CHAPTER 1:

1.

"Shareholder wealth" in a firm is represented by:

the number of people employed in the firm.
the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.

2. The long-run objective of financial management is to:

maximize earnings per share.
maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.
3. What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax profits, has 200,000 common shares
outstanding and $1.2 million in retained earning at the year end?
$100,000
$6.00
$0.50 (100,000/200,000)
$6.50
4. A(n)

would be an example of a principal, while a(n)

shareholder; manager
manager; owner
accountant; bondholder
shareholder; bondholder

5. The market price of a share of common stock is determined by:

the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.

would be an example of an agent.

6. The focal point of financial management in a firm is:

the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.
the dollars profits earned by the firm.
7. The decision function of financial management can be broken down into the

decisions.

financing and investment

investment, financing, and asset management
financing and dividend
capital budgeting, cash management, and credit management
8. The controller's responsibilities are primarily

in nature, while the treasurer's responsibilities are primarily related to

operational; financial management

financial management; accounting
accounting; financial management
financial management; operations
9. In the US, the
has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public
companies and their auditors as well as investigate and discipline those involved.
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
10. A company's

is (are) potentially the most effective instrument of good corporate governance.

common stock shareholders

board of directors
top executive officers
11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous others.

a dramatic rise in the US trade deficit.

charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial accounting for stock options.
The following item is NEW to the 13th edition.
12. ___________ refers to meeting the needs of the present without compromising the ability of future generations to meet their own
needs.
Corporate Social Responsibility (CSR)
Sustainability
Convergence
Green Economics
CHAPTER 2:
1. Which of the following enjoys limited liability?
A general partnership.
A corporation.
A sole proprietorship.
None of the above.
2. Michael Cohn is a "member" (a type of owner) of a marine supply business. Michael's business is
a sole proprietorship.
a corporation.
a limited liability company.
a general partnership.
3. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the MACRS method of depreciation.
What is tax depreciation for the second year of the asset's life?
$12,000
$19,200 (60,000*.32)
$20,000

$24,000
4. A corporation in which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. You will be called
on to pay:
a proportionate share of bondholder claims based on the number of common shares
that you own.
a proportional share of all creditor claims based on the number of common shares
that you own.
an amount that could, at most, equal what you originally paid for the shares of
common stock in the corporation.
nothing.
5. A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in the
primary money market.
secondary money market.
primary capital market.
secondary capital market.
6. A major advantage of the corporate form of organization is:
reduction of double taxation.
limited owner liability.
legal restrictions.
ease of organization.
7. Money market mutual funds
enable individuals and small businesses to invest indirectly in money-market instruments.
are available only to high net-worth individuals.
are involved in acquiring and placing mortgages.
are also known as finance companies.
8. The purpose of financial markets is to:
increase the price of common stocks.
lower the yield on bonds.

allocate savings efficiently.

control inflation.
9. Which of the following is NOT an example of a financial intermediary?
International Business Machines, Inc. (IBM).
Vanguard Mutual Fund.
El Dorado Savings and Loan Association.
Bank of America.
10. How are funds allocated efficiently in a market economy?
The most powerful economic unit receives the funds.
The economic unit that is willing to pay the highest expected return
receives the funds.
the economic unit that considers itself most in need of funds
receives them.
Receipt of the funds is rotated so that each economic unit can receive
them in turn.
11. Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50 percent applies to a new,
$100,000 piece of equipment purchased by Bellemans Chocolatier, Inc. The asset has a $10,000 estimated final salvage value. If this
asset is fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will have depreciated for tax purposes
is
.
$90,000
$100,000
$135,000
$150,000
CHAPTER 3:
1. 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
$32,000.
$39,272. PVA = 4000(PVIFA at 8% for 20 periods) = 4000(9.818)
$40,000.
$80,000.

2. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to
$34,898.
$40,171. FVA = 2000*e^(.10*30)
$164,500.
$328,282.
3. 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
fall.
rise.
remain unchanged.
cannot be determined without more information.
4. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?
Year1
Year2 Year3
Year4
$400

$300

$200

$100

$100

$200

$300

$400

$250

$250

$250

$250

Any of the above, since they each sum to $1,000.

5. 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?
8 percent.
9 percent.
12 percent.
25 percent.
6. To increase a given present value, the discount rate should be adjusted
upward.
downward.
True.

Fred.
7. 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
8 percent.
9 percent.
10 percent.
11 percent.
8. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan agreement calls for 3 equal payments,
to be paid at the end of each of the next 3 years. (Payments include both principal and interest.) The annual payment that will fully pay
off (amortize) the loan is closest to
$2,674.
$2,890.
$3,741.
$4,020.
9. When n = 1, this interest factor equals one for any positive rate of interest.
PVIF
FVIF
PVIFA
FVIFA
None of the above (you can't fool me!)
10. (1 + i)n
PVIF
FVIF
PVIFA
FVIFA
11. You can use
to roughly estimate how many years a given sum of money must earn at a given compound annual interest rate
in order to double that initial amount .
Rule 415

the Rule of 72
the Rule of 78
Rule 144
12. In a typical loan amortization schedule, the dollar amount of interest paid each period

increases with each payment

decreases with each payment
remains constant with each payment
13. In a typical loan amortization schedule, the total dollar amount of money paid each period
increases with each payment
decreases with each payment
remains constant with each payment