1. Financial Management is mainly concerned with ____________.

A. arrangement of funds
B. all aspects of acquiring and utilizing financial resources for firm’s activities
C. efficient Management of every business.
D. profit maximization

2. Future value interest factor takes ____________.

A. compounding rate
B. discounting rate.
C. inflation rate.
D. deflation rate.

3. Financial decisions involve ____________.

A. investment, financing and dividend decisions.
B. investment sales decisions.
C. financing cash decisions.
D. investment dividend decisions.

4. Which one of the following terms is defined as the management of a firm's long-term
investments?
A. working capital management
B. financial allocation
C. agency cost analysis
D. capital budgeting

5. Which one of the following is defined as a firm's short-term assets and its short-term
liabilities?
A. working capital
B. investment capital
C..equity capital
D. debt capital

6. Which one of the following statements concerning a sole proprietorship is correct?

A. A sole proprietorship is designed to protect the personal assets of the owner.
B. The profits of a sole proprietorship are subject to double taxation.
C. The owner of a sole proprietorship is personally responsible for all of the company’s
debts
D. A sole proprietorship is structured the same as a limited liability company.
ANSWER: C
7. Which one of the following best describes the primary advantage of being a limited partner
instead of a general partner?
A. tax-free income.
B. active participation in the firm's activities
C. limited potential financial loss
D. greater control over the business affairs of the partnership

8. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years.
You expect annual interest rates will be 8 percent over that time period. The maximum price you
would be willing to pay for the annuity is closest to:

A. $32,000.
B. $39,272. (PV ordinary annuity=A*(1-(1+r)^-n)/r)
C. $40,000.
D. $80,000.

PV is the present value (the maximum price you would be willing to pay),
a is the annuity payment per period ($4,000),
r is the interest rate per period (8% or 0.08), and
n is the number of periods (20 years).

9. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present
value of that future amount to you would
A. fall.
B. rise.
C. remain unchanged.
D. cannot be determined without more information.

PV=FV/(1+r)^n
PV = Future value, PV = present value
10. You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16
years it will be redeemed for $1,000. What approximate annual rate of growth does this
represent?
A. 8 percent.
B. 9 percent.
C. 12 percent.
D. 25 percent.
1
FV n
YTM =CAGR=( ) −1
PV
CAGR = (1000/250)^1/16 – 1
11. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of
$263.80 for 5 years. The compound annual interest rate implied by this arrangement is closest to
A. 8 percent.
B. 9 percent.
C. 10 percent.
D. 11 percent.

PV=PMT×(1−(1+r)−n)/r

Where:

 PV is the present value, or the amount you’re paying for the annuity ($1,000 in this case)
 PMT is the payment per period ($263.80 per year)
 r is the interest rate per period (what we’re trying to find)
 n is the number of periods (5 years)

12. In a typical loan amortization schedule, the dollar amount of interest paid each period .
A. increases with each payment
B. decreases with each payment
C. remains constant with each payment
D. changes according to the market interest rates

13. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your
required rate of return is 15 percent?
A. More than its face value.
B. Less than its face value.
C. $1,000.
D. True.

14. If a bond sells at a high premium, then which of the following relationships hold true?
(P0 represents the price of a bond and YTM is the bond's yield to maturity.)
A. P0 < par and YTM > the coupon rate.
B. P0 > par and YTM > the coupon rate.
C. P0 > par and YTM < the coupon rate.
D. P0 < par and YTM < the coupon rate.

15. The expected rate of return on a bond if bought at its current market price and held to
maturity.
A. yield to maturity
B. current yield
C. coupon yield
D. capital gains yield

16. The stated interest payment, in dollars, made on a bond each period is called the bond:
A) Coupon
B) Face value.
C) Maturity
D) Yield to maturity.

17. The rate of return required by investors in the market for owning a bond is called the:
A) Coupon
B) Face value
C) Maturity
D) Yield to maturity
18. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a:
A) Par bond
B) Discount bond
C) Premium bond
D) Zero-coupon bond

19.The long-term bonds issued by the United States government are called:
A) Treasury bonds.
B) Municipal bonds.
C) Floating rate bonds.
D) Junk bonds.

20. The annual coupon payment of a bond divided by its market price is called the:
A) Coupon rate.
B) Current yield.
C) Yield to maturity.
D) Bid-ask spread.

21. A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 10
years ago. The bond currently sells for $1,000 and has 8 years remaining to maturity. This
bond’s ______________ must be 10%.

I. Yield to maturity
II. Market premium
III. coupon rate
A) I only
B) I and II only
C) III only
D) I and III only
22. Which of the following statements regarding bond pricing is true?
A) The lower the discount rate, the more valuable the coupon payments are today.
B) Bonds with high coupon payments are generally (all else the same) more sensitive to changes
in interest rates than bonds with lower coupon payments.
C) When market interest rates rise, bond prices will also rise, all else the same.
D) Bonds with short maturities are generally (all else the same) more sensitive to changes in
interest rates than bonds with longer maturities.

