1. A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is most correct? A) The manager should select project A because it maximizes profits. B) The manager should select the project that maximizes long-term profits, not just one year of profits. C) The manager should select project A or he is irrational. D) The manager should select the project that causes the stock price to increase the most, which could be A or B. 2. Shareholder wealth maximization means: A) maximizing earnings per share. B) maximizing dividends per share. C) maximizing the price of existing common stock. D) maximizing stockholders equity. 3. Corporate dividends paid to individual investors are A) taxed at the individual's marginal tax rate. B) not taxable income to the individual because the income was already taxed at the corporate level. C) taxed at a fixed rate of 10%. D) taxed at a maximum rate of 15%. 4. A corporate treasurer is typically responsible for each of the following duties except A) cash management. B) credit management. C) capital expenditures. D) cost accounting. 5. Which of the following statements about depreciation is true? A) Depreciation is a non-cash expense, but it is important because it affects a corporation's tax liability. B) Depreciation must be calculated the same way for financial reporting and tax purposes. C) The choice of depreciation method has no impact on a firm's value because the same amount of depreciation is taken over the life of an asset regardless of the method used. D) A shareholder wealth maximizing corporation prefers to defer depreciation expense in order to increase current reported profits. 6. The principle of risk-return tradeoff means that: A) higher risk investments must earn higher returns. B) an investor who takes more risk will earn a higher return. C) a rational investor will only take on higher risk if he expects a higher return. D) an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago. 7. Profit maximization does not adequately describe the goal of the firm because: A) profit maximization does not require the consideration of risk. B) profit maximization ignores the timing of a project's return. C) maximization of dividend payout ratio is a better description of the goal of the firm. D) profit maximization does not require the consideration of risk and profit maximization ignores the timing of a project's return. 8. In finance, we assume that investors are generally A) neutral to risk. B) averse to risk. C) fond of risk. D) none of these. 9. Which of the following is not a deductible business expense for income tax purposes? A) Cost of goods sold B) Dividends C) Depreciation D) Interest 10. In making financial decisions, the relevant tax rate is the: A) marginal tax rate. B) average (effective) tax rate. C) previous year's tax rate. D) maximum allowable tax rate. 11. Over-the-counter markets include all security markets, with the exception of organized exchanges. A) True B) False 12. The rate of return available on the next best investment alternative for the saver refers to the opportunity cost of funds. A) True B) False 13. In a private placement, the securities are offered and sold to a limited number of investors. A) True B) False 14. Money market instruments include: A) common stock. B) preferred stock. C) T-bonds. D) T-bills. 15. Which of the following statements is most correct? A) The after-tax cost of debt is greater than the after-tax cost of preferred stock. B) The after-tax cost of debt is higher than the cost of common equity. C) The cost of preferred stock is generally higher than the after-tax cost of debt. D) Federal taxes favor corporate dividends over the interest costs associated with debt. 16. Investment firms, such as Goldman Sachs, assist the transfer of capital by A) facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital). B) selling indirect securities to savers and using the funds to buy common stock for corporations needing funds. C) selling direct securities. D) selling common stock for corporate clients in the secondary market. 17. General Motors raises money by selling a new issue of common stock. This transaction occurs in: A) the secondary market. B) the capital market. C) the money market. D) the futures market. 18. Which of the following is an advantage of organized stock exchanges? A) increased stock price volatility B) screening companies to ensure only low risk stocks are sold C) providing a continuous market D) Only profitable companies may issue new securities on an organized exchange. 19. Activities of the investment banker include: A) assuming the risk of selling a security issue. B) selling new securities to the ultimate investors. C) providing advice to firms issuing securities. D) all of these. 20. The costs associated with issuing securities to the public can be high. Some types of securities have lower expenses associated with them than others. Which of the following is the least costly security to issue? A) Common stock B) Corporate bonds C) Preferred stock D) All of these are about equal in cost to issue. 21. Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors. A) True B) False 22. An income statement reports the firm's revenues and expenses for a specific period of time such as one year. A) True B) False 23. A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity. A) True B) False 24. The basic format of an income statement is A) Sales - Expenses = Profits. B) Income - Expenses = EBIT. C) Sales - Liabilities = Profits. D) Assets - Liabilities = Profits. 25. Examples of uses of cash are: A) giving cash dividends to stockholders. B) repaying a loan. C) purchasing machinery. D) all of these. 26. Which of the following accounts does NOT belong on the asset side of a balance sheet? A) Accounts receivable B) Accumulated depreciation C) Cash D) Accruals 27. Which of the following accounts belongs in the liability section of a balance sheet? A) Interest expense B) Accumulated depreciation C) Accounts payable D) Preferred stock 28. Which of the following accounts belongs in the equity section of a balance sheet? A) Retained earnings B) Cash C) Long-term debt D) Dividends 29. Which of the following accounts does NOT belong in the equity section of a balance sheet? A) Retained earnings B) Paid-in-Surplus C) Long-term debt D) Preferred stock 30. What information does a firm's statement of cash flows provide to the viewing public? A) A report of investments made and their cost for a specific period of time B) A report documenting a firm's cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time C) A report of revenues and expenses for a defined period of time D) An itemization of all of a firm's assets, liabilities, and equity for a defined period of time 31. Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value. A) True B) False 32. Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company. A) True B) False 33. Common stockholders may use financial ratios to monitor manager actions to help lessen agency problems. A) True B) False 34. Financial ratios are used by personnel in marketing, human resources, and other groups within a firm, not just by the finance and accounting personnel. A) True B) False 35. A high debt ratio can be favorable because higher leverage may result in a higher return on equity. A) True B) False 36. In an ideal world, which of the following would be used to evaluate firm performance: A) book value of assets B) corporate retained earnings from the day of incorporation C) accounting assets and profits D) market value of assets 37. Financial analysis A) uses historical financial statements and is thus useful only to assess past performance. B) relies on generally accepted accounting principles to make comparisons between companies valid. C) uses historical financial statements to measure a company's performance and in making financial projections of future performance. D) is accounting record-keeping using generally accepted accounting principles. 38. All of the following measure liquidity except: A) current ratio. B) debt ratio. C) acid-test ratio. D) accounts receivable turnover. 39. A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? A) liquidity B) leverage C) efficiency D) profitability 40. Which of the following has the most significant influence on return on equity? A) Common dividends B) Principal payments C) Accruals D) Operating income