1. The nominal interest rate is equal to the real risk-free rate, plus an inflation premium, plus a default risk premium, plus a liquidity premium, plus a maturity risk premium.

True

False

2. A company decides to pay out all it's income in dividends rather than retaining it for future investment. By passing its income to the shareholders in this manner, the company can avoid paying corporate income taxes.

True

False

3. A firm with a Current Ratio of 2.0 is twice as profitable as a firm with a Current Ratio of 1.0.

True

False

4. At any positive rate of return (r), the present value (PV) of a lump sum will be lower than its future value (FV).

True

False

5. Which of the following is the best measure of the wealth of a firm's stockholders?

The firm's Net Income during the past year

Expected Earnings per Share during the coming year

Book Value (or Net Worth) as recorded on the balance sheet

The price of the firm's stock on the open market

6. Consider the following firms:

	Net Income	Stock Price at	Stock Price at
	this year	Beg of Year	End of Year
Firm A:	$10,000,000	$20	$10
Firm B:	$(10,000,000)	$10	$20

The manager of Firm A is doing a better job than B

The manager of Firm B is doing a better job than A

Neither manager is doing a good job

Both managers are doing a good job

7. A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales $1,000 Costs 700 Depreciation 100 EBIT $ 200 Interest expense 50 EBT $ 150 Taxes (40%) 60 Net income $ 90

$ 90

$120

$150

$180

8. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

2.40%

3.60%

4.50%

5.25%

6.00%

Question 9

If a firm's current ratio is less than 1.0, it indicates that:

	The firm had negative net income for the year
	The firm will be unable to pay its shortterm loans which come due this year
	Current Assets are less than Current Liabilities
	The firm is insolvent

Question 10

In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)

	262%
	62%
	585%
	1.6%