Practice

Student: ___________________________________________________________________________

1. Which type of business organization has all the respective rights and privileges of a legal person?

A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company

2. A conflict of interest between the stockholders and management of a firm is called:

A. stockholders' liability.
B. corporate breakdown.
C. the agency problem.
D. corporate activism.
E. legal liability.

3. A business created as a distinct legal entity composed of one or more individuals or entities is called a:

A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. unlimited liability company.

4. When considering a capital budgeting project the financial manager should consider:

A. only the size of the project.

B. only the timing of the project cash flows.
C. only the risk of the project cash flows.
D. only the size and timing of the project cash flows.
E. the size, timing, and risk of the project cash flows.

Page 1
5. Which one of the following statements is correct concerning corporations?

A. The largest firms are usually corporations.

B. The majority of firms are corporations.
C. The stockholders are usually the managers of a corporation.
D. The ability of a corporation to raise capital is quite limited.
E. The income of a corporation is taxed as personal income of the stockholders.

6. You will be receiving $5,000 from your family as a graduation present. You have decided to save this
money for your retirement. You plan to retire thirty-five years after graduating. How much additional
money will you have at that time if you can earn an average of 8.5 percent on your investment instead of
just 8 percent?

A. $12,971.49
B. $13,008.47
C. $13,123.93
D. $13,234.44
E. $13,309.85

7. You hope to buy your dream house six years from now. Today your dream house costs $189,900. You
expect housing prices to rise by an average of 4.5 percent per year over the next six years. How much will
your dream house cost by the time you are ready to buy it?

A. $240,284.08
B. $246,019.67
C. $246,396.67
D. $246,831.94
E. $247,299.20

8. You would like to give your daughter $40,000 towards her college education thirteen years from now. How
much money must you set aside today for this purpose if you can earn 6.3 percent on your funds?

A. $17,750.00
B. $17,989.28
C. $18,077.05
D. $18,213.69
E. $18,395.00

Page 2
 9. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's
investments are each worth $8,500. Which one of the following statements is correct concerning their
investments?

A. Three years from today, Joe's investment will be worth more than Marie's.
B. Last year, Marie's investment was worth more than Joe's.
C. Joe has earned more interest on interest than Marie.
D. Marie earned an annual interest rate of 27.73 percent.
E. Joe earned an annual interest rate of 6.45 percent.

10. Thomas invests $100 in an account that pays 5 percent simple interest. How much money will Thomas
have at the end of five years?

A. $120.00
B. $123.68
C. $124.92
D. $125.00
E. $127.63

11. As the discount rate increases, the present value of $500 to be received six years from now:

A. remains constant.
B. also increases.
C. decreases.
D. becomes negative.
E. will vary but the direction of the change is unknown.

12. The interest rate used to calculate the present value of future cash flows is called the _____ rate.

A. free
B. annual
C. compound
D. simple
E. discount

Page 3
13. On your tenth birthday, you received $100 which you invested at 4.5 percent interest, compounded
annually. That investment is now worth $3,000. How old are you today?

A. age 77
B. age 82
C. age 84
D. age 86
E. age 87

14. The amount an investment will worth after one or more periods of time is the _____ value.

A. future
B. present
C. principal
D. discounted
E. simple

15. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest. Today, she gave you the
proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

A. $2,700.00
B. $2,730.30
C. $2,750.00
D. $2,768.40
E. $2,774.90

16. Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to his
retirement account. His employer contributes an additional 50 percent of the amount contributed by Sam.
If both Sam and his employer continue to do this and Sam can earn a monthly rate of ½ of 1 percent, how
much will he have in his retirement account 35 years from now?

A. $199,45.944.
B. $200,456.74
C. $249,981.21
D. $299,189.16
E. $300,685.11

Page 4
17. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4
percent rate of return. How much will you receive each year if the trust is required to pay you all of the
interest earnings on an annual basis?

A. $3,750
B. $4,000
C. $4,500
D. $5,400
E. $6,000

18. Brinker, Inc. has been investing $136,000 a year for the past 4 years into a business venture. Today,
Brinker sold that venture for $685,000. What is their rate of return on this venture?