23. The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be
constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever.
Its required return (rs) is 12%. What is the best estimate of the current stock price?

A. $41.58
B. $42.64
C. $43.71
D. $44.80

24. The Isberg Company just paid a dividend (D0) of $0.75 per share, and that dividend is
expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15,
the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's
current stock price, P0?

A. $18.62
B. $19.08
C. $19.56
D. $20.05

25. The growth in dividends of Music Doctors, Inc. is expected to be 8% per year for the next
two years, followed by a growth rate of 4% per year for three years; after this five-year period,
the growth in dividends is expected to be 3% per year, indefinitely. The required rate of return on
Music Doctors, Inc. is 11%. Last year's dividends per share were $2.75. The price of the stock
today should be closest to

A. $ 8.99
B. $ 25.21
C. $ 39.71
D. $110.00
26. You have been asked to determine the intrinsic value of Quick Filters Inc (QF) common stock.
The company’s most recent dividend was $2.00 (Do). You expect dividends to grow at a
supernormal rate of 15% for the next three years. You then expect that dividends will grow at a
normal 5% rate thereafter (indefinitely). As a potential investor, you would expect to earn 10% on
this investment. What is the intrinsic value of a share of QQ?

A. $ 21.00
B. $ 52.01
C. $ 56.03
D. $ 63.88

27. Beta Budget Brooms will pay a big $2 dividend next year on its common stock, which is
currently selling at $50 per share. What is the market's required return on this investment if the
dividend is expected to grow at 5% forever?

A. 4.0%
B. 5.0%
C. 7.0%
D. 9.0%

28. Elaine has just received an insurance settlement of $25,000. She wants to save this money
until her daughter goes to college. If she can earn an average of 6.5 percent, compounded
annually, how much will she have saved when her daughter enters college 8 years from now?
A. $38,000.00
B. $40,929.02
C. $41,374.89
D. $41,899.60

29.When you were born, your parents opened an investment account in your name and deposited
$500 into the account. The account has earned an average annual rate of return of 4.8 percent.
Today, the account is valued at $36,911.22. How old are you?
A. 74.47 years
B. 76.67 years
C. 81.08 years
D. 91.75 years
30.You just won $25,000 and deposited your winnings into an account that pays 6.2 percent
interest, compounded annually. How long will you have to wait until your winnings are worth
$50,000?
A. 11.53 years
B. 12.00 years
C. 12.29 years
D. 12.67 years

31. A bank pays interest monthly with an EAR of 6.17%. What is the periodic interest rate
applicable per month?

A. 0.50%
B. 0.55%
C. 0.52%
D. 0.48%

32. Which of the following instruments are exchange-traded?

A. Listed shares
B. Municipal bonds
C. Private stock in corporation
D. Bank deposits

33. A(n) ________ is defined as a conflict of interest between the stockholders and managers of a
firm.

A) stockholders’ liability
B) corporate breakdown
C) agency problem
D) corporate activist

34. Ultimately, the ________ control(s) the corporation.

A) board of directors
B) stockholders
C) president
D) chief executive officer
35. Net capital spending is equal to the:
A) net change in total assets plus depreciation.
B) net change in fixed assets plus depreciation.
C) net income plus depreciation.
D) difference between the market and book values of the total assets.

36. ________ is the cash flow resulting from a firm’s ongoing, normal business activities.

A) Operating cash flow

B) Net capital spending
C) Additions to net working capital
D) Free cash flow

37. Assume a firm has a receivables turnover value of 10. Which one of the following statements
is correct?

A) It takes the firm 10 days to collect payment from its customers.

B) It takes the firm 36.5 days to sell its inventory and collect the payment from the sale.
C) It takes the firm an average of 36.5 days to sell its items.
D) The firm collects its credit sales in an average of 36.5 days.

38. The return on equity equals:

A) ROA × Equity multiplier.

B) Net profit margin × ROA.
C) Net profit margin × ROA × Total asset turnover.
D) ROA × Net income/Total assets.

39. ________ annuities have payments that occur at the end of each period, whereas ________
annuities have payments that occur at the beginning of each period.

A) Ordinary annuities; early annuities

B) Delayed annuities; straight annuities
C) Straight annuities; delayed annuities
D) Ordinary annuities; annuities due

40. In which way does a perpetuity differ from an annuity?

A) Perpetuity cash flows vary with the rate of inflation.

B) Perpetuity cash flows vary with the market rate of interest.
C) Perpetuity cash flows are variable while annuity payments are constant.
D) Perpetuity cash flows never cease.