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Multiple choice

1. Under which of the following legal forms of organization, is ownership readily transferable?
A) Sole proprietorships.
B) Partnerships.
C) Limited partnership.
D) Corporation.

2. The true owner(s) of the corporation is (are) the ________.
A) Board of directors
B) Chief executive officer
C) Stockholders
D) Creditors

3. A major weakness of a partnership is
A) Limited liability.
B) Difficulty liquidating or transferring ownership.
C) Access to capital markets.
D) Low organizational costs.

4. Wealth maximization as the goal of the firm implies enhancing the wealth of
A) The Board of Directors.
B) The firm's employees.
C) The federal government.
D) The firm's stockholders.

5. The agency problem may result from a manager's concerns about any of the following EXCEPT
A) Job security.
B) Personal wealth.
C) Corporate goals.
D) Company-provided perquisites.

6. The Sarbanes-Oxley Act of 2002 did all of the following EXCEPT
A) Tighten audit regulations and controls.
B) Toughen penalties against overcompensated executives.
C) Toughen penalties against executives who commit corporate fraud.
D) All of the above are true.

7. If a person's required return does not change when risk increases, that person is said to be
A) risk-seeking.
B) risk-indifferent.
C) risk-averse.
D) risk-aware.

8. The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested.
A) Return
B) Value
C) Risk
D) Probability

9. Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year?
A) 11.7 percent.
B) 13.2 percent.
C) 14.1 percent.
D) 15.9 percent.

10. The ________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.
A) Return
B) Standard deviation
C) Probability distribution
D) Range

11. Which asset would the risk-averse financial manager prefer? (See below.)

Asset A B C D
Initial investment $15,000 $15,000 $15,000 $15,000
Annual rate of return
Pessimistic 8% 5% 3% 11%
Most likely 12% 12% 12% 12%
Optimistic 14% 13% 15% 14%

A) Asset A.
B) Asset B.
C) Asset C.
D) Asset D.

12. An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is
A) 12.67%.
B) 12.00%.
C) 10.00%.
D) Unable to be determined from the information provided.

13. The present value of $200 to be received 10 years from today, assuming an opportunity cost of
10 percent, is
A) $ 50.
B) $200.
C) $518.
D) $ 77.

14. The future value of a dollar ________ as the interest rate increases and ________ the farther in the future an initial deposit is to be received.
A) Decreases; decreases
B) Decreases; increases
C) Increases; increases
D) Increases; decreases

15. The ________ is the annual rate of interest earned on a security purchased on a given date and held to maturity.
A) Term structure
B) Yield curve
C) Risk-free rate
D) Yield to maturity

16. Generally, an increase in risk will result in ________ required return or interest rate.
A) A lower
B) A higher
C) An unchanged
D) An undetermined

17. Generally, long-term loans have higher interest rates than short-term loans because of
A) The general expectation of higher future rates of inflation.
B) Lender preferences for shorter-term, more liquid loans.
C) Greater demand for long-term rather than short-term loans relative to the supply of such loans.
D) All of the above.

18. A type of long-term financing used by both corporations and government entities is
A) Common stock.
B) Bonds.
C) Preferred stock.
D) Retained earnings.

19. A behavioral approach for dealing with project risk that uses several possible values for a given variable such as cash inflows to assess that variable's impact on NPV is called
A) Sensitivity analysis.
B) Scenario analysis.
C) Simulation analysis.
D) None of the above.

20. A behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of project variables is called
A) Sensitivity analysis.
B) Scenario analysis.
C) Simulation analysis.
D) None of the above.

21. Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
Project A Project B
Initial Investment $350,000 $425,000
Year Cash Inflows (CF)
1 $140,000 $175,000
2 165,000 150,000
3 190,000 125,000
4 100,000
5 75,000
6 50,000

The NPVs of projects A and B are ________:
A) $95,066 and $56,386, respectively.
B) $56,386 and $95,066, respectively.
C) -$56,386 and -$95,066, respectively.
D) None of the above.

22. The investment banker does all of the following EXCEPT
A) Make long-term investments for banking institutions.
B) Bear the risk of selling a security issue.
C) Act as a middleman between the issuer and buyer of a new security.
D) Advise clients.

23. A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm's common stock is
A) $120
B) $10
C) $12
D) $100

24. A firm has experienced a constant annual rate of dividend growth of 9 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk involvements. The value of the firm's common stock is ________.
A) $22.50/share
B) $9/share
C) $90/share
D) $30/share

25. A common stock currently has a beta of 1.3, the risk-free rate is an annual rate of 6 percent, and the market return is an annual rate of 12 percent. The stock is expected to generate a constant dividend of $5.20 per share. A toxic spill results in a lawsuit and potential fines, and the beta of the stock jumps to 1.6. The new equilibrium price of the stock
A) Will be $37.68.
B) Will be $43.33.
C) Will be $33.33.
D) Cannot be determined from the information given.

26. The goal of working capital management is to
A) Balance current assets against current liabilities.
B) Pay off short-term debts.
C) Achieve a balance between risk and return in order to maximize the firmʹs value.
D) Achieve a balance between short-term and long-term assets so that they add to the achievement of the firm's overall goals.

27. One major risk a firm assumes in an aggressive financing strategy is
A) The possibility that collections will be slower than expected.
B) The possibility that long-term funds may not be available when needed.
C) The possibility that short-term funds may not be available when needed.
D) The possibility that it will run out of cash.

28. A firm with highly unpredictable sales revenue would best choose ________ financing strategy to minimize risk.
A) The aggressive
B) The conservative
C) The trade-off
D) A seasonal

29. Earnings before interest and taxes (EBIT) is a descriptive label for
A) Operating profits.
B) Net profits before taxes.
C) Earnings per share.
D) Gross profits.

30. The three basic types of leverage are
A) Operating, production, and financial.
B) Operating, production, and total.
C) Production, financial, and total.
D) Operating, financial, and total.

31. An increase in fixed operating costs will result in ________ in the degree of operating leverage.
A) A decrease
B) An increase
C) No change
D) An undetermined change

32. Because the degree of total leverage is multiplicative and not additive, when a firm has very high operating leverage it can moderate its total risk by
A) Increasing sales.
B) Using more financial leverage.
C) Increasing EBIT.
D) Using a lower level of financial leverage.

33. Total leverage measures the effect of fixed costs on the relationship between
A) Sales and EBIT.
B) Sales and EPS.
C) EBIT and EPS.
D) None of the above.

Solution Summary

The solution explains various multiple choice questions in finance