1. In which way is accounting different from finance?

• Accounting forecasts future performance, given the past, while finance records past
performance.

• Accounting is focused on allocating capital, while finance is focused on bringing in capital.

• Accounting is about budgeting, saving, and borrowing, while finance is about investing,
forecasting, and lending.

• Correct - Accounting is backward looking, while finance is focused on the future.

2. What is the main question that both individuals and companies must consider when making
financial decisions to reach a goal?

• Will utility be maximized through this decision?

• Will this decrease the amount of cash available?

• Correct - Will the benefits of the action outweigh the costs?

• Will this decision require debt or equity financing?

3. A financial manager at a company is trying to determine whether to issue new stocks or new
bonds to cover the costs of a project the company is doing the next year.

Which main task in business finance is this situation an example of?

• Managing interdepartmental loans

• Making investment decisions

• Managing working capital

• Correct - Making financing decisions

4. How can investing help a person reach personal financial goals?

• It helps a person understand how money was spent previously in order to reliably predict future
expenses.

• Correct - It provides access to potential revenue or increases in value to help meet goals faster.

• It ensures money is placed in a safe, risk-free, and easily accessible financial asset.

• It provides a guaranteed future outcome in order to predictably meet financial goals.

5. A sign company is planning to have an initial public offering (IPO). In which type of market will its
stock first be sold to the public?

• Secondary market

• Correct - Primary market

• Efficient market

• Money market

6. Which type of economic indicator changes after the economy changes and helps identify trends
in the long term?

• Coincident indicator

• Yield curve indicator

• Leading indicator

• Correct - Lagging indicator

7. How does an investment institution, such as a mutual fund, facilitate the circulation of money in
the economy?

• Correct - By providing individuals and firms access to financial markets to buy or sell financial
securities

• By accepting deposits of money, paying interest on deposits, and providing loans to individuals
and organizations

• By insuring deposits in investment accounts up to $250,000 to promote public confidence

• By raising capital on a contractual basis, such as an insurance contract

8. Which type of economic indicator is used by governments and policymakers to implement or

alter policies in an effort to avoid or minimize the effects of an economic downturn?

• Correct - Leading indicator

• Lagging indicator

• Correlated indicator

• You Selected - Coincident indicator

9. Suppose an individual does not eat chocolate because eating chocolate goes against personal
beliefs. Which type of standard is this?

• Correct - Moral

• Legal

• Financial

• Ethical

10. Which action is based upon moral standards?

• Since it is generally accepted in the company that no personal information about clients should
be released without written permission, a financial manager denies the request for a third party
to access its data.

• As mandated by government regulations, a financial manager files a registration statement with

the U.S. Securities and Exchange Commission (SEC) before offering equity securities for sale.

• As outlined in the company’s policies, a financial manager hires a third-party entity to review all
annual report filings to ensure they are compliant with applicable generally accepted accounting
principles (GAAP).

• Correct - Although there is no company policy regarding it, a financial manager chooses not to
accept gifts from the company’s clients to avoid creating a conflict of interest.

11. What should a potential bondholder (lender) do to prevent a company (borrower) from taking
on risky projects?

• Release managers who do not attempt to maximize immediate shareholder value

• Encourage manipulation of accounting procedures to optimize the company’s profit

• Correct - Set strict covenants that the company cannot uphold if it chooses a risky project

• Separate owners from management so their interests do not conflict

12. What is the term for an individual’s beliefs concerning what is and is not acceptable to
personally do?

• Ethics

• Correct - Morals

• Laws

• Honesty
13. Which factor contributes to the inflation of the prices of goods and services over time?

• Decrease in employee demand for higher wages

• Correct - Increase in demand for goods and services

• Decrease in costs of production

• Increase in purchasing power of goods and services

14. Why can compounding interest be a good tool but also a significant detriment?

• Compounding interest can be a good tool because it summarizes the required return, but it is a
detriment because it requires a larger cost of capital.

• Compounding interest can be a good tool to understand the time value of money, but it is a
detriment because it does not take inflation into account.

• Compounding interest can be a good tool to understand opportunity cost, but it is a detriment
because it does not take risk into account.

• Correct - Compounding interest can be a good tool because it allows a lender to gain interest on
interest, but it is a detriment because it causes a borrower to pay interest on interest.

15. Which component of the required rate of return takes into account the loss of potential gain
from other alternatives?

• Inflation

• Hurdle rate

• Correct - Opportunity cost

• Risk

16. How is inflation calculated?

• Inflation is determined by the federal government at a target rate of 2% a year.

