Part I:

1) Managerial finance

devotes the majority of its attention to the collection and presentation of financial data.

involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.

involves the design and delivery of advice and financial products.

recognizes funds on an accrual basis.

2) Financial service

is concerned with the duties of the financial manager.

involves the design and delivery of advice and financial products.

handles accounting activities related to data processing.

provides guidelines for the efficient operation of the business.

3) A major weakness of a partnership is

difficulty liquidating or transferring ownership.

limited liability.

access to capital markets.

low organizational costs.

4) The primary economic principle used in managerial finance is

the crowding out effect.

the liquidity trap.

supply and demand.

marginal analysis.

5) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Al- though the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

$7,000 and -$3,000, respectively.

$3,000 and -$7,000, respectively.

$3,000 and $7,000, respectively.

$3,000 and $10,000, respectively.

6) By concentrating on cash flows within the firm the financial manager should be able to

control expenses.

avoid insolvency.

prepare tax returns.

speak authoritatively to stockholders.

7) A firm has just ended its calendar year making a sale in the amount of $200,000 f merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The possible problem this firm may face is

high leverage.

low profitability.

lack of cash flow.

inability to receive credit.

8) Included in the primary activities of the financial manager are

financial analysis and planning.

making financing decisions.

analyzing and planning cash flows.

making investment decisions.

all of the above

9) The financial manager may be responsible for any of the following EXCEPT

analyzing the effects of more debt on the firm's capital structure.

determining whether to accept or reject a capital asset acquisition.

analyzing budget and performance reports.

monitoring of quarterly tax payments.

10) Managing the firm's assets includes all of the following EXCEPT

notes payable.

accounts receivable.

fixed assets.

inventory.

11) The primary goal of the financial manager is

maximizing profit.

minimizing return.

minimizing risk.

maximizing wealth.

12) The wealth of the owners of a corporation is represented by

share value.

profits.

earnings per share.

cash flow.

13) All of the following are functions of security exchanges EXCEPT

aiding in new financing.

holding demand deposits.

allocating scarce capital.

creating continuous markets.

14) The major securities traded in the capital markets are

commercial paper and Treasury bills.

bonds and commercial paper.

Treasury bills and certificates of deposit.

stocks and bonds.

15) The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is

15 percent.

46 percent.

23 percent.

34 percent.

16) The statement of retained earnings reports all of the following EXCEPT

interest.

net profits after taxes.

preferred stock dividends.

common stock dividends.

17) Paid-in-capital in excess of par represents the amount of proceeds

from the original sale of stock.

at the current market value of common stock.

in excess of the par value from the original sale of common stock.

at the current book value of common stock.

18) The primary concern of creditors when assessing the strength of a firm is the firm's

leverage.

profitability.

short-term liquidity.

share price.

19) is where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement.

Combined analysis

Benchmarking

Time-series analysis

None of the above

20) Cross-sectional ratio analysis is used to

reflect the symptoms of a possible problem.

correct expected problems in operations.

isolate the causes of problems.

provide conclusive evidence of the existence of a problem.

21) The ratios are primarily measures of return.

activity

profitability

debt

liquidity

22) The two categories of ratios that should be utilized to assess a firm's true liquidity are the

liquidity and profitability ratios.

current and quick ratios.

liquidity and activity ratios.

liquidity and debt ratios.

23) The measures the percentage of each sales dollar remaining after ALL expenses, including taxes, have been deducted.

operating profit margin

earnings available to common shareholders

gross profit margin

net profit margin

24) All of the following are outflows of cash EXCEPT

a decrease in notes payable.

a decrease in accounts receivable.

an increase in accounts receivable.

an increase in inventory.

25) NICO Corporation had net fixed assets of $2,000,000 at the end of 2006 and $1,800,000 at the end of 2005. In addition, the firm had a depreciation expense of $200,000 during 2006 and $180,000 during 2005. Using this information, NICO's net fixed asset investment for 2006 was

$400,000.

