1. A firm's capital structure refers to the firm's: mixture of various types of production equipment.

• investment selections for its excess cash reserves.
• combination of cash and cash equivalents.
• combination of accounts appearing on the left side of its balance sheet.
• proportions of financing from current and long-term debt and equity.

2. Which one of these accounts is included in net working capital?

• copyright
• manufacturing equipment
• common stock
• long-term debt
• inventory

3. For a firm to create value it must:

• have a greater cash inflow from its stockholders than its outflow to them.
• create more cash flow than it uses.
• reduce its investment in fixed assets since fixed assets require the use of cash.
• avoid payments to the government so dividends can be increased.
• avoid the issuance of debt securities.

4. The process of planning and managing a firm's long-term assets is called:

• working capital management.
• financial depreciation.
• agency cost analysis.
• capital budgeting.
• capital structure.

5. The understanding of the work and cash to be contributed to a partnership by each member of that partnership is formalized in the:

• indemnity clause.
• indenture contract.
• statement of purpose.
• partnership agreement.
• group charter.

6. The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

• effective annual
• annual percentage
• periodic interest
• compound interest
• daily interest

7. Binder and Sons borrowed $138,000 for three years from their local bank and now they are paying monthly payments that include both principal and interest. Paying off debt by making installments payments, such as Binder and Sons is doing, is referred to as:

• foreclosing on the debt.
• amortizing the debt.
• funding the debt.
• calling the debt.
• refunding the debt.

8. A perpetuity differs from an annuity because:

• perpetuity payments vary with the rate of inflation.
• perpetuity payments vary with the market rate of interest.
• perpetuity payments are variable while annuity payments are constant.
• perpetuity payments never cease.
• annuity payments occur at irregular intervals of time.

9. The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:

• [1 + (.09 / 365)] × 365.
• e.⁰⁹ ×q.
• e × (1 + .09).
• e.⁰⁹ -1.
• [1 + (.09 / 365)]³⁶⁵ -1.

10. Given a stated interest rate, which form of compounding will yield the highest effective rate of interest?

• annual compounding
• monthly compounding
• daily compounding
• continuous compounding
• semiannual compounding

11. Janet saves $3,000 a year at an interest rate of 4.2 percent. What will her savings be worth at the end of 35 years?

• $229,317.82
• $230,702.57
• $230,040.06
• $234,868.92
• $236,063.66

12. Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four years from today. She will immediately invest these funds for retirement. If she earns 9.6 percent on her investments, how much will she have in savings 30 years from today?

• $586,124.93
• $591,414.14
• $646,072.91
• $620,008.77
• $641,547.39

13. The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost.

• incremental
• sunk
• opportunity
• erosion
• equivalent annual

14. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

• aftertax depreciation savings.
• depreciable basis.
• depreciation tax shield.
• operating cash flow.
• aftertax salvage value.

15. The increase you realize in buying power as a result of owning an investment is referred to as the _____ rate of return.

• inflated
• realized
• nominal
• real
• risk-free

16. Sunk costs include any cost that:

• will change if a project is undertaken.
• will be incurred if a project is accepted.
• has previously been incurred and cannot be changed.
• will be paid to a third party and cannot be refunded for any reason whatsoever.
• will occur if a project is accepted and once incurred, cannot be recouped.

17. You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

• opportunity
• fixed
• incremental
• sunk
• relevant

18. Which one of the following should be excluded from the analysis of a project?

• erosion costs
• incremental fixed costs
• incremental variable costs
• sunk costs
• opportunity costs

19. For a profitable firm, an increase in which one of the following will increase the operating cash flow?

• employee salaries
• office rent
• building maintenance
• depreciation
• equipment rental

20. Thornley Machines is considering a 3-year project with an initial cost for fixed assets of $618,000. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory over the project's life. What is the NPV if the discount rate assigned to the project is 14 percent?

• -$2,646.00
• -$30,086.23
• -$32,593.78
• $43,106.54
• $16,884.40

21. A grant of authority allowing someone else to vote shares of stock that you own is called:

• a power-of-share authorization.
• a proxy.
• a share authority grant (SAG).
• a restricted conveyance.
• a general right of execution.

22. Unsecured corporate debt is called a(n):

• indenture.
• debenture.
• note.
• mortgage obligation.
• preferred stock.

23. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called:

• homemade leverage.
• dividend recapture.
• the weighted average cost of capital.
• private debt placement.
• personal offset.

24. The unlevered cost of capital is:

• the cost of capital for a firm with no equity in its capital structure.
• the cost of capital for a firm with no debt in its capital structure.
• the interest tax shield times pretax net income.
• the cost of preferred stock for an all-equity firm.
• equal to the profit margin for a firm with some debt in its capital structure.

25. The increase in risk to shareholders when financial leverage is introduced is best evidenced by:

• higher EPS as EBIT increases.
• a higher variability of EPS with debt than with all-equity financing.
• increased use of homemade leverage.
• the increase in taxes.
• decreasing earnings as EBIT increases.