36) In practice, the __________ rule is preferred. A. Payback B. NPV C. PI D. IRR

1. FIN/571 Guide 1
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1) Which principle states that extraordinary returns are achievable with new ideas?
A. The Principle of Valuable Ideas
B. The Notional Principle
C. The Principle of Risk-Return Trade-Off
D. The Principle of Incremental Ideas
2) Occurs when a "follower" receives the benefit of an expenditure made by a "leader" by imitating the
leader's behavior.
A. asymmetric information
B. The Principle of Comparative Advantage
C. put option
D. free-rider problem
3) Occurs when inaccurate information can falsely exist.
A. free-rider problem
B. The Principle of Valuable Ideas
C. adverse selection
D. moral hazard
4) The annual report refers to
A. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet,
a statement of cash flows, and accompanying notes.
B. the length of time remaining until an assetÂ’s maturity.

2. C. the extent to which something can be sold for cash quickly and easily without loss of value.
D. a report issued annually by managers to primarily convey information about select working capital
ratios.
5) Remaining maturity refers to:
A. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet,
a statement of cash flows, and accompanying notes.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.
C. the amount of time remaining until its maturity.
D. the length of an assetÂ’s life when it is issued.
6) Generally accepted accounting principles (GAAP) refers to
A. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet,
a statement of cash flows, and accompanying notes.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.
C. the extent to which something can be sold for cash quickly and easily without loss of value.
D. the length of an asset’s life when it is issued.
7) The firm’s assets in the balance sheet refer to:
A. the statement of a firm's financial position at one point in time, including its assets and the claims on
those assets by creditors (liabilities) and owners (stockholders' equity).
B. the productive resources in the firm’s operations.
C. the extent to which something can be sold for cash quickly and easily without loss of value.
8) Original maturity refers to:
A. the net amount (net book value) for something shown in quarterly accounting statements.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to
define accepted accounting practice at a particular time.
C. the price for which something could be bought or sold in a reasonable length of time, where
“reasonable length of time” is defined in terms of the itemÂ’s liquidity.
D. the length of an asset’s life when it is issued.

3. 9) Book value (or Net book value) refers to:
A. the net amount shown in the accounting statements.
B. the statement of a firm's financial position at one point in time, including its assets and the claims on
those assets by creditors (liabilities) and owners (stockholders' equity).
C. the price for which something could be bought or sold in a reasonable length of time, where
“reasonable length of time” is defined in terms of the item’s liquidity.
D. the length of an asset’s life when it is issued.
10) Preferred stock payment obligations are typically __________.
A. viewed like debt obligations.
B. issued with a maturity date.
C. valued as an annuity.
D. none of these
11) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the
current yield is 10%. Which of the following statements is true?
A. The market value of the bond is less than $1,000
B. The current yield was a lot less than 9% when the bond was first issued
C. The current yield was a lot greater than 9% when the bond was first issued
D. The market value of the bond is more than $1,000
12) If the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the
bond is __________.
A. cannot tell
B. greater than the par value.
C. less than the par value.
D. equal to the par value.
13) According to the CAPM, the expected return for a portfolio is determined by the portfolio's.
A. variance.
B. beta.

4. C. standard deviation.
D. none of these
14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much
internationally. Possible factors include __________.
A. lower transaction costs.
B. less political risk.
C. costs of converting currencies.
D. all of these
15) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much
internationally. Possible factors include __________.
A. lower transaction costs.
B. expropriation risk.
C. firm-specific risk.
D. all of these
16) One problem with using negative values for w1 (the proportion invested in the riskless asset) to
represent a borrowed amount is that the implied borrowing rate of interest is the same as __________.
A. the nominal rate of interest
B. the prime rate of interest
C. the current rate of interest
D. the lending rate of interest
17) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate
for __________.
A. greater risk
B. lack of diversification
C. diversification
D. less risk
18) The Principle of __________ implies that the expected return for an asset equals its required return.

