Sdncsajdaskldj

Practice MCQs
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) A correlation coefficient of -0.7 indicates that the returns from two securities ________.
A) are perfect mirror images of each other
C) tend to move in opposite directions
B) move independently of each other

D) tend to move in the same direction
2) For a portfolio, which of the following portfolio measurements is not a weighted average of the measurements for the
securities in that same portfolio?
A) beta
C) systematic risk
B) expected return
D) standard deviation
3) The "January effect" describes a situation which the CAPM does not adequately explain, namely the finding that
________.
A) common stock held from December to January tends to produce a higher return than in other months
B) the shares of small companies are traded more frequently during January than during the rest of the year
C) the price of bonds tends to increase the first week in January
D) the number of common stocks traded in January tends to be lower than in the rest of the year
4) In the Capital Asset Pricing Model, the term (Rm - Rf) represents ________.
A) the unsystematic risk premium for a security
B) the expected return of a security
C) the market risk premium
D) the security market line
5) The capital asset pricing model (CAPM) involves the relationship between ________.
A) expected return and difference between systematic and unsystematic risk
B) expected return and systematic risk
C) expected return and total risk
D) expected return and unsystematic risk
6) What are the earnings per share (EPS) for a company that earned $100,000 last year in earnings after taxes, has 200,000
common shares outstanding, and $1.2 million in retained earnings at the year end?
A) $6
B) $100,000
C) $6.50
D) $0.50
7) The treasurer of a large corporation is primarily concerned with ________.

A) gathering and reporting information for external bodies, such as the SEC
B) gathering and reporting accounting information for internal company use
C) investing, financing, and asset management decisions
D) preparing budgets and forecasts
8) The primary difference between the corporation and other historically popular forms of business organizations is
________.
A) that the corporation is unconcerned about the welfare of its employees
B) that the corporation is primarily concerned with the social welfare of society
C) the separation between ownership and management
D) that owners and management are generally the same entity
9) "Shareholder wealth" in a firm is represented by ________.
A) the number of people employed in the firm
B) the amount of salary paid to its employees
C) the book value of the firm's assets less the book value of its liabilities
D) the market price per share of the firm's common stock
10) What piece of legislation was largely a response to a series of corporate scandals involving Enron, WorldCom, Global
Crossing, Tyco and numerous others?
A) Securities Exchange Act of 1932 (SEA)
B) Financial Accounting Standards Board Act (FASB)
C) The Sarbanes-Oxley Act of 2002 (SOX)
D) The Corporate Corruption Act of 1992 (CCA)
11) The ________ is a measure of the variability of a distribution around the mean return of an individual security or
portfolio.
A) coefficient of variation
C) correlation coefficient
B) standard deviation
D) covariance
12) The CAPM can be used to estimate ________.

A) dividends
B) the required rate of return on a security
C) betas
D) the actual price of a security when the market opens tomorrow morning
13) Suppose General Catfood Inc. has a beta of 1.11. If the market goes up and provides an excess return of 10 percent for
a month, then General Catfood should provide ________.
A) a return of 11.1 percent
C) a return of 10.1 percent
B) an excess return of 11.1 percent

D) an excess return of 10.1 percent
14) An investor holding a well-diversified portfolio will not be exposed to ________.

A) inflation risk
C) default risk
B) systematic risk
D) unsystematic risk
15) The CAPM illustrates very clearly the concept that ________.
A) the expected return for a security with a beta equal to zero is also zero
B) an investor cannot hope to earn a return in excess of the market portfolio
C) risk and return have a direct relationship
D) diversification reduces systematic risk

16) The branch of economic theory which relates the behavior of principals and agents is referred to as ________.
A) Theory of the Firm
C) Agency Theory
B) Management Behavior Theory