A. 9.43 percent
B. 11.06 percent
C. 15.59 percent
D. 16.67 percent
E. 18.71 percent

19. On June 1, you take out a mortgage in the amount of $124,900 at a 6 percent rate compounded monthly.
Payments are to be made at the end of each month for thirty years. How much of the first loan payment is
interest? (Assume that each month is equal to 1/12 of a year.)

A. $600.00
B. $624.50
C. $633.33
D. $644.20
E. $648.84

20. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last
day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account
balances at the end of thirty years?

A. $35,822.73
B. $36,803.03
C. $38,911.21
D. $39,803.04
E. $40,115.31

Page 5
21. The interest rate expressed as if it were compounded once per year is called the _____ rate.

A. stated interest
B. compound interest
C. effective annual
D. periodic interest
E. daily interest

22. A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and
repays the remainder of the principal at the end of the loan, is called a(n) _____ loan.

A. amortized
B. continuous
C. balloon
D. pure discount
E. interest-only

23. You are considering a project with the following cash flows:
Year 1: $1,200
Year 2: $1,800
Year 3: $2,900
What is the present value of these cash flows, given a 9 percent discount rate?

A. $4,713.62
B. $4,855.27
C. $5,103.18
D. $5,292.25
E. $6,853.61

24. Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both
Martha and Stewart will receive payments for five years. At an 8 percent discount rate, what is the
difference in the present value of these two sets of payments?

A. $32.88
B. $40.00
C. $99.01
D. $108.00
E. $112.50

Page 6
25. Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity,
your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the
rate of return on this investment?

A. 3.45 percent
B. 3.47 percent
C. 3.50 percent
D. 3.52 percent
E. 3.55 percent

26. All else constant, a coupon bond that is selling at a premium, must have:

A. a coupon rate that is equal to the yield to maturity.

B. a market price that is less than par value.
C. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
E. a coupon rate that is less than the yield to maturity.

27. The bonds issued by Jensen and Son bear a 6 percent coupon, payable semiannually. The bond matures in
8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?

A. 5.87 percent
B. 5.97 percent
C. 6.00 percent
D. 6.09 percent
E. 6.17 percent

28. If you want to sell a bond issued by a smaller corporation, you:

A. can always do so quite easily by trading it on the New York Stock Exchange.
B. may encounter difficulties in executing the trade.
C. can usually do so quite efficiently due to the high liquidity of the bond market.
D. can do so quite quickly due to the high volume of trading in the bond markets.
E. will most likely trade in an auction market, such as the New York Stock Exchange.

Page 7
29. "Cat" bonds are primarily designed to help:

A. cities recover from economic recessions.

B. corporations recover from overseas competition.
C. the federal government cope with huge deficits.
D. animal food producers raise capital to compete internationally.
E. insurance companies recover from natural disasters.

30. A put provision in a bond indenture allows:

A. a bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.
B. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a
specified amount.
C. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E. the issuer to suspend interest payments for any year in which the interest expense exceeds the net
income of the firm.

31. One basis point is equal to:

A. .01 percent.
B. .10 percent.
C. 1.0 percent.
D. 10 percent.
E. 100 percent.

32. A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market
price of _____ and interest payments in the amount of _____ each.

A. $1,007; $70
B. $1,070; $35
C. $1,070; $70
D. $1,000; $35
E. $1,000; $70

Page 8
33. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to
maturity is the _____ provision.

A. sinking fund
B. call
C. seniority
D. collateral
E. trustee

34. A corporate bond is quoted at a price of 98.625 with a 7.875 coupon. The bond pays interest semiannually.
What is the current yield on one of these bonds?

A. 7.50 percent
B. 7.76 percent
C. 7.88 percent
D. 7.97 percent
E. 7.98 percent

35. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

A. par
B. discount
C. premium
D. zero coupon
E. floating rate

36. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by
5 percent annually. What is one share of this stock worth to you today if the appropriate discount rate is 14
percent?

A. $7.14
B. $7.50
C. $11.11
D. $11.67
E. $12.25

Page 9
37. The voting procedure where a shareholder grants authority to another individual to vote his/her shares is
called _____ voting.

A. democratic
B. cumulative
C. straight
D. deferred
E. proxy

38. The common stock of Grady Co. returned an 11.25 percent rate of return last year. The dividend amount
was $.70 a share which equated to a dividend yield of 1.5 percent. What was the rate of price appreciation
on the stock?

