1) How is net cash flow calculated if depreciation is the only noncash item in a firm's income statement?

a.Net cash flow = Net income + Depreciation and amortization

b.Net cash flow = Accounting profit - Depreciation and amortization

c.Net cash flow = Accounting profit - Operating cash flow

d.Net cash flow = Fixed assets + Depreciation and amortization

e.Net cash flow = Operating cash flow - Depreciation and amortization

2) Lower-grade bonds offer higher returns than high-grade bonds because of:

a.their increase in coupon interest rate over the life of the bonds.

b.their higher risk and more restricted market.

c.their maturity value being higher than the market value.

d.their attractive returns to risk-averse investors.

e.their tax-free returns and no capital gain tax liability.

3) Which of the following statements is correct?

a.A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do.

b.An advantage of the corporate form for many businesses is the fact that the corporate tax rate always exceeds the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.

c.There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce more goods and services than do other forms of business.

d.Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large businesses choose to incorporate.

e.Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.

4) Which of the following accounts contains the actual money that can be spent by a firm?

a.Retained earnings

b.Notes payable

c.Net worth

d.Common stock

e.Cash and equivalents

5) Which of the following example involves transferring income to the future as well as transferring income from the future?

a.Buying a car with own surplus funds

b.Buying a car with a bank loan

c.Buying a security with own funds

d.Buying a security with borrowed funds

e.Selling a security to buy an insurance policy