D) Behavioral Theory
17) The ________ decision is concerned about the make-up of the right-hand side of the balance sheet with the dividend
policy of the firm being integral as well as the mechanics of physically requiring the necessary funds.
A) financing
C) investment
B) asset management
D) wealth management
18) Incentives such as stock options, bonuses, and perquisites are utilized by the corporation ________.
A) as a means of controlling the actions of competitors
B) to provide an incentive to allocate resources towards philanthropic endeavors
C) to provide an incentive to employees to act in the best interest of shareholders
D) as a means of over-compensating white-collar workers relative to blue-collar workers
19) If the goal of the financial manager were to maximize earnings per share ________.
A) risk would not matter
B) the company would never pay a dividend
C) the timing of returns would not matter
D) all of the above
20) The ________ decision is concerned about charging the manager with an appropriate level of operating responsibility
over existing assets to supervise the assets efficiently.
A) wealth management
B) investment
C) financing
D) asset management
21) The ________ is a measure of the degree to which two variables, such as the returns of two different common stocks,
move together.
A) variance
C) covariance
B) coefficient of variation
D) standard deviation
22) You estimate that the characteristic line for U.S. Blivet common stock has a slope (i.e., rise over run) of 1.33. Therefore,
this common stock is considered ________ based on its estimated beta.
A) overvalued B) aggressive
C) defensive
D) undervalued
23) The ________ of return is a measure of relative risk for either an individual security or portfolio.
A) covariance
B) correlation coefficient
C) standard deviation
D) coefficient of variation
24) The ________ is a standardized measure of the linear relationship between two variables, such as between the returns
of two different stocks.
A) correlation coefficient
B) covariance
C) standard deviation
D) coefficient of variation
25) If the expected return on Treasury securities is 7 percent, the expected return on the market portfolio is 10 percent, and
the beta of the Tolliman Lighting Corp. is 1.25, then the required return on TLC stock is ________.
A) 3.75 percent
B) 3 percent.
C) 10.75 percent
D) 7 percent
26) You have calculated that the required rate of return on a particular common stock is less than the expected rate of
return. Therefore, you would conclude ________.
A) that the stock has a high dividend payout ratio
B) that the stock is more risky than the market portfolio
C) that an investor should buy the stock
D) that an investor should sell the stock
27) Which of the following statements (in general) is correct?
A) The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
B) The higher the tax rate for a firm, the lower the interest coverage ratio.
C) A low receivables turnover is desirable.
D) An increase in the net profit margin with no change in sales or assets means a poor ROI.
Table 6-1
ALPHA MANUFACTURING COMPANY, Balance Sheet
Cash and Marketable Securities
$225,000
Accounts Receivable
890,000
Inventories (lower of cost or market)
930,000
Prepaid Expenses
10,150
Accumulated Tax Prepayments
12,000
Current Assets
2,067,150
Fixed Assets at Cost
2,500,000
less: Accumulated Depreciation
700,000
Net Fixed Asset
1,800,000
Investments, Long-Term
35,000
Goodwill
100,000
Total Assets
$4,002,150
Bank Loans and Notes Payable
Accounts Payable
Accrued Taxes
Other Accrued Liabilities
Current Liabilities
Long-Term Debt
Common Stock, $1 par value
Additional Paid-in Capital
Retained Earnings
Total Net Worth
Total Liabilities and Net Worth
$448,500
148,000
36,000
195,500
828,000
1,200,000
700,000
174,150
1,100,000
1,974,150
$4,002,150
ALPHA MANUFACTURING COMPANY, Income statement
Net Sales
less: Cost of Goods Sold
Gross Profit
Selling, General and Administrative Expense
Depreciation
Interest Expense
Earnings Before Taxes
Income Taxes
Earnings After Tax
Cash Dividends
Increase (decrease) in Retained Earnings
$5,200,000
4,576,000
624,000
750,000
95,000
75,000
(296,000)
0
(296,000)
0
($296,000)
28) According to these statements in Table 6-1, ALPHA's debt-to-equity ratio was ________.
A) 0.61 B) 1.32 C) 1.03 D) 0.51
29) Most accounting questions concerning the balance sheet have to do with ________.
A) the appropriate depreciation schedule used by accounting
B) the appropriate valuation of "good will" by accounting
C) the balance between short- and long-term assets
D) the way the assets are valued by accounting
30) If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential
customer's ________.
A) average age of accounts receivable
C) average age of accounts payable
B) acid ratio
D) current ratio
31) National Automobile Parts had sales of $2 million this year. The marketing manager expects sales to grow at a 10
percent compound annual rate over the next 10 years. On this basis, sales in 10 years should be closest to ________.
A) $5,187,485
B) $4,622,885
C) $5,081,309
D) $2,593,722
32) If you invest $400 today in a savings account paying 8 percent interest per year, how much will you have in the account
at the end of three years if the interest is compounded annually?
A) $1,299
B) $325
C) $609
D) $504
33) Which of the following arrangements for a $1,000 CD yields the largest terminal (future) value?
A) 9.75% compounded monthly
C) 10.00% compounded semiannually
B) 10.2% compounded annually