A. 1.50 percent
B. 8.00 percent
C. 9.75 percent
D. 11.25 percent
E. 12.75 percent

39. The dividends paid by a corporation:

I. to an individual become taxable income of that individual.
II. reduce the taxable income of the corporation.
III. are declared by the chief financial officer of the corporation.
IV. to another corporation may or may not represent taxable income to the recipient.

A. I only
B. I and IV only
C. II and III only
D. I, II, and IV only
E. I, III, and IV only

40. Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5
percent annually. The market rate of return on this stock is 9 percent. What is the amount of the last
dividend paid by Weisbro and Sons?

A. $.77
B. $.80
C. $.84
D. $.87
E. $.88

Page 10
41. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The
company has promised to maintain a constant dividend. How much are you willing to pay for one share of
this stock if you want to earn 12 percent return on your equity investments?

A. $10.00
B. $13.33
C. $16.67
D. $18.88
E. $20.00

42. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on
retaining all of its earnings for the next six years. Seven years from now, the company projects paying an
annual dividend of $.25 a share and then increasing that amount by 3 percent annually thereafter. To value
this stock as of today, you would most likely determine the value of the stock _____ years from today
before determining today's value.

A. 4
B. 5
C. 6
D. 7
E. 8

43. Which one of the following correctly defines the dividend growth model?

A. P0= D0¸ (R-g)

B. D = P0x (R-g)
C. R = (P0¸ D0) + g
D. R = (D1¸ P0) + g
E. P0= (D1¸ R) + g

44. Which one of the following statements concerning preferred stock is correct?

A. Unpaid preferred dividends are a liability of the firm.

B. Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount of
the quarterly dividend.
C. Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
D. All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any
income can be distributed to common shareholders.
E. Preferred shareholders may be granted voting rights and seats on the board if preferred dividend
payments remain unpaid.

Page 11
45. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind,
are called:

A. retained earnings.
B. net income.
C. dividends.
D. redistributions.
E. infused equity.

Page 12
 Practice Key

1. Which type of business organization has all the respective rights and privileges of a legal person?

a. sole proprietorship
b. general partnership
c. limited partnership
D. corporation
e. limited liability company

2. A conflict of interest between the stockholders and management of a firm is called:

a. stockholders' liability.
b. corporate breakdown.
C. the agency problem.
d. corporate activism.
e. legal liability.

3. A business created as a distinct legal entity composed of one or more individuals or entities is called a:

A. corporation.
b. sole proprietorship.
c. general partnership.
d. limited partnership.
e. unlimited liability company.

4. When considering a capital budgeting project the financial manager should consider:

a. only the size of the project.

b. only the timing of the project cash flows.
c. only the risk of the project cash flows.
d. only the size and timing of the project cash flows.
E. the size, timing, and risk of the project cash flows.

Page 1
5. Which one of the following statements is correct concerning corporations?

A. The largest firms are usually corporations.

b. The majority of firms are corporations.
c. The stockholders are usually the managers of a corporation.
d. The ability of a corporation to raise capital is quite limited.
e. The income of a corporation is taxed as personal income of the stockholders.

6. You will be receiving $5,000 from your family as a graduation present. You have decided to save this
money for your retirement. You plan to retire thirty-five years after graduating. How much additional
money will you have at that time if you can earn an average of 8.5 percent on your investment instead of
just 8 percent?

A. $12,971.49
b. $13,008.47
c. $13,123.93
d. $13,234.44
e. $13,309.85

7. You hope to buy your dream house six years from now. Today your dream house costs $189,900. You
expect housing prices to rise by an average of 4.5 percent per year over the next six years. How much will
your dream house cost by the time you are ready to buy it?

a. $240,284.08
b. $246,019.67
c. $246,396.67
d. $246,831.94
E. $247,299.20

8. You would like to give your daughter $40,000 towards her college education thirteen years from now. How
much money must you set aside today for this purpose if you can earn 6.3 percent on your funds?

a. $17,750.00
b. $17,989.28
C. $18,077.05
d. $18,213.69
e. $18,395.00

Page 2
 9. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's
investments are each worth $8,500. Which one of the following statements is correct concerning their
investments?

a. Three years from today, Joe's investment will be worth more than Marie's.
b. Last year, Marie's investment was worth more than Joe's.
c. Joe has earned more interest on interest than Marie.
D. Marie earned an annual interest rate of 27.73 percent.
e. Joe earned an annual interest rate of 6.45 percent.

