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CMA testAcknowledgement:

Ross, S & Trayler, R 2008, Instructor CD to accompany Essentials of corporate finance, McGraw-Hill, Sydney, chs 1–11.

Chapter 1 – Introduction to Financial Management

QUESTION 1

The top financial officer in a firm is commonly referred to as the:

chief financial officer

president of finance

controller

treasurer

finance manager

QUESTION 2

A business organization that is similar to a sole proprietorship but has two or more owners is called a:

limited liability company

corporation

dual company

partnership

joint stock company

Chapter 2 – Financial Statements, Taxes and Cash Flow

QUESTION 3

A tangible asset:

is defined as any asset which adds value to a firm

by definition includes both equipment and patents

is another term for a fixed asset

is defined as an asset with a market value that exceeds the book value

is a fixed asset with a physical existence

QUESTION 4

An intangible asset is a:

valuable fixed asset that has no physical existence

physical fixed asset that loses value over time, such as equipment

fully-depreciated fixed asset which has no remaining market value

current asset with a negligible book value but considerable market value

current asset with minimal market value and no physical existence

QUESTION 5

Which one of the following will increase the cash flow from assets, all else constant?

a decrease in net capital spending

a decrease in the cash flow to creditors

a decrease in the annual depreciation

an increase in the change in net working capital

an increase in the net new equity raised

Chapter 3 – Working with Financial Statements

QUESTION 6

Your company has cash available of $4 300, net working capital of $1 348, inventory of $10 500, and accounts receivable of $2 340. What is the cash ratio?

3.19

0.31

0.27

1.84

0.41

QUESTION 7

The cash ratio is defined as cash divided by:

current assets

current liabilities

total assets

total debt

total equity

QUESTION 8

The amount of profit a firm earns for every $1 of equity is referred to as the:

profit margin

equity multiplier

return on equity

capital intensity ratio

price-earnings ratio

Chapter 4 – Introduction to Valuation: The Time Value of Money

QUESTION 9

The process of accumulating interest in an investment over time to earn more interest is called:

discounting

compounding

complexing

indexing

multiplying

QUESTION 10

Which one of the following is the correct formula for the future value of a lump sum invested today?

FV = PV / (1 + r)t

FV = PV / (1 + rt)

FV = PV × rt

FV = PV × (1 + t)r

FV = PV × (1 + r)t

QUESTION 11

Given a rate of return of zero, the future value of a lump sum invested today will always:

remain constant, regardless of the period of time

decrease as the period of time decreases

decrease as the period of time increases

increase as the period of time increases

remain constant or increase as the period of time increases

Chapter 5 – Discounted Cash Flow Valuation

QUESTION 12

An annuity where the cash flows continue forever is called a(n):

ordinary annuity

annuity due

absolute annuity

perpetuity

perpetuity due

QUESTION 13

In Canada and the United Kingdom, a perpetuity is also called a(n):

consol

infinite bond

infinity flow

dowry

preference stream

QUESTION 14

Which one of the following is generally valued as a perpetuity?

short-term bond

long-term bond

non-dividend paying common stock

common stock paying increasing dividends

preferred stock

Chapter 6 – Interest Rates and Bond Valuation

QUESTION 15

The coupon rate is best defined as the:

annual coupon divided by the current price of a bond

periodic payment divided by the premium value of a bond

semi-annual interest payment divided by the market price

semi-annual interest payment divided by the par value

annual coupon divided by the face value of a bond

QUESTION 16

The rate required in the market on a bond is called the:

yield to maturity

call yield

current yield

liquidity premium

risk premium

QUESTION 17

When interest payments on a bond are made directly to the owner of record, the bond is said to be in __________ form.

bearer

coupon

street

registered

secure

QUESTION 18

The lowest rating a bond can receive from Moody's and still be classified as investment grade is:

A

BBB

B

Baa

Ba

Chapter 7 – Equity Markets and Share Valuation

QUESTION 19

Tellite Ltd, a telecommunication company, did not pay a dividend in the last financial year. However, the company has indicated that it expects to earn $1 per share in this financial year and to pay out 20% of these earnings in dividends. Financial analysts expect that Tellite’s earnings per share and dividend per share will grow at a rate of 10% a year. The rate of return required by investors has been estimated at 12% per annum. Estimate the present value of the share.

