Identify the letter of the choice that best completes
the statement or answers the question in the attached answer sheet.
______1. The principal
difference between a stockholder and a bondholder is:
a. 
the stockholder receives interest and the 
b. 
only the bondholder can attend annual meetings 
c. 
The bondholder has an ownership interest in a 
d. 
The stockholder has an ownership interest in a 
______2. Assume
the pretax profit of $50,000 has been earned by a business, and the
owner/proprietor wants to withdraw all of the aftertax profit for personal
use. Assume the tax rate for a C
corporation is 32%, while the rate for a person is 25%. The aftertax earnings available under the
corporate and proprietorship forms of business are:
a. 
for a corporation, $24,090; for a 
b. 
for a corporation, $25,125; for a 
c. 
for a corporation, $25,500; for a proprietorship, 
d. 
for a corporation, $25,125; for a 
The company had cash of $1,234,
inventory of $13,480, and accounts receivables
of $7,789. The company’s net fixed assets are $42,331, and
other assets are $1,822.
It has accounts payable of $9,558,
notes payable of $2,756, common stock of $22,000,
and retained earnings of $14,008. How much longterm debt does the firm
have?
a. 
$16,685 
b. 
$18,334 
c. 
$12,314 
d. 
$22,342 
______4. The Millennium Chemical Corporation announced
that for the period ending December 31, 2013, it earned income after taxes of $2,768,028
on revenues of $13,144,680. The
company’s costs (excluding depreciation and amortization) amounted to 61% of revenues,
and Millennium had interest expenses of$392,168.
What is the firm’s depreciation and amortization expense if
its tax rate was 34 percent?
a. 
$ 540,275 
b. 
$ 486,290 
c. 
$ 739,184 
d. 
$ 958,083 
The

______ 5.
What is the change in net working capital from 2012 to 2013?
a. 
$2,015 
b. 
$1,200 
c. 
$1,257 
d. 
$3,405 
______6. ShiptoShore had earnings after tax (EAT) of
$320,000 last year. Its expenses included
depreciation of $52,000,
interest of $40,000. It purchased new equipment for $28,000.
The company also sold stock for $36,000. What
is ShiptoShore’s net cash flow for last year?
a. 
$380,000 
c. 
$315,000 
b. 
$425,000 
d. 
$395,000 
______7. GenTech Pharma has reported the following
information:
Sales/Total Assets = 2.89 ROA =
10.74% ROE =
20.36%
What is the firm’s profit
margin and debt ratio?
a. 
7.1%; 1.90 
c. 
3.7%; 1.90 
b. 
7.1%; 0.53 
d. 
3.7%; 0.47 
______8. Lee
Sun’s has sales of $3,000, total assets of $2,500, and a profit margin of 5%.
The firm has a total debt ratio of 40%. What is the return on equity?
a. 
6% 
c. 
10% 
b. 
8% 
d. 
12% 
______ 9. You are comparing two
investment options. The cost to invest
in either option is the same today. Both
options provide you with $20,000 of income.
Option A pays five annual payments of $4,000 each. Option B pays five
annual payments starting with $8,000 the first year followed by four annual
payments of $3,000 each. Which one of
the following statements is correct given these two investment options?
a. 
Both options are of equal value given that 
b. 
Option A has a higher present value than 
c. 
Option B has a higher present value than 
d. 
Option B has a lower future value at year 5 
_____ 10. You
want to buy a car for $28,320. The finance
company will charge you 7.4% annual rate compounded monthly on a 5year
loan. If you can afford $485 monthly
payments, how much do you need to borrow?
How much do you need for a down payment?
a. 
$22,687; $5,633 
b. 
$24,262; $4,058 
c. 
$28,320; $0 
d. 
$25,386; $2,934 
_____ 11. You
are the manager of an annuity settlement company. Bob Logan just won the state lottery which promises
to pay him $1,000 per year for 20 years, starting from today, and $2,000 per
year for years 2145, given a 6.58% discount rate. Your company wants to purchase the proceeds
from the lottery from Jim. What is the most
that your company can offer?
a. 
$13,770.90 
b. 
$15,780.51 
c. 
$16,940.38 
d. 
$18,884.79 
____ 12. Joan Hampton currently
has $5,750 in a money market account paying 4.37 percent compounded semiannually. She plans to use this amount and her savings
over the next 5 years to make a down payment on a townhouse. She estimates that he will need $15,000 in 5
years. How much should she
invest in the money market
account semiannually over the next 5 years to achieve this target?
a. 
$ 
b. 
$ 712.01 
c. 
$ 650.97 
d. 
$ 610.79 
____ 13. The Felix Corp has just decided to save
$10,000 each quarter for the five years as a safety net for economic
downturns. The money will be set aside
in a separate savings account that pays 4.25 percent annual rate, with interest
compounded quarterly. The first deposit
will be made today. If the company
wanted to deposit an equivalent lump sum today, how much would it have to
deposit?
a. 
$181,230.32 
c. 
$190,454.86 
b. 
$173,299.39 
d. 
$170,633.25 
____ 14. Jackson Central has a 6year, 8% annual
coupon bond with a $1,000 par value. Earls Enterprises has a 12year, 5.89%
annual coupon bond with a $1,000 par value. Both bonds currently have a yield
to maturity of 6%. Which of the following statements are correct if the market
yield increases to 7%?
a. 
Both bonds will decrease in value by 4.61%. 
b. 
The Earls bond will increase in value by $88.65. 
c. 
The Jackson bond will increase in value by 
d. 
The Earls bond will decrease in value by 
____ 15. What is the value of this 25 year lease? The first payment, due one year from today is
$2,000 and each annual payment will increase by 5%. The discount rate used to evaluate similar
leases is 6.5%. (Round to the nearest
dollar).
a. 
$24,361 
b. 
$39,808 
c. 
$40,000 
d. 
$68,000 
____ 16. Breezewinds stock has exhibited a standard
deviation in returns of 0.5, whereas Selectron
stock has exhibited a standard
deviation of 0.9. The correlation
coefficient between the
stock returns is 0.2. What is the standard deviation of a portfolio
composed of 65%
Breezewinds and 35% Selectron?
a. 
0.49578 
b. 
0.32122 
c. 
0.50578 
d. 
0.56676 
____ 17.
If a stock portfolio is well diversified, then
the portfolio variance
a. 
will equal the variance of the 
b. 
will be a weighted average of the 
c. 
must be equal to or greater than 
d. 
may be less than the variance of the least risky stock in the 
_____18. Star Solutions, Inc. paid
a dividend last year of $3.55, which is expected to grow at a constant rate of 6%. Star Solutions has a beta of 1.5 and their
stock is currently selling for $51.66. If
the market interest rate is 11% and the riskfree rate is 3%, would you
purchase Star Solutions’ stock?
a. 
No, because it is overvalued $4.76 
c. 
No, because it is overvalued $9.85 
b. 
Yes, because it is undervalued $4.76 
d. 
Yes, because it is undervalued $9.85 
_____
19.You are comparing stock A to stock B. Given the
following information, which one of these two
Stocks
should you prefer and why?