10. Thomas invests $100 in an account that pays 5 percent simple interest. How much money will Thomas
have at the end of five years?

a. $120.00
b. $123.68
c. $124.92
D. $125.00
e. $127.63

11. As the discount rate increases, the present value of $500 to be received six years from now:

a. remains constant.
b. also increases.
C. decreases.
d. becomes negative.
e. will vary but the direction of the change is unknown.

12. The interest rate used to calculate the present value of future cash flows is called the _____ rate.

a. free
b. annual
c. compound
d. simple
E. discount

Page 3
13. On your tenth birthday, you received $100 which you invested at 4.5 percent interest, compounded
annually. That investment is now worth $3,000. How old are you today?

a. age 77
b. age 82
c. age 84
d. age 86
E. age 87

14. The amount an investment will worth after one or more periods of time is the _____ value.

A. future
b. present
c. principal
d. discounted
e. simple

15. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest. Today, she gave you the
proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

a. $2,700.00
B. $2,730.30
c. $2,750.00
d. $2,768.40
e. $2,774.90

16. Today is January 1. Starting today, Sam is going to contribute $140 on the first of each month to his
retirement account. His employer contributes an additional 50 percent of the amount contributed by Sam.
If both Sam and his employer continue to do this and Sam can earn a monthly rate of ½ of 1 percent, how
much will he have in his retirement account 35 years from now?

a. $199,45.944.
b. $200,456.74
c. $249,981.21
d. $299,189.16
E. $300,685.11

Page 4
17. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4
percent rate of return. How much will you receive each year if the trust is required to pay you all of the
interest earnings on an annual basis?

a. $3,750
b. $4,000
c. $4,500
d. $5,400
E. $6,000

18. Brinker, Inc. has been investing $136,000 a year for the past 4 years into a business venture. Today,
Brinker sold that venture for $685,000. What is their rate of return on this venture?

a. 9.43 percent
b. 11.06 percent
C. 15.59 percent
d. 16.67 percent
e. 18.71 percent

19. On June 1, you take out a mortgage in the amount of $124,900 at a 6 percent rate compounded monthly.
Payments are to be made at the end of each month for thirty years. How much of the first loan payment is
interest? (Assume that each month is equal to 1/12 of a year.)

a. $600.00
B. $624.50
c. $633.33
d. $644.20
e. $648.84

20. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last
day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account
balances at the end of thirty years?

a. $35,822.73
B. $36,803.03
c. $38,911.21
d. $39,803.04
e. $40,115.31

Page 5
21. The interest rate expressed as if it were compounded once per year is called the _____ rate.

a. stated interest
b. compound interest
C. effective annual
d. periodic interest
e. daily interest

22. A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and
repays the remainder of the principal at the end of the loan, is called a(n) _____ loan.

a. amortized
b. continuous
C. balloon
d. pure discount
e. interest-only

23. You are considering a project with the following cash flows:
Year 1: $1,200
Year 2: $1,800
Year 3: $2,900
What is the present value of these cash flows, given a 9 percent discount rate?

a. $4,713.62
B. $4,855.27
c. $5,103.18
d. $5,292.25
e. $6,853.61

24. Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both
Martha and Stewart will receive payments for five years. At an 8 percent discount rate, what is the
difference in the present value of these two sets of payments?

A. $32.88
b. $40.00
c. $99.01
d. $108.00
e. $112.50

Page 6
25. Your insurance agent is trying to sell you an annuity that costs $100,000 today. By buying this annuity,
your agent promises that you will receive payments of $384.40 a month for the next 40 years. What is the
rate of return on this investment?

A. 3.45 percent
b. 3.47 percent
c. 3.50 percent
d. 3.52 percent
e. 3.55 percent

26. All else constant, a coupon bond that is selling at a premium, must have:

a. a coupon rate that is equal to the yield to maturity.

b. a market price that is less than par value.
c. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
e. a coupon rate that is less than the yield to maturity.