• Correct - Inflation is calculated by determining the rate at which the average price level of
particular goods and services increases over a period of time in an economy.

• Inflation is built into the economy and will rise as employees receive salary raises.

• Inflation is calculated by determining the rate at which the demand for particular goods and
services has increased over a period of time in an economy.
17. Based on the following information about the stocks of several companies, which stock displays
the greatest amount of risk?

Stock A: Return = 22.22%, Standard Deviation = 9.99%

Stock B: Return = 15.05%, Standard Deviation = 7.35%

Stock C: Return = 38.83%, Standard Deviation = 4.54%

Stock D: Return = 5.69%, Standard Deviation = 5.32%

• Correct - Stock A

• Stock B

• Stock C

• Stock D

18. What is the relationship between risk and return?

• The lower risk an investor takes, the higher return the investor expects to receive.

• Correct - The higher risk an investor takes, the higher return the investor expects to receive.

• The higher risk an investor takes, the slower the investor expects to receive a return.

• The lower risk an investor takes, the faster the investor expects to receive a return.

19. An investor is considering purchasing stock in a certain company, but the investor’s financial
advisor suggests purchasing stocks in multiple companies instead of just one.

Which risk management technique is this financial advisor suggesting?

• Risk separation

• Risk transfer

• Correct - Risk diversification

• Risk avoidance
20. An energy company discovers that a new bill has been proposed to change the amount of fuel
that can be exported outside the country. If passed, this could have a serious negative effect on
the company’s revenues. Some of the company’s competitors are obtaining insurance policies to
compensate for this risk, but since the energy company believes the likelihood of this bill passing
is low, it chooses to do nothing—ultimately taking responsibility for this particular risk instead of
trying to transfer the risk through an insurance policy.

Which risk management technique is this choice an example of?

• You Selected - Risk avoidance

• Correct - Risk retention

• Risk separation

• Diversification

21. Which type of ratio should be used to examine the cost efficiency of a firm’s production?

• Liquidity

• You Selected - Efficiency

• Market

• Correct - Profitability

22. What is the process of analyzing financial data with ratios to compare a firm’s performance to
competitors?

• Valuing

• Correct - Benchmarking

• Evaluating

• Auditing

23. Which action will increase the return on equity of a firm?

• Decreasing the profitability of the firm

• Decreasing the debt financing of the firm

• Correct - Increasing the asset usage efficiency of the firm

• You Selected - Increasing the liquidity of the firm

 24. Based on the information in the chart below, what can you conclude about Company A’s ability
to collect its accounts receivable (AR)?

Percentage of Sales AR Collection

Entity AR Turnover
on Credit Period

Industry 30% 12 30.42

Company A 30% 7 52.14

• Company A is more efficient at collecting its accounts receivable than the industry.

• Company A collects its accounts receivable in a highly variable pattern compared to the
industry.

• Correct - Company A is less efficient at collecting its accounts receivable than the industry.

• Company A collects its accounts receivable just as quickly as the average of other firms in the
industry.

25. Which principle of ratio analysis means that ratios are open for analyst interpretation, are not
governed by rules, and allow creativity to work according to a particular company or asset?

• Evaluation

• Focus

• Standardization

• Correct - Flexibility
 26. Why might an investor be concerned by how Company A is achieving its higher-than-industry
return on equity?

Net Profit Total Asset Leverage Return on

Entity
Margin Turnover Multiplier Equity

Company A 7% 1.25 2.5 21.88%

Company B 15% 1.30 1.3 25.35%

Industry 8% 1.30 1.5 15.6%

• The company’s return on assets is significantly higher than the industry’s.

• The company has a higher amount of profit generated per sales earned when compared to the
industry.

• The company is more efficient than the industry at using its assets to generate sales, and this
may be unsustainable.

• Correct - The company’s significantly higher use of debt could present a financial risk.

27. An investor is analyzing a portfolio to decide if there are any stocks that should be removed
from the pool of financial securities. Quiet Flag Industries, a company the investor has invested
in, has just released its annual report.

Which method should the investor use to see if the company has improved?

• Focus analysis

• Progress measurement

• Correct - Trend analysis

• Cross-sectional analysis

28. Which type of ratios are banks and lenders most concerned about?

• Efficiency

• Profitability

• Correct - Liquidity

• Activity
 29. Which ratio helps an analyst evaluate whether a company can cover its short-term obligations?

• Correct - Current ratio

• Return on equity

• Market-to-book ratio

• Net margin

30.

