1.

The term "capital structure" refers to:

a. long-term debt, preferred stock, and common stock equity.
b. current assets and current liabilities.
c. total assets minus liabilities.
d. shareholders' equity.
2. The term mutually exclusive investments mean:
a. Choose only the best investments.
b. Selection of one investment precludes the selection of an alternative.
c. The elite investment opportunities will get chosen.
d. There are no investment options available.
3. Which method provides more confidence, the payback method or the net
present value method?
a. Payback because it provides a good timetable.
b. Payback because it tells you when you break even.
c. Net present value because it considers all inflows and outflows
and the time value of money.
d. Net present value because it does not need to use cost of capital.
4. The method of investment appraisal which calculates that rate of discount which makes net
present value = 0 for any project, is called:

The payback period

The internal rate of return
The reducing balance method
The average rate of return

a.
b.
c.
d.

5. If the intrinsic value of a stock is greater than its market value, which of
the following is a reasonable conclusion?
The stock has a low level of risk.
The stock offers a high dividend payout ratio
.The market is undervaluing the stock.
The market is overvaluing the stock.
6. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year, what
is the stock's current price?
A. $4.50
B. $18.00
C. $22.22
D. $40.50

P/E = 13.5X
Then P = 13.5 x $3
Price = $40.50
7. The expected return on a common stock is composed of:
A. dividend yield.
B. capital appreciation.
C. both dividend yield and capital appreciation.
D. capital appreciation minus the dividend yield.
8. According to the dividend discount model, the current value of a stock is
equal to the:
A. present value of all expected future dividends.
B. sum of all future expected dividends.
C. next expected dividend, discounted to the present.
D. discounted value of all dividends growing at a constant rate.
9. To compute the required rate of return for equity in a company using the CAPM, it is

necessary to know all of the following EXCEPT:

a. the risk-free rate.
b.
the beta for the firm.
c.

the earnings for the next time period.

d.

the market return expected for the time period.

10. In calculating the costs of the individual components of a firm's financing, the

corporate tax rate is important to which of the following component cost formulas?
a. common stock.
b.
debt.
c.

preferred stock.

d.

none of the above.

11. Beta measure _______________risk of a firm .

a. Systematic risk
b. Unsystematic risk
c. Both of the above
d. None of the above
12. The process of planning expenditures that will influence the operation of a firm over a

number of years is called

a. investment.

b. capital budgeting.
c. net present valuation.
d. dividend valuation.

13. Which of the following is an example of a capital investment project?

i.

a. Replacement of worn out equipment

b. Expansion of production facilities
c. Development of employee training programs
d. All of the above are examples of capital investment projects.

14. The net present value of a project is equal to

i.

a. the present value of all net cash flows that result from the project.
b. the present value of all revenues minus the present value of all costs that result
from the project.
c. the present value of all future net cash flows that result from the project minus
the initial investment required to start the project.
d. All of the above are correct.

15. Which of the following is an internal source of investment funding?

i.

a. Issuing bonds
b. Sale of stocks
c. Undistributed profits
d. All of the above are internal sources.

16. A firm can borrow at an interest rate of 10%. Its marginal tax rate is 40%. What is its

cost of debt?

a. 10%
b. 14%
c. 6%
d. None of the above is correct.

17. The method of raising funds for capital investment that involves the greatest risk to

the firm is
i.

a. borrowing by selling bonds.

b. relying on retained profits.
c. issuing common stock.
d. raising the dividend rate.

18. Which of the following sources of funds for capital investment involves a tax

adjustment to determine the cost of capital?

i.

a. Retained profits
b. Issuing debt
c. Issuing common stock
d. All of the above involve a tax adjustment.

19. The beta coefficient is associated with

i.

a. the capital asset pricing model.

b. the dividend valuation model.

c. the risk-free rate plus premium model.

d. the tax-adjusted cost of debt.

20. Assume that the risk-free rate is 5% and that the rate of return on a balanced portfolio

of common stocks is 9%. If a firm has a beta coefficient of 2, then its risk premium is
i.

a. 18%
b. 10%
c. 8%
d. 4%

21. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to

as the:
A. compound rate.
B. current yield.
C. cost of debt.
D. capital gains yield.
E. cost of capital.
22. Which of the following is a variable cost?
i.

a. Interest payments
b. Raw materials costs
c. Property taxes
d. All of the above are variable costs.

23. EBIT is usually the same thing as:

a.
funds provided by operations.
b.

earnings before taxes.

c.

net income.

d.

operating profit.

24. If a firm has a DOL of 5 at Q units, this tell us that:

a.
if sales rise by 5%, EBIT will rise by 5%.
b.

if sales rise by 1%, EBIT will rise by 1%.

c.

if sales rise by 5%, EBIT will fall by 25%.

d.

if sales rise by 1%, EBIT will rise by 5%.

25. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage
a.

its degree of financial leverage (DFL).

plus

b.

minus

c.

divided by

d.

multiplied by

26. Degree of combined leverage:

a. should be minimized by the financial manager
b. affects only balance sheet items
c. decreases the firm's operating profit
d. shows the impact of sales or volume changes on bottom line EPS

27. The borrower's attitude toward his or her credit obligations is called:

A. capacity.
B. capital.
C. character.
D. collateral.
E. conditions.
28. A term that refers to the borrower's assets or net worth is called:

A. capacity.
B. character.
C. capital.
D. collateral.
E. conditions.
29. The best way to maintain your credit rating is to:

A. use credit sparingly.

B. pay cash for your purchases.
C. repay your debts on time.
D. declare a Chapter 7 bankruptcy.
E. use as many credit cards as you can.