27. The bonds issued by Jensen and Son bear a 6 percent coupon, payable semiannually. The bond matures in
8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?

a. 5.87 percent
b. 5.97 percent
C. 6.00 percent
d. 6.09 percent
e. 6.17 percent

insert graphic

28. If you want to sell a bond issued by a smaller corporation, you:

a. can always do so quite easily by trading it on the New York Stock Exchange.
B. may encounter difficulties in executing the trade.
c. can usually do so quite efficiently due to the high liquidity of the bond market.
d. can do so quite quickly due to the high volume of trading in the bond markets.
e. will most likely trade in an auction market, such as the New York Stock Exchange.

Page 7
29. "Cat" bonds are primarily designed to help:

a. cities recover from economic recessions.

b. corporations recover from overseas competition.
c. the federal government cope with huge deficits.
d. animal food producers raise capital to compete internationally.
E. insurance companies recover from natural disasters.

30. A put provision in a bond indenture allows:

a. a bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.
b. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a
specified amount.
C. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
d. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
e. the issuer to suspend interest payments for any year in which the interest expense exceeds the net
income of the firm.

31. One basis point is equal to:

A. .01 percent.
b. .10 percent.
c. 1.0 percent.
d. 10 percent.
e. 100 percent.

32. A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market
price of _____ and interest payments in the amount of _____ each.

a. $1,007; $70
b. $1,070; $35
c. $1,070; $70
D. $1,000; $35
e. $1,000; $70

Page 8
33. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to
maturity is the _____ provision.

a. sinking fund
B. call
c. seniority
d. collateral
e. trustee

34. A corporate bond is quoted at a price of 98.625 with a 7.875 coupon. The bond pays interest semiannually.
What is the current yield on one of these bonds?

a. 7.50 percent
b. 7.76 percent
c. 7.88 percent
d. 7.97 percent
E. 7.98 percent

35. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

a. par
B. discount
c. premium
d. zero coupon
e. floating rate

36. Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by
5 percent annually. What is one share of this stock worth to you today if the appropriate discount rate is 14
percent?

a. $7.14
b. $7.50
c. $11.11
D. $11.67
e. $12.25

Page 9
37. The voting procedure where a shareholder grants authority to another individual to vote his/her shares is
called _____ voting.

a. democratic
b. cumulative
c. straight
d. deferred
E. proxy

38. The common stock of Grady Co. returned an 11.25 percent rate of return last year. The dividend amount
was $.70 a share which equated to a dividend yield of 1.5 percent. What was the rate of price appreciation
on the stock?

a. 1.50 percent
b. 8.00 percent
C. 9.75 percent
d. 11.25 percent
e. 12.75 percent

39. The dividends paid by a corporation:

I. to an individual become taxable income of that individual.
II. reduce the taxable income of the corporation.
III. are declared by the chief financial officer of the corporation.
IV. to another corporation may or may not represent taxable income to the recipient.

a. I only
B. I and IV only
c. II and III only
d. I, II, and IV only
e. I, III, and IV only

40. Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5
percent annually. The market rate of return on this stock is 9 percent. What is the amount of the last
dividend paid by Weisbro and Sons?

a. $.77
B. $.80
c. $.84
d. $.87
e. $.88

Page 10
41. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The
company has promised to maintain a constant dividend. How much are you willing to pay for one share of
this stock if you want to earn 12 percent return on your equity investments?

a. $10.00
b. $13.33
C. $16.67
d. $18.88
e. $20.00

42. Latcher's Inc. is a relatively new firm that is still in a period of rapid development. The company plans on
retaining all of its earnings for the next six years. Seven years from now, the company projects paying an
annual dividend of $.25 a share and then increasing that amount by 3 percent annually thereafter. To value
this stock as of today, you would most likely determine the value of the stock _____ years from today
before determining today's value.

a. 4
b. 5
C. 6
d. 7
e. 8

43. Which one of the following correctly defines the dividend growth model?

a. P0= D0¸ (R-g)

b. D = P0x (R-g)
c. R = (P0¸ D0) + g
D. R = (D1¸ P0) + g
e. P0= (D1¸ R) + g

44. Which one of the following statements concerning preferred stock is correct?

a. Unpaid preferred dividends are a liability of the firm.

b. Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount of
the quarterly dividend.
c. Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
d. All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any
income can be distributed to common shareholders.
E. Preferred shareholders may be granted voting rights and seats on the board if preferred dividend
payments remain unpaid.

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45. Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind,
are called:

a. retained earnings.
b. net income.
C. dividends.
d. redistributions.
e. infused equity.

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