Net Profit Total Asset Leverage Return on

Margin Turnover Multiplier Equity

Company 1 20.00% 1.5 2.5 75.0%

Company 2 15.00% 0.83 2.0 25.0%

Company 3 10.00% 0.5 3.0 15.0%

Given the table above, what does the DuPont framework indicate about return on assets?

• Return on assets is based on the amount of the firm’s debt and equity.

• You Selected - A firm can still have a high return on assets with low net income.

• The firm’s market ratio helps determine the price of the stock.

• Correct - All returns are based on the firm’s profitability and efficiency.

31. An investment analyst is concerned about a construction company’s ability to sell its inventory
to meet current obligations, because much of the inventory (commercial buildings) it builds and
sells takes longer than a year to construct.

Which ratio should this analyst use to consider the effect of the firm’s inventory on the firm’s
ability to meet current obligations?

• Leverage ratio

• Correct - Quick ratio

• You Selected - Inventory ratio

• Current ratio
32. An employee was recently hired as a financial analyst and asked to create a cash budget for the
employee’s division for the next year.

Which component should the employee exclude from the budget?

• Purchase of inventory for sales that the employee will make this year

• Payments to suppliers that will be made over the next six months

• Payment toward the line of credit that is due next month

• Correct - Purchase of equipment that will be bought in three years

33. What are the benefits of using the traditional envelope method to track cash flows?

• Correct - It is simple and helps ensure that users do not spend more than the cash that they
have available.

• It automatically separates expenses into categories so users can quickly assess their purchases
during the month.

• It enables users to connect bank and credit card accounts to automatically update income and
expenses.

• It requires users to carefully track specific expenses and write down their income and spending
for the month.

34. A company calculated variances of a budget and actual cash flows that indicate the firm’s
strengths and weaknesses in cash flows and its budgeting process.

Which major use of cash budgeting is this an example of?

• Assessment of future needs

• Standardization

• Corrective action

• Correct - Performance evaluation

35. Which process is a person engaging in when making a personal budget and keeping a record of
cash flows?

• Monitoring

• Correct - Tracking

• Revising

• Forecasting
36. Which type of expense is a magazine subscription?

• Monitored expense

• Correct - Variable expense

• You Selected - Fixed expense

• Asset expense

37. Which tool is forward-looking and thus helps decision makers understand how actions taken
today can affect their firm’s future performance?

• Ratio analysis

• Financial statements

• Accounting

• Correct - Financial forecasting

38. A company is developing a financial forecast for the next year. The company plans to implement
a new factory that will increase production and resulting sales by 20%.

Since the company’s assets are increasing significantly, what else must increase?

• Accounts receivable turnover

• Gross margin

• Correct - Financing

• Profit turnover

39. A company that manufactures televisions must obtain financing to increase the company’s
inventory levels. A manager at the company knows that current investment markets are tight,
and it may be difficult for the company to obtain additional financing for the next year. The
manager wants to propose a way for the firm to reduce its discretionary financing needed
(DFN).

What should the manager suggest to reduce next year’s DFN?

• Lower the net margin by decreasing the sales prices and maintaining current costs

• Increase the amount spent on fixed assets to increase production capacity

• Correct - Lower the amount of dividends that are paid out to shareholders next year

• Increase sales growth, resulting in a larger amount of revenue coming into the firm
40. What is the term for the rate that allows a firm to maintain its present financial ratios without
issuing new equity or increasing debt?

• Sales growth rate

• Steady state growth rate

• Capital growth rate

• Correct - Sustainable growth rate

41. Which method is most commonly used for determining a company’s DFN?

• Historical regression

• Company multiples

• You Selected - Sustainable growth rate

• Correct - Percent of sales

42. Freedom Rock Bicycles has a sales capacity of $10 million. When sales exceed this capacity, the
company must invest $200,000 in new equipment. Freedom Rock Bicycles had sales of $9
million in one year, and it projects a sales growth of 10%. The net fixed assets in the year were
$500,000.

By how much will the company’s discretionary financing need increase?

• Correct - $0

• $50,000

• You Selected - $200,000

• $900,000

43. Why are financial models helpful in financial forecasting?

• Models provide credibility to a firm’s financial statements for government agencies to review.

• Models show the future supply schedule for a firm, which allows for negotiation with suppliers.

• Models are required by the SEC when a firm plans to issue additional stock on the public market.

• Correct - Models allow users to see the complex relationships between sales and other aspects
of the business.
44. A firm is currently operating at 75% capacity with current sales of $34 million.

Will the firm need to acquire additional fixed assets if its sales are predicted to increase by $6
million next year?