D) 9.65% compounded daily
34) What approximate annual interest rate would you have to earn in order to double your money in six years?
A) 10 percent
B) 7 percent
C) 16 percent
D) 12 percent
35) If you want to earn 8 percent, approximately how much should you pay for a U.S. Treasury security which matures in
one year at $1,000?
A) $920
B) $1,080
C) $940
D) $926
36) Which of the following would improve the current ratio?

A) Issue long-term debt to buy inventory.
B) Sell common stock to retire long-term debt.
C) Borrow short-term to finance additional fixed assets.
D) Sell fixed assets to repurchase common stock.
Table 6-2
BETA MANUFACTURING COMPANY, Balance Sheet
$80,000
Accounts Receivable
1,500,000
257,800
Prepaid Expenses
20,000
15,000
Current Assets
1,872,800
1,245,000
670,000
Net Fixed Assets
574,500
233,700
Goodwill
1,000,000
Total Assets
$3,681,000
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Paid-in Capital
Retained Earnings
Total Net Worth
$90,000
25,000
45,000
190,000
350,000
900,000
250,500
180,000
2,000,500
2,431,000
$3,681,000
BETA MANUFACTURING COMPANY, Income statement

Net Sales
$2,800,800
1,800,000
Gross Profit
1,000,800
550,000
Depreciation
111,600
Interest Expense
250,000
89,200
Income Taxes
30,300
Earnings After Tax
58,900
Cash Dividends
15,000
Increase in Retained Earnings
$43,900
37) According to the statements in Table 6-2, BETA's net profit margin was ________.
A) 2.10 percent B) 3.62 percent. C) 5.69 percent D) 4.28 percent
22) ______
Table 6-1
$225,000
Accounts Receivable
890,000
930,000
Prepaid Expenses
10,150
12,000
Current Assets
2,067,150
2,500,000
700,000
Net Fixed Asset
1,800,000
35,000
Goodwill
100,000
Total Assets
$4,002,150
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Retained Earnings
Total Net Worth
$448,500
148,000
36,000
195,500
828,000
1,200,000
700,000
174,150
1,100,000
1,974,150
$4,002,150

Net Sales
$5,200,000
4,576,000
Gross Profit
624,000
750,000
Depreciation
95,000
Interest Expense
75,000
(296,000)
Income Taxes
0
Earnings After Tax
(296,000)
Cash Dividends
0
($296,000)
38) According to these statements in Table 6-1, ALPHA's total asset turnover is closest to ________.
A) 5.25
B) 4.90
C) 0.77
D) 1.30
39) Which of the following statements is not correct as it relates to stock options given to management as part of their
compensation?
A) Firms, per FASB 2006, are required to provide 15% of all senior executive compensation in the form of stock options
tied to the performance of the firm's common stock.
B) In 2006, FASB required that firms record stock option expense using the fair value method.
C) Most companies include stock option expense as part of Selling, General and Administrative expenses.
Table 6-1
$225,000
Accounts Receivable
890,000
930,000
Prepaid Expenses
10,150
12,000
Current Assets
2,067,150
2,500,000
700,000
Net Fixed Asset
1,800,000
35,000
Goodwill
100,000
Total Assets
$4,002,150
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Retained Earnings
Total Net Worth
$448,500
148,000
36,000
195,500
828,000
1,200,000
700,000
174,150
1,100,000
1,974,150
$4,002,150

