Risk-free rate of return = 6 percent
Return on the market = 12 percent Beta = 1.2
7. According to the information provided in the table, what is the cost of debt?
A. 2.45 percent C. 6.25 percent
B. 4.55 percent D. 7.0 percent
8. According to the information in the table, what is the cost of preferred stock?
A. 8 percent C. 10 percent
B. 9 percent D. 12 percent
9. According to the information in the table, what is the cost of equity using the capital asset
pricing model (CAPM)?
A. 12 percent C. 13.95 percent
B. 13.2 percent D. 14.4 percent
10. According to the information in the table, what is the cost of equity using the bond yield
A. 12 percent C. 13.95 percent
B. 13.2 percent D. 14 percent
11. According to the information in the table, what is the cost of equity using the expected
growth method?
A. 12 percent C. 13.95 percent
B. 13.2 percent D. 14.4 percent
12. A firm should make an investment if the present value of the cash inflows on the
investment is
A. less than zero.
B. greater than zero.
C. less than the cost of the investment.
D. greater than the cost of the investment.
13. Which of the following statements about retained earnings is correct?
A. Retained earnings have no cost.
B. Retained earnings are the firm’s cheapest source of funds.
C. Retained earnings have the same cost as new shares of stock.
D. Retained earnings are cheaper than the cost of new shares.
Use the following information to complete Questions 14, 15, 16, and 17.
A firm has two investment opportunities. Each investment costs \$2,000, and the firm’s cost of capital is 8 percent. The cash flows of each investment are shown in the following table:
Cash Flow of
Investment A
Cash Flow of
Investment B
Year 1 \$1,800 \$900
Year 2 00\$600 \$900
Year 3 00\$500 \$900
Year 4 00\$400 \$900
14. According to the information in the table, the NPV for Investment A is
A. \$871. C. \$2,871.
B. \$1,300. D. \$3,300.
15. According to the information in the table, the NPV for Investment B is
A. \$980. C. \$2,980.
B. \$1,600. D. \$3,600.
16. Based on the information in the table, if the investments are mutually exclusive, the firm
should select
A. the higher NPV investment.
B. both investments.
C. neither investment.
D. the higher payback investment.
17. Based on the information in the table, if the investments are independent, the firm
should select
A. the higher IRR investment.
B. all investments with an IRR that’s greater than 8 percent.
C. all investments with an IRR that’s less than 8 percent.
D. only one investment if the IRR is greater than 8 percent.
18. A firm should reject an investment if the internal rate of return (IRR) on the investment is
A. greater than the cost of capital. C. greater than the interest rate.
B. less than the cost of capital. D. less than the interest rate.
19. The net present value of an investment will be higher if
A. the cost of capital is higher.
B. there’s no salvage value.
C. the cost of the investment is lower.
D. a firm uses straight-line depreciation.
20. Which of the following statements about the marginal cost of capital is correct?
A. The marginal cost of capital is a firm’s cost of debt and equity finance.
B. The marginal cost of capital is constant once the optimal capital structure is determined.
C. The marginal cost of capital declines as flotation costs alter equity financing.
D. The marginal cost of capital refers to the cost of additional funds.