• Yes, because the increase in sales will exceed the firm’s sales capacity.

• Correct - No, because the increase in sales will not exceed the firm’s sales capacity.

• No, because the increase in sales will exceed the firm’s sales capacity.

• Yes, because the increase in sales will not exceed the firm’s sales capacity.

45. How does an analyst use the hurdle rate?

• Correct - It is used to compare with the IRR to determine whether a project should be accepted.

• It is used with the IRR as a method to find the required payment amount for a project.

• It is used to determine the time frame of a project.

• You Selected - It is used to calculate the IRR for a project and determine its value.

46. Which term refers to the metrics and calculations that use tools such as net present value (NPV),
internal rate of return (IRR), and profitability index (PI) to evaluate investments?

• Security analysis criteria

• Projected financing criteria

• Accounting investment criteria

• Correct - Capital budgeting criteria

47. What would profitability index (PI) be useful for?

• You Selected - Calculating returns for a project that does not have a definite return rate for IRR
or NPV

• Computing the future value of a project in the future rather than the present value

• Correct - Determining whether a firm should invest in projects with different initial outlays

• Deciding between projects that are mutually exclusive

 48. Company ABC is considering several projects for the next year as outlined in the chart below.

NPV IRR PI

Project 1 $5,600 15% 2.5

Project 2 $2,700 18% 1.7

Project 3 $8,300 17% 2.0

If the company has a limited amount of capital to spend on projects, in which order should Company
ABC do the projects to create the greatest value?

• Project 3, Project 1, Project 2

• Correct - Project 1, Project 3, Project 2

• Project 3, Project 2, Project 1

• Project 2, Project 3, Project 1

49. Anna is planning to invest in some company stocks for retirement and is trying to figure out if
the stocks are a good buy. She calculates the intrinsic value of one of the stocks, Quiet Flag
Industries, to be $35. The stock is currently trading on the market for $30, so she decides to buy
it.

Why was it a good idea for Anna to buy this stock?

• The stock is overvalued.

• Correct - The stock is undervalued.

• The stock’s intrinsic value is greater than 1.

• The stock’s intrinsic value is less than its actual value.

50. How do bond payments to investors differ from stock payments to investors?

• Stock payments have a shorter duration than bond payments.

• Stock payments are fixed, and bond payments are variable.

• Bond payments are larger than stock payments.

• Correct - Bond payments are fixed, and stock payments are variable.
51. An investor really cares about having voting rights in a firm.

Which type of financial security should this investor purchase?

• Correct - Common stock

• Zero-coupon bonds

• Preferred stock

• Secured bonds

52. The lowest rate of return is required by which type of investor or lender?

• Correct - Bank

• Common stockholder

• Bondholder

• Preferred stockholder

53. Which cash flow of a particular project would be a sunk cost?

• $20,000 market value of equipment at the end of the project

• $35,000 incremental cash flows for the third year of the project

• Correct - $50,000 marketing study conducted three months ago for the project

• $100,000 initial investment for the project

54. Quiet Flag Industries has a large piece of land worth $250,000 that it is considering using for a
miniature golf business.

When evaluating the cash flows that would result from doing this project, should Quiet Flag
consider the land value? Why or why not?

• Correct - Yes, the land value represents an opportunity cost.

• No, the land value represents an existing expense.

• Yes, the land value represents cannibalization.

• No, the land value represents a sunk cost.

55. What is the effect of debt financing on a firm’s income?

• Correct - Debt interest payments reduce taxable income.

• Income is taxed at a lower rate when a firm has no debt.

• Debt interest payments have no effect on taxable income.

• Income is taxed at a lower rate when a firm has more debt.

56. An investor is reviewing the bonds of four different companies: Company A issues AA-rated
bonds. Company B issues A-rated bonds. Company C issues BB-rated bonds. Company D issues
C-rated bonds.

Which company is likely to provide the lowest rate of return to the investor?

• Correct - Company A

• Company B

• Company C

• Company D

57. How is the cost of capital used in the decision-making process for a capital investment project?

• Correct - It is used as the discount rate of cash flows.

• It is input into cash flow calculations.

• You Selected - It is part of the initial investment.

• It is compared to the NPV.

58. A pharmaceutical company recently spent $2 million developing a new drug. The company then
conducts capital budgeting analysis to determine if it should produce the newly developed drug.
The net present value (NPV) of the project is $1.5 million.

Why should this company produce the drug?