Net Sales
$5,200,000
4,576,000
Gross Profit
624,000
750,000
Depreciation
95,000
Interest Expense
75,000
(296,000)
Income Taxes
0
Earnings After Tax
(296,000)
Cash Dividends
0
($296,000)
40) According to these statements in Table 6-1, ALPHA's return on equity was ________.
A) -2.20 percent
B) -14.99 percent
C) -7.59 percent
D) -2.42 percent
41) Which of the following statements is correct with respect to common-size income and balance sheet statements?
A) They show how both total sales and total assets change over time.
B) They provide no information about how total assets or total sales change over time.
C) They show how total assets change over time, but not total sales.
D) They show how total sales change over time, but not total assets.
42) An analysis of percentage financial statements where all balance sheet items are divided by ________ is known as
________.
A) total assets; an index analysis
B) net sales or revenues; a common-size analysis
C) net sales or revenues; an index analysis
D) total assets; a common-size analysis
43) Which of the following is a use of funds in the sources and uses of funds statement?
A) a net decrease in the cash account
C) proceeds from the sale of common stock
B) a net decrease in any liability

D) a gross decrease in fixed assets
44) A firm collects 80 percent of its credit sales in 30 days and the remainder in 60 days. The average collection period is
________.
A) 36 days
B) 46 days
C) 33 days
D) 42 days
45) When analyzing a statement of cash flows, which of the following is the most positive sign?
A) rapid growth in short-term borrowing
B) strong internal generation of operating cash
C) large additions to fixed assets
D) rapid growth in receivables
46) A "use" of funds would be a (an) ________.
A) $10,001 increase in accounts payable
C) $12,012 decrease in notes payable.
B) $8,950 decrease in net fixed assets

D) $5,005 decrease in accounts receivable
47) At the beginning of the year, the net fixed assets for the OPQ Corporation were $500,000. During the year, the firm
purchased $200,000 in new plant and equipment and sold $50,000 in fixed assets at their depreciated book value. If
depreciation for the year is $100,000, the net fixed assets at the end of the year would be ________.
A) $550,000
B) $500,000
C) $600,000
D) $650,000
48) Which of the following statements is correct with respect to the sales forecast needed to prepare a cash budget?
A) The initial sales forecast should take into account constraints such as physical production capacity.
B) Sales should be based on maximum potential demand.
C) An internal approach, such as collecting and compiling sales estimates from the basic divisions, is preferred.
D) Internal and external sales forecasts should match exactly.
49) For the statement of cash flows, which of the following is considered a cash flow item from investing activities?
A) cash outflow to acquire fixed assets