5. A. Risk-Return Trade-Off
B. Capital Market Efficiency
C. Signaling
D. Comparative Advantage
19) Stony Products has a receivables turnover of ten times. What is Stony’s receivables collection period
(RCP)?
A. about 35.42 days
B. about 36.50 days
C. about 40.83 days
D. none of these
20) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
A. about 30.42 days
B. about 56.50 days
C. about 60.83 days
D. none of these
21) Stony Products has an inventory conversion period (ICP) of about 60.83 days. The receivables
collection period (RCP) is 36.50 days. The payables deferral period (PDP) is about 30.42 days. What is
Stony's cash conversion cycle (CCC)?
A. about 67 days
B. about 66 days
C. about 69 days
D. about 68 days
22) Bank term loans represent __________.
A. long-term loans that looks like short-term debt
B. loans for specified amounts that require borrowers to repay them according to specified schedules
C. the pledge of receivables
D. all of these

6. 23) __________ says to compare the benefits and costs of alternative uses and sources of money using
after-tax APYs.
A. The Signaling Principle
B. The Principle of Time Value of Money
C. The Options Principle
D. The Principle of Incremental Benefits
24) Firms make short-term financial decisions just about every day solving such questions as
__________.
A. Where should we borrow?
B. Where should we invest our cash?
C. How much liquidity should we have?
D. all of these
25) Which (if any) of the following statements is false?
A. When invoices are numerous, a firm may use statement billing instead of invoice billing.
B. With statement billing, all of the sales for a period such as a month (for which a customer receives
invoices, too) are collected into a single statement and sent to the customer as one bill.
C. CIA (cash in advance) refers to when the shipper collects the payment (on behalf of the seller) upon
delivery.
D. none of these
26) Credit-policy decisions involve all aspects of receivables management. The decision does NOT
include which of the following?
A. the choice of credit terms
B. setting evaluation methods and credit standards
C. controlling and administering the firm’s credit functions
D. monitoring receivables and avoiding actions for slow payment
27) Which of the following statements is (are) true?
A. The "dating 120" or the "60 extra" mean that the clock does not start until 120 or 60 days after the
invoice date.

7. B. Prox or proximate refers to the next month.
C. Invoices with "10th prox" must be paid by the 10th of the next month.
D. all of these
28) An all-equity-financed firm would __________.
A. pay corporate income taxes because it would have interest expense.
B. not pay any income taxes because interest would exactly offset its taxable income.
C. pay corporate income taxes if its taxable income is positive.
D. not pay corporate income taxes because it would have no interest expense.
29) Whenever a firm splits itself into separate units, with each unit having limited liability with respect
to its financing, the capital structure of each unit becomes __________.
A. an irrelevant consideration for a cost of capital.
B. the relevant consideration for a cost of capital.
C. important only if the firm faces financial distress.
D. none of these
30) A profitable firm would __________.
A. pay corporate income taxes because it would have interest expense.
B. pay corporate income taxes because it would not have interest expense.
C. pay corporate income taxes if it had a positive taxable income.
D. none of these
31) The capital budgeting process can be broken down into five steps. These steps include which of the
following?
A. Generate ideas for capital budgeting projects
B. Prepare proposals
C. Review existing projects and facilities
D. all of these
32) Ideas for capital budgeting projects come from all levels within an organization. The bottom up
process results in ideas percolating through the organization.

8. A. upward
B. downward
C. any way
D. sideways
33) Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often
faces a critical __________ decision: whether to develop a new generation of passenger aircraft.
A. payback
B. present value
C. dividend
D. capital budgeting
34) Net present value ( NPV) is the difference between __________.
A. cash flows before taxes and cash flows after taxes
B. what a capital budgeting project produces and what it is worth (its market value)
C. what a capital budgeting project costs and what it is worth (its market value)
D. what a capital budgeting project produces and what it is pays
35) Whenever projects are both independent and conventional, then the IRR and NPV methods agree.
Which of the following statements is true?
A. A mutually exclusive project is one that can be chosen independently of other projects.
B. When undertaking one project prevents investing in another project, and vice versa, the projects are
said to have a positive payback.
C. A conventional project is a project with an initial cash outflow that is followed by one or more
expected future cash inflows.
D. all of these
36) In practice, the __________ rule is preferred.
A. Payback
B. NPV
C. PI

9. D. IRR
37) Studies show systematic differences in capital structures across industries. These are due mostly to
differences in __________.
A. hiring and firing practices.
B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation,
investment tax credit, and operating tax loss carryforwards.
C. what the arbitrage pricing theory tells us.
D. none of these
38) Studies show systematic differences in capital structures across industries. These are due mostly to
differences in __________.
A. management’s attitude toward what other industries are doing.
B. the firm’s inventory turnover ratio.
C. accounting practices.
D. the ability of assets to support borrowing.
39) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in
any particular industry with respect to __________.
A. tax position.
B. size.
C. competitive position.
D. all of these
40) There can be a variety of motives for stock repurchases including __________.
A. all of these
B. a buyback of undervalued stock.
C. a decrease in leverage.
D. a decrease in anticipated earnings.
41) There can be a variety of motives for stock repurchases including __________.
A. a buyback of overvalued stock.