• Correct - Because the NPV is greater than zero

• Because the development costs are greater than the value of the project

• You Selected - Because the losses due to cannibalization are less than the value of the project

• Because the project will provide a total value of $3.5 million to the company
 59. Time Value of Money Calculations

Download Workbook

Task 1

An investor decides to invest $3,000 a year for the next 25 years, starting today, into an account that
earns a 5% annual return. How much will the investor in 25 years?

• [-0.1]

The value in cell C7 is not correct

C2 – C8

Question 1
rate 5.0%
nper 25
pmt ($3,000)
pv $0
type 0
FV $143,181.30

Task 2

An individual purchased land 12 years ago. The price of the land increased at the rate of 2% each year
for the past 12 years, and the land would now sell for $35,000. How much did the individual pay for the
land 12 years ago?

Fabulous! You earned full credit for this task.

F2-F8

Question 2
rate 2.0%
nper 12
pmt $0
fv $35,000
type 0
PV ($27,597.26)
Task 3

Today, Li has $900,000 (treat this as a cash inflow) in an account that gives an 8% return each year. Li
has been investing $7,000 a year at the end of each year for 30 years. How much did Li have in the
account 30 years ago?

Fabulous! You earned full credit for this task.

C11-C16

Question 3
rate 8.0%
nper 30
pmt ($7,000)
fv $900,000
type 0
PV ($10,635.12)

Task 4

Alex opened an investment account today with an initial investment of $50,000. Alex is going to then
invest $8,000 a year for 30 years, starting a year from today. How much will Alex be able to withdraw in
30 years if the investment earns 6% annual interest?

Fabulous! You earned full credit for this task.

F11-F16

Question 4
rate 6.0%
nper 30
pmt ($8,000)
pv ($50,000)
type 0
FV $919,640.05
Task 5

What is the present value of the cash flows depicted on the table if the discount rate is 6%?

Fabulous! You earned full credit for this task.

C20-F20 and C21 and C22

Question 5
Year 1 Year 2 Year 3 Year 4
CFs ($1,500) $5,000 $20,000 ($4,000)
Discount Rate 6.0%
PV $16,658.90

Task 6

What is the rate of return of the investment depicted in the table?

Fabulous! You earned full credit for this task.

C26-H26 and C27

Question 6
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
CFs ($35,000) $14,000 $20,000 $3,000 $1,000 $500
Rate of Return 5.5%

Task 7

What is the future value of $3,550 cash receipts per year at the end of each year for 10 years if the
discount rate is 5%?

• [-0.1]

The value in cell C32 is not correct

C30-C35

Question 7
rate 5.0%
nper 10
pmt ($3,550)
pv $0
type 0
FV $44,651.52
Task 8

What was the present value, when the deposit was made, of a $50,000 withdrawal today that was
deposited 12 years ago in an account with an annual interest rate of 3%?

Excellent! You earned full credit for this task.

F30-F35

Question 8
rate 3.0%
nper 12
pmt $0
fv $50,000
type 0
PV ($35,068.99)

Task 9

Kamal plans to save $7,000 a year for 17 years starting a year from today. He expects to earn 9% on his
investment. How much will he have in 17 years?

Fabulous! You earned full credit for this task.

C38-C43

Question 9
rate 9.0%
nper 17
pmt ($7,000)
pv $0
type 0
FV $258,815.93
Task 10

Fatima is looking at a vacation that would cost her $6,000 today (assume this is a negative cash flow).
She makes a goal to go on the trip 14 years from today. The inflation rate is 3%. How much will it cost
Fatima to go on the vacation in 14 years?

Excellent! You earned full credit for this task.

F38-F43

Question 10
rate 3.0%
nper 14
pmt $0
pv ($6,000)
type 0
FV $9,075.54

Task 11

Lucas is wondering if he has enough money to cover his college tuition for the next four years. Annual
tuition is $8,000 (assume this is a negative cash flow) that is due at the beginning of each year with the
first payment due today. If Lucas can earn a 2% return on his savings account, how much does he need
to have in his account now to cover the cost of tuition?

Excellent! You earned full credit for this task.

C46-C51

Question 11
rate 2.0%
nper 4
pmt ($8,000)
fv $0
type 1
PV $31,071.07
Task 12

A parent decided to save $5,000 a year for four years, starting a year from today, in an account that
gives an interest rate of 5% to purchase a new car for a child when the child is ready to drive. What is
the most the parent can afford to spend on a car in four years?

Fabulous! You earned full credit for this task.

F46-F51

Question 12
rate 5.0%
nper 4
pmt ($5,000)
pv $0
type 0
FV $21,550.63