C) cash inflow from dividend income
B) cash outflow to government for taxes

D) cash inflow from borrowing
50) A portfolio containing at least one pair of securities with a correlation coefficient less than 1.0 but greater than 0 will
have a standard deviation ________ the weighted average of the individual standard deviations.
A) more than
B) equal to
C) less than
D) double
51) BookBuyerHaven.com, Inc.'s common stock measured beta is calculated to be 1.75. The market beta is, of course, 1.00
and the beta of the industry of which the company is a part is 1.20. If Block & Block Investment Advisors were to calculate
an "adjusted beta" for BookBuyerHaven.com's common stock, that adjusted beta would most likely be ________.
A) equal to 1.32 {i.e., (1/3) x (1.75 + 1.00 + 1.20)}
B) less than 1.00
C) more than 1.20, but less than 1.75
D) more than 1.00, but less than 1.20
E) greater than 1.75
52) One proxy for the expected market return would be ________.
A) the rate of return on short-term U.S. Treasury securities
B) the rate of return on the Standard & Poor's 500-stock index
C) the rate of return on long-term U.S. Treasury securities
D) beta
53) When comparing a certainty equivalent (CE) to a risky gamble, the CE ________.
A) equals expected value for most people
B) is less than the gamble's expected value for most people
C) is less than the minimum possible outcome in a gambling situation
D) must be less than, but close to, the maximum possible outcome in a gambling situation
54) An investor is considering investing in only one of the following securities:
Expected Return
Standard Deviation
A
0.10
0.05
B
0.10
0.06
C
0.15
0.09
Which of the following statements is true?

A) Security B is relatively less risky than Security C.
B) Security C is more desirable than Security A if the investor is very risk-averse.
C) Securities B and C are of equal relative risk.
D) Securities A and B are equally desirable if the investor is risk-averse.
55) An analysis of percentage financial statements where all balance sheet or income statement figures for a base year
equal 100.0 and subsequent financial statement items are expressed as percentages of their values in the base year is
known as ________.
A) an index analysis
C) a discriminant analysis
B) a flow of funds
D) a common-size analysis
56) Which of the following statements is correct with respect to convergence? Convergence refers to the desire and need to
________.
A) internationalize accounting standards to U.S. GAAP
B) narrow or remove differences between different international accounting standards
C) narrow differences between the euro and the dollar to facilitate a single accounting statement for each firm.
D) All of the above answers are correct.
Table 6-2
$80,000
Accounts Receivable
1,500,000
257,800
Prepaid Expenses
20,000
15,000
Current Assets
1,872,800
1,245,000
670,000
Net Fixed Assets
574,500
233,700
Goodwill
1,000,000
Total Assets
$3,681,000
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Paid-in Capital
Retained Earnings
Total Net Worth
$90,000
25,000
45,000
190,000
350,000
900,000
250,500
180,000
2,000,500
2,431,000
$3,681,000

Net Sales
$2,800,800
1,800,000
Gross Profit
1,000,800
550,000
Depreciation
111,600
Interest Expense
250,000
89,200
Income Taxes
30,300
Earnings After Tax
58,900
Cash Dividends
15,000
$43,900
57) According to the statements in Table 6-2, BETA's return on assets was ________.
A) 7.59 percent
B) 1.60 percent
C) 2.20 percent
D) 7.40 percent
58) Expected changes in capital expenditures and firm dividend policy during the next year are both likely to influence
________.
A) earned (receipts) from Treasury bills held by the firm
B) cash disbursements of the firm
C) cash receipts of the firm
D) disbursements to holders of the firm's 10-year, 8% fixed rate bonds
59) Which of the following is a source of funds in the sources and uses of funds statement?
A) a net decrease in accounts payable
B) payment of cash dividends
C) a purchase (buy back) of preferred stock by the firm
D) a net decrease in the cash account
60) The Wilde Wood Willow's common stock is currently selling at $3 per share, its quarterly dividend is 7 cents, and the
stock is expected to rise to $3.30 in a year. What is its expected rate of return?
A) 19.3%
B) 10.0%
C) 9.3%
D) 11.0%
Table 6-2
$80,000
Accounts Receivable
1,500,000
257,800
Prepaid Expenses
20,000
15,000
Current Assets
1,872,800
1,245,000
670,000
Net Fixed Assets
574,500
233,700
Goodwill
1,000,000
Total Assets
$3,681,000
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Paid-in Capital
Retained Earnings
Total Net Worth
$90,000
25,000
45,000
190,000
350,000
900,000
250,500
180,000
2,000,500
2,431,000
$3,681,000

