Ch 9 1. Unsophisticated capital budgeting techniques do NOT: A) use net profits as a measure of return.

B) explicitly consider the time value of money. C) take into account an unconventional cash flow pattern. D) examine the size of the initial outlay. 2. Among the reasons many firms use the payback period as a guideline in capital investment decisions are all of the following EXCEPT: A) it is easy to calculate. B) it gives an implicit consideration to the timing of cash flows. C) it is a measure of risk exposure. D) it recognises cash flows which occur after the payback period. 3. The minimum return that must be earned on a project to leave the firm's market value unchanged is all of the following EXCEPT: A) average rate of return. B) discount rate. C) cost of capital. D) opportunity cost. 4. A firm would accept a project with a net present value of zero because: A) the return on the project would be zero. B) the return on the project would be positive. C) the project would enhance the wealth of the firm's owners. D) the project would maintain the wealth of the firm's owners. 5. The __________ is the discount rate that equates the present value of the cash inflows with the initial investment. A) payback period B) internal rate of return C) average rate of return D) cost of capital 6. The underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is: A) that neither method explicitly considers the time value of money. B) the reinvestment rate assumption regarding intermediate cash flows. C) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal rate of return. D) the assumption made by the IRR method that intermediate cash flows are reinvested at the cost of capital. Ch 10 1. The analysis of project risk can involve the use of any the following EXCEPT: A) sensitivity analysis.

B) psychological analysis C) simulation analysis. D) scenario analysis. 2. The risk-adjusted discount rate (RADR) reflects: A) diversifiable risk B) average rate of return C) the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows. D) the cost of capital 3. A project that has a coefficient of variation greater than zero will have a riskadjusted discount rate (RADR): A) less than the risk-free rate of return. B) equal to the risk-free rate of return. C) not related to the risk-free rate of return. D) greater than the risk-free rate of return. 4. It has been found that the value of the shares of companies whose shares are traded publicly in an efficient marketplace is: A) generally positively affected by diversification, because of the reduction in risk. B) generally not affected by diversification, unless greater returns are expected. C) generally negatively affected by diversification, because of the increase in the required rate of return. D) generally negatively affected by diversification, because of the increase in risk. 5. Mutually exclusive projects with unequal lives should be evaluated using the: A) net present value (NPV). B) annualised net present value approach (ANPV). C) internal rate of return (IRR). D) certainty equivalent (CE) approach. 6. A drawback of the IRR approach to capital rationing is: A) it fails to identify the group of acceptable projects. B) there is no guarantee that the projects accepted will maximise total dollar returns and therefore owners' wealth. C) it fails to incorporate the cost of capital into the analysis. D) it graphs projects in ascending order against total dollar investment. Ch11 1. The four basic sources of long-term funds for the firm are: A) current liabilities, long-term debt, ordinary shares and preference shares. B) current liabilities, long-term debt, ordinary shares and retained earnings. C) long-term debt, ordinary shares, preference shares and retained earnings. D) long-term debt, accounts payable, ordinary shares and retained earnings. 2. The firm's optimal mix of debt and equity is called its:

A) target capital structure. B) maximum book value. C) optimal ratio. D) maximum wealth. 3. Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a company is: A) preference share capital, retained earnings, ordinary share equity capital, new ordinary share equity capital. B) ordinary share equity capital, preference share capital, long-term debt, short-term debt. C) new ordinary share equity capital, retained earnings, preference share capital, long-term debt. D) long-term debt, preference share capital, retained earnings, new ordinary share equity capital. 4. A firm has issued preference shares at $250 per share par value. The shares will pay a $30 annual dividend per share. The cost of issuing and selling the shares was $8 per share. The cost of preference share capital is: A) 12.4 per cent. B) 7.2 per cent. C) 12 per cent. D) 15 per cent. 5. If a company has an average tax rate of 40 per cent, the approximate annual aftertax cost of debt for a 15-year, 12 per cent, $10,000 par value bond, selling at $9,500, is: A) 12.65 per cent. B) 5 per cent. C) 7.6 per cent. D) 12 per cent. 6. The cost of each type of capital depends on: A) the business risk of the firm. B) the financial risk of the firm. C) the risk-free cost of that type of funds. D) all of the above Ch 13 1. A firm's operating break-even point is sensitive to all of the following variables EXCEPT: A) fixed operating costs. B) sales price per unit. C) variable operating cost per unit. D) interest payment.

2. A firm has fixed operating costs of $10 000 000, the sale price per unit of its product is $25000, and its variable cost per unit is $15 000. The firm's operating break-even point in units is__________ and its break-even point in dollars is: A) 667; $16 675 000 B) 400; $10 000 000 C) 250; $6 250 000 D) 1 000; $25 000 000 3. __________ is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share. A) Operating leverage B) Total leverage C) Financial leverage D) Debt service 4. A firm has fixed operating costs of $650 000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500 000 units, the firm's degree of operating leverage is: A) 1.23 B) 1.18 C) 1.07 D) 1.11 5. The cost of debt financing results from: A) the increased probability of bankruptcy caused by debt obligations. B) the costs associated with managers having more information about the firm's prospects than do investors. C) the agency costs of the lenders monitoring and controlling the firm's actions. D) all of the above. 6. In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed: A) to emphasise the relationship between interest expenses and taxes. B) to ease the calculations of owners' equity. C) to concentrate on the effect of revenue and expenses on capital structure decisions. D) to isolate the impact on returns of the financing costs associated with alternative capital structures. Ch 14 1. In working capital management, risk is measured by the probability that a firm will become: A) technically insolvent. B) liquid. C) less profitable. D) unable to meet long-term obligations. 2. In general, the less working capital a firm has:

A) the lower its risk. B) the less likely are creditors to lend to the firm. C) the lower its level of long-term funds. D) the greater its risk. 3. An decrease in the current asset to total asset ratio has the effects of __________ on profits and __________ on risk. A) a decrease; an increase B) a decrease; a decrease C) an increase; an increase D) an increase; a decrease 4. The economic order quantity method of inventory management: A) minimises the total of order and carrying costs B) is always better than the ABC system. C) is not favoured by financial managers D) none of the above 5. __________ is the amount of assets a credit applicant has available for securing credit. A) Character B) Capital C) Capacity D) Collateral 6. A firm finds that the average collection period has risen from 30 days to 45 days after a relaxation of credit standards. The turnover of accounts receivable has ____________ from ___________ to _____________. A) fallen; 12; 8 B) fallen; 20;12 C) risen; 8; 12 D) risen 12; 20 ch 15 1. The planning and supervision by the firm of the time that elapses between purchase of raw materials and payment to the supplier is called: A) accounts payable management. B) working capital management. C) profitability plan. D) gearing policy. 2 When a firm routinely foregoes all cash discounts it is probably because: A) the firm is in a low-risk position. B) the firm has excessive amounts of current assets. C) the firm is small and lack resources. D) the firm has positive net working capital.

3. If the amount borrowed decreases, then (all things equal) the effective interest rate will: A) increase. B) decrease. C) be unaffected. D) become unstable. 4. Which of the following parties to creating a bill of exchange is the lender? A) Drawer B) Acceptor C) Endorser D) None of the above 5. All the following characteristics make an item unsuited as collateral EXCEPT: A) perishable. B) specialised C) unstable market price D) desirable physical properties 6. A __________ is a short-term, unsecured loan instrument issued by firms with a high credit standing. A) self-liquidating loan B) line of credit C) revolving line of credit D) promissory note