$380,000.

$0.

$20,000.

Part II:

1) If a person's required return does not change when risk increases, that person is said to be

risk-indifferent.

risk-aware.

risk-averse.

risk-seeking.

2) The of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested.

return

risk

probability

value

3) Prime-grade commercial paper will most likely have a higher annual return than

a common stock.

a Treasury bill.

a preferred stock.

an investment-grade bond.

4) The of an event occurring is the percentage chance of a given outcome.

reliability

standard deviation

probability

dispersion

5) Since for a given increase in risk, most managers require an increase in return, they are

risk-free.

risk-i nd ifferent.

risk-seeking.

risk-averse.

6) The the coefficient of variation, the the risk.

more stable; higher

lower; higher

lower; lower

higher; lower

7) A(n) portfolio maximizes return for a given level of risk, or minimizes risk for

a given level of return.

efficient

continuous

coefficient

risk-indifferent

8) Perfectly correlated series move exactly together and have a correlation coefficient of , while perfectly correlated series move exactly in opposite directions and have a correlation coefficient of _

negatively; +1; positively; -1

negatively; -1; positively; +1

positively; -1; negatively; + 1

positively; +1; negatively; -1

9) Combining negatively correlated assets having the same expected return results in a portfolio with level of expected return and level of risk.

the same; a lower

the same; a higher

a higher; a lower

a lower; a higher

10) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that

decreases to a level below that of either asset.

increases to a level above that of either asset.

remains unchanged.

stabilizes to a level between the asset with the higher risk and the asset with the lower risk.

11) Risk that affects all firms is called

nondiversifiable risk.

total risk.

diversifiable risk.

management risk.

12) A beta coefficient of +1 represents an asset that

is unaffected by market movement.

has the same response as the market portfolio.

is less responsive than the market portfolio.

is more responsive than the market portfol io.

13) The higher an asset's beta,

the lower the expected return will be in an up market.

the more responsive it is to changing market returns.

the higher the expected return will be in a down market.

the less responsive it is to changing market returns.

14) An increase in the Treasury Bill rate the required rate of return of a common stock.

has no effect on

decreases

increases

cannot be determined by

15) Nico wants to invest all of his money in just two assets: the risk free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?

1.00

0.25

0.00

0.75

16) In the capital asset pricing model, the beta coefficient is a measure of ______ risk and an index of the degree of movement of an asset's return in response to a change in _____.

diversifiable; the prime rate

nondiversifiable; the market return

nondiversifiable; the Treasury bill rate

diversifiable; the bond index rate

17) As risk aversion increases

a firm's beta will decrease.

investors' required rate of return will increase.

investors' required rate of return will decrease.

a firm's beta will increase.

18) The rate of interest is typically the required rate of return on a three-month U.S. Treasury bill.

nominal

premium

risk-free

real

19) A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called

flat yield curve.

normal yield curve.

inverted yield curve.

none of the above.

20) The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called

expectation hypothesis.

market segmentation theory.

liquidity preference theory.

none of the above.

21) At any time, the slope of the yield curve is affected by

liquidity preferences.

the comparative equilibrium of supply and demand in the short-term and long-term

market segments.

inflationary expectations.

all of the above.

22) A is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.

conversion feature

subordination clause

sinking-fund requirement

redemption clause

23) Violation of any standard or restrictive provision by the borrower gives the lender the right to do all of the following EXCEPT

seize the loan collateral.

demand immediate repayment.

increase the interest rate.

alter the terms of the initial agreement, for example accelerate the maturity date.

24) To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically

charges a higher interest rate on long-term loans.

reserves the right to change the terms of the loan at any time.

reserves the right to demand immediate payment at any time.

includes excessively restrictive debt provisions.

25) Bonds are

a series of short-term debt instruments.

long-term debt instruments.

a form of equity financing that pays interest.

a hybrid form of financing used to raise large sums of money from a diverse group of lenders.