1. Determining the best way to raise money to fund a firm’s long-term investments is called:
   1. the capital budgeting decision
   2. the money flow processing decision
   3. the portfolio decision
   4. the capital structure decision
2. Which of the following is NOT true regarding mortgaged-backed securities (MBS)?
   1. Securitization provides liquidity to the mortgage market and makes it possible for banks to loan more money to home buyers.
   2. MBS are sold to investors who can hold them as an investment or resell them to other investors.
   3. The MBS process allows the mortgage bank or other financial institution that made the original mortgage loan to get its money back out of the loan and lend it to someone else.
   4. All of the above.
   5. To

measure value, the concept of time value of money is used:

1. to bring the future benefits and costs of a project, measured by its cash flows, back to the present
2. to determine the interest rate paid on corporate debt
3. to bring the future benefits and costs of a project, measured by its expected profits, back

to the present

1. to ensure that expected future profits exceed current profits today
2. An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is MOST correct if both investments A and B have the same cost?
3. A risk averse investor will select investment A because it provides cash earlier than investment B.
4. A risk averse investor will select investment B because it is expected to provide the most cash ($6,000 > $5,000).
5. The investor will select investment A only if the cost is less than $1,000.
6. The investor may select investment A or investment B depending on the opportunity cost

of money.

45

BAM 313 Introduction to Financial Management

Unit 1 Examination

5. Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, or receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take?
6. You would be indifferent as to when you would receive the $20 million since the total number of dollars received is the same either way.
7. You would take the $20 million in equal installments of $1 million per year for 20 years because it would be worth more than if you would receive it today.
8. You would take the $20 million in equal installments of $1 million per year for 20 years because you would be afraid of spending it all right away.
9. You would take the $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years.
10. Maximization of shareholder wealth:
    1. is achieved only if cash flows exceed accounting profits
    2. represents a zero sum game in which one corporation gains at the expense of others
    3. is not a practical goal since it cannot be measured effectively
    4. provides benefits to society as scarce resources are directed to their most productive use
11. Which of the following securities will likely have the highest liquidity premium?
    1. S. Treasury Bond maturing in 2027
    2. S. Treasury Bill
    3. AAA-rated corporate bond maturing in 2015 not actively traded
    4. BBB-rated corporate bond maturing in 2020 actively traded on a major exchange
12. Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?
    1. higher interest costs
    2. reduced flotation costs
    3. avoidance of registration with the SEC
    4. strictly standardized features/terms
13. Common examples of financial intermediaries include all of the following EXCEPT:
    1. life insurance companies
    2. venture capital firms
    3. pension funds
    4. mutual funds

46

BAM 313 Introduction to Financial Management

Unit 1 Examination

1. A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore:
   1. the corporate bonds are direct securities and the life insurance policies are direct securities
   2. the corporate bonds are indirect securities and the life insurance policies are indirect securities
   3. the corporate bonds are indirect securities and the life insurance policies are direct securities.
   4. the corporate bonds are direct securities and the life insurance policies are indirect securities.
2. Which of the following represents an attempt to measure the net results of the firm’s operations (revenues versus expenses) over a given time period?
   1. statement of cash flows
   2. sources and uses of funds statement
   3. balance sheet
   4. income statement
3. Gross profit is equal to:
   1. revenues minus expenses
   2. profits plus depreciation
   3. sales minus cost of goods sold
   4. earnings before taxes minus taxes payable
4. An income statement may be represented as follows:
   1. Sales – Expenses = Retained Earnings
   2. Sales – Expenses = Profits
   3. Revenues – Liabilities = Net Income
   4. Sales – Liabilities = Profits
5. Which of the following ratios would be the poorest indicator of how rapidly the firm’s credit accounts are being collected?
   1. average collection period
   2. cash conversion cycle
   3. times interest earned
   4. accounts receivable turnover ratio

47

BAM 313 Introduction to Financial Management

Unit 1 Examination

1. An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B’s debt level, but not about Company A’s debt level. Which of the following would best explain this position?
   1. Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
   2. Company B has much higher operating income than Company A.
   3. Company B has a higher operating return on assets than Company A, but Company A has a

higher return on equity than Company B.