10. B. an increase in leverage.
C. a decrease in anticipated earnings.
D. all of these
42) Some countries have __________ in which shareholders' returns are not fully taxed twice.
A. an imputation tax system
B. a split tax system
C. a two-tier tax system
D. none of these
43) Conditional sales contracts __________.
A. are seldom issued to finance the purchase of aircraft
B. are similar to equipment trust certificates
C. enable the borrower to obtain title to the assets only before it fully repays the debt
D. all of these
44) The Time Value of Money Principle says __________.
A. that announcing the firm's decision to issue securities conveys information about the firm
B. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as
alternative securities to sell, lease versus borrow and buy, and bond refunding
C. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative
D. to set a price and other terms that investors will find acceptable when issuing securities
45) Stated maturity is __________.
A. usually a fixed rate, but it can be a variable rate that’s adjusted according to a specified formula
B. the date the borrower must repay the money it borrowed
C. the amount the borrower must repay
46) __________ says to calculate the net advantage of leasing based on the incremental after-tax
benefits that leasing will provide.
A. The Capital Market Efficiency

11. B. The Options Principle
C. The Principle of Incremental Benefits
D. The Principle of Comparative Advantage
47) __________ says to look for opportunities to develop asset-based financing arrangements that offer
new positive-NPV financing mechanisms.
A. The Time Value of Money Principle
B. The Principle of Valuable Ideas
C. The Principle of Comparative Advantage
D. The Principle of Self-Interested Behavior
48) The Principle of Self-Interested Behavior says __________.
A. to look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it.
B. to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will
provide.
C. that leasing transfers the tax benefits of ownership from the lessee to the lessor.
D. to use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the
alternative of borrowing and buying.
49) The wholesale price for Captain John’s is $3.00 per loaf. One million loaves will be sold in the next
year. What is the contribution margin?
A. $3.00
B. $3,000,000 minus fixed costs
C. cannot tell
D. $3,000,000
50) The wholesale price for Captain John’s is $0.612 per loaf, and the variable cost of production is
$0.387 per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 4.5
million loaves in the next five years. What additional revenues minus expenses will be generated from
expansion?
A. $912,500
B. $1,000,500

12. C. $1,102,000
D. $1,012,500
51) The wholesale price for Captain John’s is $1.00 per loaf, and the variable cost of production is $0.50
per loaf. Captain John’s is expecting that expansion will allow them to sell an additional 5.0 million
loaves in the next year. What additional revenues minus expenses will be generated from expansion?
A. $25,000
B. $250,000
C. $550,000
D. none of these
52) Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from
outside sources.
B. Hard capital rationing refers to the rationing imposed internally by the firm.
C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.
D. all of these
53) Pursuing valuable ideas is the best way __________.
A. to achieve extraordinary returns.
B. to get yourself in trouble.
C. to avoid risk.
D. to restrain your spending.
54) Due to asymmetric information, the market fears that a firm issuing securities will do so when the
stock is ___________.
A. caught up in a bear market.
B. undervalued.
C. overvalued.
D. being sold by insiders.

13. 55) __________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of
alternative decisions.
A. The Principle of Incremental Benefits
B. The Signaling Principle
C. The Time Value of Money Principle
D. The Principle of Risk-Return Trade-Off
56) __________ says to carefully evaluate and monitor the financial plan’s impact on the firm and its
stakeholders.
A. The Principle of Capital Market Efficiency
B. The Principle of Risk-Return Trade-Off
C. The Principle of Diversification
D. The Principle of Self-Interested Behavior
57) ___________ says to use both bottom-up and top-down processes to increase the chance of
uncovering valuable ideas.
A. The Principle of Two-Sided Transactions
B. The Behavioral Principle
C. The Principle of Comparative Advantage
D. The Principle of Valuable Ideas