Rate of Return if State Occurs 

State of the Economy 
Probability of State of the Economy 
Stock A 
Stock B 
Boom 
60% 
9% 
15% 
Recession 
40% 
4% 
6% 
a. 
Stock A; because it has a higher 
b. 
Stock A; because it has a lower expected return but appears to be 
c. 
Stock B; because it has a higher 
d. 
Stock B; because it has a higher 
_____20. Abraxas Electronics bought a new machine for
$5 million. This is expected to result
in
additional cash flows of $1.2
million over the next seven years. What
is the payback
period for this project? If their acceptance period is 5 years, will
this project be accepted?
a. 
4.17 years; yes 
c. 
3.83 years, yes 
b. 
4.17 years; no 
d. 
3.83 years; no 
_____21. An investment has the following cash
flows. Should the project be accepted if
the required rate of return is 9.5%?
Year 
Cash Flow 
0 
$24,000 
1 
$8,000 
2 
$12,000 
3 
$9,000 
a. 
Yes; the required rate is greater than IRR 
c. 
No; the required rate is greater than IRR 
b. 
Yes; IRR is greater than the required rate 
d. 
No; the IRR is greater than required rate. 
____ 22. The projected cash flows
for two mutually exclusive projects are as follows:
Year 
Project A 
Project B 
0 
($150,000) 
($150,000) 
1 
150,000 
50,000 
2 
0 
50,000 
3 
0 
50,000 
4 
0 
50,000 
5 
100,000 
50,000 
If the cost of capital is 10%, the decidedly
more favorable project is:
a. 
project B with an NPV of $39,539 and an IRR of 
b. 
project A with an NPV of $5,230 and an IRR of 
c. 
project A with an NPV of $48,456 and an IRR of 
d. 
project B with an NPV of $5,230 and an IRR of 
____ 23. You are considering two
mutually exclusive projects with the following cash flows. Will your choice
between the two projects differ if the required rate of return is 8% rather
than 11%? If so, what should you do?
Year 
Project A 
Project B 

0 
($240,000) 
($198,000) 

1 
0 
110,800 

2 
0 
82,500 

3 
325,000 
45,000 

a. 
Yes; select A at 8% and B at 11%. 

b. 
Yes; select B at 8% and A at 11%. 

c. 
No; regardless of the required rate, project A 

d. 
No; regardless of the required rate, project B 

_____24. Which of the
following statements is correct?
a. 
If project A has a higher IRR than project B, 
b. 
If a project’s IRR exceeds the cost of 
c. 
The IRR calculation implicitly assumes that 
d. 
Statements (a) and (c) are correct. 
_____25. Capital budgeting analysis of mutually exclusive
projects A and B yields the following:
Project A 
Project B 

IRR 
18% 
22% 
NPV 
$270,000 
$255,000 
Payback Period 
2.5 yrs 
2.0 yrs 
Management should choose:
a. 
project B because most executives prefer the 
b. 
project B because two out of three methods 
c. 
project A because NPV is the best of the three 
d. 
either project because the results aren’t 