Net Sales
$2,800,800

Gross Profit
Depreciation
Interest Expense
Income Taxes
Earnings After Tax
Cash Dividends
1,800,000
1,000,800
550,000
111,600
250,000
89,200
30,300
58,900
15,000
$43,900
61) According to the statements in Table 6-2, BETA's gross profit margin was ________.
A) 19.8 percent
B) 35.7 percent
C) 16.3 percent
D) 12.0 percent
62) According to the Financial Accounting Standards Board (FASB), which of the following would be considered a cashflow item from an "investing" activity?
A) cash outflow to acquire fixed assets
B) cash inflow from interest income
C) cash inflow from borrowing
D) cash outflow to repurchase the firm's own equity securities
Table 6-1
$225,000
Accounts Receivable
890,000
930,000
Prepaid Expenses
10,150
12,000
Current Assets
2,067,150
2,500,000
700,000
Net Fixed Asset
1,800,000
35,000
Goodwill
100,000
Total Assets
$4,002,150
Accounts Payable
Accrued Taxes
Current Liabilities
Long-Term Debt
Retained Earnings
Total Net Worth
$448,500
148,000
36,000
195,500
828,000
1,200,000
700,000
174,150
1,100,000
1,974,150
$4,002,150

Net Sales
$5,200,000
4,576,000
Gross Profit
624,000
750,000
Depreciation
95,000
Interest Expense
75,000
(296,000)
Income Taxes
0
Earnings After Tax
(296,000)
Cash Dividends
0
($296,000)
63) According to these statements in Table 6-1, ALPHA's long-term debt capitalization ratio was ________.
A) 0.51
B) 0.38
C) 0.42
D) 0.27
64) A financial manager that generates numerous cash budgets under varying inputs for a particular project is attempting
to ________.
A) determine which cash budget is correct for this project
B) determine a single-point estimate of cash-flows for this project
C) determine which model generates the most advantageous cash-flow results for this particular project
D) determine the expected variation in cash-flows for this project
65) A firm's annual credit sales are $1.2 million and its average receivables are $150,000. Assuming a 360-day year, the
average collection period is ________.
A) 20 days
Answer Key
1) C
2) D
3) A
4) C
5) B
6) D
7) C
8) C
9) D
10) C
11) B
12) B
13) B
14) D
15) C
16) C
17) A
18) C
19) D
B) 30 days
C) 60 days
D) 45 days
20) D
21) C
22) B
23) D
24) A
25) C
26) D
27) A
28) C
29) D
30) C
31) A
32) D
33) C
34) D
35) D
36) A
37) A
38) D
39) A
40) B
41) B
42) D
43) B
44) A
45) B
46) C
47) A
48) A
49) A
50) C
51) C
52) B
53) B
54) C
55) A
56) B
57) B
58) B
59) D
60) A
61) B
62) A
63) B
64) D
65) D

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Practice MCQs

B) move independently of each other

7) The treasurer of a large corporation is primarily concerned with ________.

12) The CAPM can be used to estimate ________.

B) an excess return of 11.1 percent

14) An investor holding a well-diversified portfolio will not be exposed to ________.

D) diversification reduces systematic risk

B) Management Behavior Theory

ALPHA MANUFACTURING COMPANY, Income statement

B) 10.2% compounded annually

36) Which of the following would improve the current ratio?

BETA MANUFACTURING COMPANY, Income statement

ALPHA MANUFACTURING COMPANY, Income statement

ALPHA MANUFACTURING COMPANY, Income statement

B) a net decrease in any liability

B) $8,950 decrease in net fixed assets

A) cash outflow to acquire fixed assets

B) cash outflow to government for taxes

Which of the following statements is true?

BETA MANUFACTURING COMPANY, Income statement

BETA MANUFACTURING COMPANY, Income statement

less: Cost of Goods Sold

ALPHA MANUFACTURING COMPANY, Income statement

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