1. Company B has more total assets than Company A.

2. Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter’s average daily credit sales?
3. $1,232.88 b. $22,222.22 c. $1,893.45 d. $745.23
4. As of today, the most severe economic crisis to afflict the United States’ economy is considered to be:
   1. the Great Depression of the 1930s
   2. the Reagan Tax Law Changes of 1985
   3. the Great Recession of 2007-2009
   4. the Savings and Loan Crisis of 1978 -1982
5. A corporate treasurer is typically responsible for each of the following duties EXCEPT:
   1. credit management
   2. capital expenditures
   3. cash management
   4. cost accounting
6. A wealthy private investor providing a direct transfer of funds is called:
   1. a financial intermediary
   2. an angel investor
   3. an investment banker
   4. a venture capitalist

48

BAM 313 Introduction to Financial Management

Unit 1 Examination

1. Rogue Industries reported the following items for the current year: Sales = $3,000,000;
   Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000;
   Administrative Expenses = $150,000; Interest Expense = $30,000;
   Marketing Expenses = $80,000; and Taxes = $300,000. Rogue’s net profit margin is equal to:
2. 35.67% b. 36.67% c. 25.67% d. 50.00%
3. Septon Inc. has an average collection period of 74 days. What is the accounts receivable turnover ratio for Septon Inc.?
4. 2.66 b. 1.74 c. 4.93 d. 2.47
5. Which form of organization is free of initial legal requirements?
   1. sole proprietorship
   2. general partnership
   3. corporation
   4. both a and b
6. Which of the following is NOT a benefit provided by the existence of organized security exchanges?
   1. standardization of all debt agreements
   2. helping businesses raise new capital
   3. providing a continuous market
   4. establishing and publicizing fair security prices
7. California Retailing Inc. has sales of $4,000,000; the firm’s cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm’s interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing’s net income?
8. $288,000 b. $377,000 c. $350,000 d. $390,000

49

BAM 313 Introduction to Financial Management

Unit 1 Examination

25. Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from:
26. Company B has more common stock.
27. Company A has lower selling and administrative expenses, resulting in a higher net profit

margin.

1. Company A has lower cost of goods sold, resulting in a higher net profit margin.
2. Company A has a lower debt ratio.
3. What is the present value of an annuity of $120 received at the end of each year for 11 years? Assume a discount rate of 7%. The first payment will be received one year from today (round to nearest $1).
4. $570 b. $250 c. $400 d. $900
5. You bought a racehorse that has had a winning streak for six years, bringing in $250,000 at the end of each year before dying of a heart attack. If you paid $1,155,720 for the horse 4 years ago, what was your annual return over this 4-year period?
6. 12% b. 8% c. 18% d. 33%
7. How much money do I need to place into a bank account that pays a 1.08% rate in order to have $500 at the end of 7 years?
8. $751.81 b. $463.78 c. $629.51 d. $332.54
9. Your daughter is born today and you want her to be a millionaire by the time she is 40 years old. You open an investment account that promises to pay 11.5% per year. How much money must you deposit today so your daughter will have $1,000,000 by her 35th birthday?
10. $20,100 b. $18,940 c. $28,575 d. $22,150
11. If you want to have $3,575 in 29 months, how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly (round to nearest $1).
12. $2,438 b. $2,679 c. $3,147 d. $3,008

96

BAM 313 Introduction to Financial Management

Unit 2 Examination

1. S. Savings Bonds are sold at a discount. The face value of the bond represents its value on its future maturity date. Therefore:
   1. The current price of a $50 face value bond that matures in 10 years will be greater than the current price of a $50 face value bond that matures in 5 years.
   2. The current prices of all $50 face value bonds will be the same, regardless of their maturity dates because they will all be worth $50 in the future.
   3. The current price of a $50 face value bond will be higher if interest rates increase.
   4. The current price of a $50 face value bond that matures in 10 years will be less than the

current price of a $50 face value bond that matures on 5 years.

1. You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income?

Probability of…

Commission Occurrence

$15,000 .15 $35,000 .20 $48,000 .35 $67,000 .22 $80,000 .18

1. The salary of $50,000 is less than the expected commission of $50,050.
2. The salary of $50,000 is less than the expected commission of $52,720.
3. The salary of $50,000 is greater than the expected commission of $49,630.
4. The salary of $50,000 is greater than the expected commission of $48,400.
5. Beginning with an investment in one company’s securities, as we add securities of other companies to our portfolio, which type of risk declines?
6. unsystematic risk
7. market risk
8. systematic risk
9. non-diversifiable risk

97

BAM 313 Introduction to Financial Management

Unit 2 Examination

Project 1
Probability	Return	Standard Deviation	Beta
50% chance	22%	12%	1.1
50% chance	– 4%

 

Project 2
Probability	Return	Standard Deviation	Beta
30% chance	36%	19.5%	0.8
40% chance	10.5%
30% chance	– 20%

 

Project 3
Probability	Return	Standard Deviation	Beta
10% chance	28%	12%	2.0
70% chance	18%
20% chance	– 8%

1. Assume the risk-free rate of return is 2% and the market risk premium is 8%. If you are a risk averse investor, which project should you choose?
   1. Project 3
   2. Project 2
   3. Project 1
   4. Either Project 2 or Project 3 because the higher expected return on project 3 offsets its

higher risk.

1. Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then:
   1. the required returns on stocks A and B will not change
   2. the required returns on stocks A and B will both increase by the same amount
   3. the required return on stock A will increase more than the required return on stock B
   4. the required return on stock B will increase more than the required return on stock A

98

BAM 313 Introduction to Financial Management

Unit 2 Examination

1. Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time period would be to:
   1. buy only junk bonds which have higher interest rates
   2. invest in long-term bonds to reduce interest rate risk
   3. invest in short-term bonds to reduce interest rate risk
   4. invest in long-term bonds to lock in a bond position for when interest rates increase in the

future

1. Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct?
   1. Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.
   2. Because both Fred and Ethel will receive the same cash flows if they each buy a bond,

they both must assign the same value to the bond.

1. If Fred decides to buy the bond, then Ethel will also decide to buy the bond if markets are

efficient.

1. Fred may determine a different value for a bond than Ethel because each investor may

have a different level of risk aversion, and hence a different required return.

1. Which of the following statements is true?
   1. Short-term bonds have greater interest rate risk than do long-term bonds.
   2. Long-term bonds have greater interest rate risk than do short-term bonds.
   3. Interest rate risk is highest during periods of high interest rates.
   4. All bonds have equal interest rate risk.
2. Crandle’s common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return on Crandle’s stock?
3. 11.76% b. 11.11% c. 12.2% d. 14.21%
4. An example of the growth factor in common stock is:
   1. retaining profits in order to reinvest into the firm
   2. two strong companies merging together to increase their economies of scale
   3. acquiring a loan to fund an investment in Asia
   4. issuing new stock to provide capital for future growth

99

BAM 313 Introduction to Financial Management

Unit 2 Examination

4,000 shares of Stock H 7,500 shares of Stock I 12,500 shares of Stock J

19. The beta for the portfolio is:
20. 1.45 b. 1.27 c. 1.99 d. 1.77

Amount
Invested
$8,000 Beta = 1.3 $24,000 Beta = 1.8 $48,000 Beta = 2.2

100

1. Waterfront Solutions, Inc. paid a dividend of $5.00 per share on its common stock yesterday. Dividends are expected to grow at a constant rate of 4% for the next two years, at which point the stock is expected to sell for $56.00. If investors require a rate of return on Waterfront’s common stock of 18%, what should the stock sell for today?
2. $40.22 b. $50.22 c. $44.76 d. $48.51
3. Andre’s parents established a college savings plan for him when he was born. They deposited $50 into the account on the last day of each month. The account has earned 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?
4. $33,307 b. $30,028 c. $43,730 d. $27,560
5. Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for
   20 years after retirement. Charlie wants to receive the first annuity payment the day he retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his retirement annuity (round to nearest $10).
6. $167,130 b. $315,240 c. $256,890 d. $200,450

An investor currently holds the following portfolio:

BAM 313 Introduction to Financial Management

Unit 2 Examination

1. Which of the following will cause the value of a bond to increase, if other things held the same?
   1. interest rates decrease
   2. the company’s debt rating drops from AAA to BBB
   3. investors’ required rate of return increases
   4. the bond is callable
2. A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporation’s stock price, however, is $1 per share. Which of the following statements is MOST correct?
   1. The required return on the stock will be small because the company has very few assets.
   2. Investors believe the stock is worth $1 per share because future earnings (and cash flows)

are expected to be positive.

1. The corporation’s accountants must have made a mistake because retained earnings may

not be negative.

1. Investors are irrational to pay $1 per share when earnings per share have been negative for

three years.

1. How much money must be put into a bank account yielding 6.42% (compounded annually) in order to have $1,671 at the end of 11 years? (round to nearest $1)
2. $798 b. $886 c. $921 d. $843
3. Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Genetics Stock is:
4. 21.1% b. 13.4% c. 16.5% d. 17.6%

101

BAM 313 Introduction to Financial Management

Unit 2 Examination

1. Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart’s Moving Company bonds if investors’ required rate of return is 9.5%.
2. $1,133.05 b. $1,098.99 c. $1,082.75 d. $1,197.27
3. Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson’s current market price is $40.00, what is the stock’s expected rate of return? (nearest .01 percent)
4. 18.25% b. 5.50% c. 11.00% d. 19.00%
5. The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the firm’s cost of capital?
6. 8.92% b. 10.74% c. 11.50% d. 9.89%

Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and a tax rate of 30%. A new issue of $1,000 par bonds maturing in 20 years can be issued with a coupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no internal equity available for investment at this time, but can issue new common stock at a price of $45. The next expected dividend on the stock is $2.70. The dividend for the firm is expected to grow at constant annual rate of 5% per year indefinitely. Flotation costs on new equity will be $7.00 per share. The company has the following independent investment projects available:

Project Initial Outlay IRR

1. 1 $100,000 10%
2. 2 $10,000 8.5%
3. 3 $50,000 12.5%
4. Which of the above projects should the company take on?
   1. Project 3 only
   2. Projects 1, 2 and 3
   3. Projects 1 and 3
   4. Projects 1 and 2
5. PrimaCare has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11 million of common equity, based upon current market values. The firm’s yield to maturity on its bonds is 7.4%, and investors require an 8% return on the firm’s preferred stock and a 14% return on PrimaCare’s common stock. If the tax rate is 35%, what is PrimaCare’s WACC?
6. 7.21% b. 10.18% c. 12.25% d. 8.12%

135

BAM 313 Introduction to Financial Management

Unit 3 Examination

1. JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn $30 million in net income next year and retain 40% of it, how large can the capital budget be before common stock must be sold?
   1. $15.5 million
   2. $7.5 million
   3. $16.0 million
   4. $12.0 million
2. All else equal, an increase in beta results in:
   1. an increase in the cost of retained earnings
   2. an increase in the cost of common equity, whether or not the funds come from retained

earnings or newly issued common stock

1. an increase in the cost of newly issued common stock
2. an increase in the after-tax cost of debt

2. Haroldson Inc. common stock is selling for $22 per share. The last dividend was $1.20, and dividends are expected to grow at a 6% annual rate. Flotation costs on new stock sales are 5% of the selling price. What is the cost of Haroldson’s retained earnings?
3. 12.09% b. 11.78% c. 11.45% d. 5.73%
4. A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company’s marginal tax rate is 35%. Therefore, the cost of preferred stock is:
5. 14.26% b. 12.94% c. 18.87% d. 17.72%
6. Which of the following should NOT be considered when calculating a firm’s WACC?
   1. after-tax YTM on a firm’s bonds
   2. cost of newly issued preferred stock
   3. after-tax cost of accounts payable
   4. cost of newly issued common stock

136

BAM 313 Introduction to Financial Management

Unit 3 Examination

1. Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment’s profitability index?
2. 1.26 b. 1.69 c. 1.21 d. 1.43
3. Your firm is considering investing in one of two mutually exclusive projects. Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years. Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years. The appropriate discount rate for your firm is 12% and it is not subject to capital rationing. Assuming both projects can be replaced with a similar investment at the end of their respective lives, compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.
   1. $2,865 and $94
   2. $3,528 and $136
   3. $5,000 and $1,500
   4. $2,232 and $85
4. The capital budgeting manager for XYZ Corporation, a very profitable high technology company, completed her analysis of Project A assuming 5-year depreciation. Her accountant reviews the analysis and changes the depreciation method to 3-year depreciation. This change will:
   1. increase the present value of the NCFs
   2. have no effect on the NCFs because depreciation is a non-cash expense
   3. only change the NCFs if the useful life of the depreciable asset is greater than 5 years
   4. decrease the present value of the NCFs
5. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.’s required rate of return for these projects is 10%. The modified internal rate of return for Project B is:
6. 18.52% b. 22.80% c. 19.75% d. 17.84%

137

BAM 313 Introduction to Financial Management

Unit 3 Examination

1. A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%. The project’s required rate of return is 13%. The internal rate of return is:
   1. greater than $30,000
   2. greater than 15%
   3. between 13% and 15%
   4. less than 13%
2. A new project is expected to generate $800,000 in revenues, $250,000 in cash operating expenses, and depreciation expense of $150,000 in each year of its 10-year life. The corporation’s tax rate is 35%. The project will require an increase in net working capital of $85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is the free cash flow from the project in year one?
3. $410,000 b. $375,000 c. $380,000 d. $298,000
4. A local restaurant owner is considering expanding into another rural area. The expansion project will be financed through a line of credit with City Bank. The administrative costs of obtaining the line of credit are $500, and the interest payments are expected to be $1,000 per month. The new restaurant will occupy an existing building that can be rented for $2,500 per month. The incremental cash flows for the new restaurant include:
   1. $2,500 per month rent
   2. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rent
   3. $1,000 per month interest payments, $2,500 per month rent
   4. $500 administrative costs, $2,500 per month rent
5. Which of the following should be included in the initial outlay?
   1. increased investment in inventory and accounts receivable
   2. preexisting firm overhead reallocated to the new project
   3. first year depreciation expense on any new equipment purchased
   4. taxable gain on the sale of old equipment being replaced

138

BAM 313 Introduction to Financial Management

Unit 3 Examination

1. QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new machine costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. QRW’s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year life. What is the incremental free cash flow during year 1 of the project?
   1. $11,400
   2. $15,200
   3. $12,800
   4. $14,400
2. The cost of retained earnings is less than the cost of new common stock because:
   1. dividends are not tax deductible
   2. flotation costs are incurred when new stock is issued
   3. accounting rules allow a deduction when using retained earnings
   4. marginal tax brackets increase
3. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt–8 percent; preferred stock–12 percent; common eq