BUSN 602 Final Exam 100% Correct Answers


Question 1
The security market line can be used to determine the expected return on a security if we know the:

  1. risk-free rate
  2. systematic risk of that security
  3. market risk premium
  4. all of the above


Question 2
The constant dividend growth model assumes:

  1. a constant annual dividend
  2. a constant dividend growth rate for no more than the first 10 years
  3. that the discount rate must be greater than the dividend growth rate
  4. two of above are true assumptions


Question 3
The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.

  1. payback period
  2. average rate of return
  3. cost of capital
  4. internal rate of return


Question 4
Which one of the following types of ratios indicates the ability to meet short-term obligations to creditors as they come due?

  1. liquidity ratios
  2. asset management ratios
  3. capital structure ratios
  4. profitability ratios
  5. market value ratios


Question 5
A business organization that receives the limited liability of a corporation but is taxed as a proprietorship or partnership is called a:

  1. limited proprietorship
  2. limited partnership
  3. limited corporation
  4. S corporation


Question 6
The accrued liabilities of a firm are:

  1. retained earnings from past years
  2. reflect the prepayment of certain expenses
  3. owners’ equity in the firm
  4. amounts owed but not yet due


Question 7
Which one of the following is not considered to be a generally recognized type of market efficiency?

  1. strong-form
  2. semi-strong form
  3. weak-form
  4. insider-information form


Question 8
The internal rate of return concept is best explained by which of the following?

  1. rate where NPV is equal to zero
  2. point where initial investment has been returned
  3. marginal cost of capital
  4. average book value


Question 9
The estimate of how quickly a firm may grow by maintaining a constant mix of debt and equity is called:

  1. the retention growth rate
    B. dividend growth rate
    C. sustainable growth rate
    D. the internal growth rate


Question 10
The primary purpose of the liquidity ratios is to determine:

  1. the extent to which borrowed funds are used to finance assets
  2. the ability of the firm to meet short-term obligations to creditors
  3. the extent to which assets are used to support sales
  4. none of the above


Question 11
Firms issue more equities than bonds for the following reason(s).

  1. it is cheaper to raise equity than to borrow
  2. bonds have a maturity date making them pricier
  3. both a and b are true
  4. none of the above are true


Question 12
All of the following accounts are considered to be current liabilities on the balance sheet except:

  1. depreciation
  2. accounts payable
  3. accruals
  4. notes payable
  5. all of the above are current liabilities


Question 13
On the balance sheet, total assets minus net fixed assets equals:

  1. current assets
  2. current liabilities
  3. gross fixed assets
  4. total assets
  5. none of the above


Question 14
If a person requires greater return when risk increases, that person is said to be:

  1. risk seeking
  2. risk averse
  3. risk aware
  4. risk indifferent


Question 15
Why is depreciation considered to be a “tax shield”?


Question 16
The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:

  1. liquidity ratios
  2. asset utilization ratios
  3. financial leverage ratios
  4. profitability ratios


Question 17
A sinking fund:

  1. is a special fund set up to pay of the creditors of bankrupt firms
  2. requires specific approval by the firm’s the board of directors
  3. requires the issuer to retire a bond issue incrementally over time
  4. none of the above


Question 18
Unsystematic risk is also known as:

  1. market risk
  2. non diversifiable risk
  3. firm-specific risk
  4. macroeconomic risk


Question 19
The ratio between the present value of a project’s cash inflows and the present value of its initial investment is called the:

  1. MIRR.
  2. IRR.
  3. PI.
  4. NPV.
  5. none of the above are correct


Question 20
A firm’s business risk is measured by the variability in which one of the following over time:

  1. net sales
  2. total assets
  3. operating income (EBIT)
  4. net income

Question 21
Variations in operating income over time because of variations in unit sales, price, cost margins, and/or fixed expenses are called:

  1. business risk
  2. exchange rate risk
  3. purchasing power risk
  4. financial risk
  5. none of the above

Question 22
As a general rule, the capital structure that:

  1. minimizes the cost of equity also maximizes the stock price
  2. maximizes the stock price also minimizes the weighted average cost of capital
  3. minimizes the cost of debt also maximizes the expected earnings per share
  4. none of the above is a true statement

Question 23
The cost of capital for retained earnings:

  1. cannot be determined
  2. may be determined by more than method
  3. is greater than the cost of capital for common stock
  4. none of the above

Question 24
Examples of external economic data required for project analysis include all of the following except:

  1. business cycle stages.
  2. inflation trends
  3. labor-management relations
  4. exchange rate trends
  5. all of the above are included


Question 25
A firm’s stock is expected to pay a $2 annual dividend next year, and the current $50 stock price is expected to rise to $53 over the next year. What is the expected return?

  1. 8%
  2. 10%
  3. 12%
  4. 15