1) Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?

A) profit maximization

B) maximization of the total market value of the firm’s common stock

C) risk minimization

D) none of the above



2) A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project

A) the cost of the lot is zero since the corporation already owns it.

B) the incremental cash flow should be the $50,000 original cost less accumulated amortization.

C) the cost of the lot for valuation purposes is $50,000 because land does not depreciate.

D) the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.



3) Consider the after-tax cash flows for Project S and Project L:

Project S          Project L

Year 1  $3000  0

Year 2  0          $3000


A rational person would prefer ________.

A) Project L because they can avoid taxes by receiving cash flows later

B) Project S because the money can be reinvested sooner

C) information about profits instead of cash flows

D) neither investment over the other as they both net the same amount of after-tax cash flows



4) Working capital management is concerned with

A) how a firm should raise money to fund its investments.

B) how a firm can best manage its cash flows as they arise in its day-to-day operations.

C) what long-term investments a firm should undertake.

D) managing a firms capital stock.



Chapter 2

5) General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as

A) an initial public offering.

B) a secondary market transaction because GE common stock has been trading for years.

C) a money market transaction because GE raises new money to fund its business.

D) a seasoned equity offering because GE has sold common stock before.



6) When a company repurchases its own common stock, it is likely that

A) the stock price will remain the same as this is simply an internal transaction.

B) the stock price will decrease because the company is creating artificial demand for its stock.

C) the stock price will increase because the company views the stock as undervalued.

D) the board of directors will be fired for incompetence.



7) 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 the above



8) A basis point is equal to

A) one percent.

B) one-tenth of one percent.

C) one-hundredth of one percent.

D) one-half of one percent.



9) The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because

A) oil and gas exploration investments have a greater variability in possible returns.

B) the preferred stock is more liquid.

C) the inflation rate would vary more with oil and gas exploration investments.

D) both A and B



Chapter 3

10) Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue’s net profit margin is equal to

A) 45.67%.

B) 35.67%.

C) 36.67%.

D) 25.67%.


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