$10

$50

$11

$5.50

$5

QUESTION 20

The company share market price is $25, its next-period expected dividend is $1 and investors in that market require a rate of return at 14% per annum. What is the implied rate of growth in dividends at this time?

14%

10%

8%

9%

12%

QUESTION 21

The market in which new securities are originally sold to investors is called the __________ market.

primary

open

secondary

free

initial public

QUESTION 22

The market where one shareholder sells shares to another shareholder is called the __________ market.

primary

open

secondary

free

dealer

Chapter 8 – Net Present Value and Other Investment Criteria

QUESTION 23

The internal rate of return identifies:

the minimum acceptable discount rate

the benefit-cost ratio

the average profit from a project

none of the given answers

all of the given answers

QUESTION 24

Nawano is considering an investment of $200 000 with cash inflows of $80 000; $70 000; $75 000; $10 000 and $35 000 over the next 5 years respectively. What is the net present value of this investment, if the relevant discount rate is 11%?

$63 063.10

$11 083.10

$17 008.60

$14 200.87

$44 151.62

QUESTION 25

Your firm requires an average accounting return (AAR) of at least 15 percent on all fixed Asset purchases. Currently, you are considering some new equipment costing $96 000. This equipment will have a 3-year life over which time it will be depreciated on a straight line basis to a zero book value. The annual net income from this project is estimated at $5 500, $12 400, and $17 600 for the 3 years. Should you accept this project based on the accounting rate of return? Why or why not?

yes; because the AAR is less than 15 percent

yes; because the AAR is equal to 15 percent

yes; because the AAR is greater than 15 percent

no; because the AAR is less than 15 percent

no; because the AAR is equal to 15 percent

QUESTION 26

Ben Lake Enterprises is currently considering a project that will produce cash inflows of $3 500 a year for 3 years followed by $1 200 a year for 2 more years. The cost of the project is $10 000. What is the profitability index if the discount rate is 7 percent?

.96

.98

1.00

1.06

1.10

Chapter 9 – Making Capital Investment Decisions

QUESTION 27

Shere Khan Corporation is currently evaluating a new project. Relatively inexpensive equipment with an estimated cost of $300 000 would be purchased, but shipping costs to move the equipment would total $25 000 and installation charges would add another $15 000 to the total equipment costs. Further, the company’s inventories would have to be increased by $20 000 at the time of initial investment. The straight-line depreciation rate is 20% and corporate tax rate is 25%.

Calculate the tax effect of depreciation on annual cash flows.

$15 000

$11 250

$18 000

$18 750

$17 000

QUESTION 28

A cost that has already been incurred and cannot be recouped is referred to as a(n) __________cost.

sunk

relevant

opportunity

financial

side

QUESTION 29

Alfsonso and Sons purchased a new grinding machine 2 years ago at a cost of $390 000. Last year, some revolutionary developments occurred making their machine virtually worthless as it cannot produce products which meet the higher

quality standards of the newer machines. If Alfsonso and Sons continues using their current machine, they will lose all their customers. They have not found anyone willing to purchase the machine even at a deeply discounted price. The best description of this machine today is that it is a(n) __________ cost.

erosion

rationed

sunk

market

opportunity

QUESTION 30

Wislon and Taylor are implementing a project which will increase accounts payable by $5 000, increase inventory by $3 000, and decrease accounts receivable by $2 000. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

–$10 000

–$4 000

$0

$1 000

$4 000

Chapter 10 – Some Lessons from Capital Market History

QUESTION 31

Refer to Table 10.2 (page 300): What is the historical real return on long-term government bonds?

10.60%

2.20%

3.80%

6.45%

6.70%

QUESTION 32

One of the biggest Australian companies’ stock returned 9.37%, –3.55% and 11.55% over the past three years, respectively. What is the arithmetic average return for this period?

8.16%

5.79%

8.68%

9.37%

4.46%

QUESTION 33

Which of the following statements are correct?

I. The risk-free rate of return generally earns a risk premium of about one percent.II. The reward for bearing risk is called the standard deviation.

III. Based on historical returns, there are rewards for bearing risk.

IV. In general, the higher the risk, the higher the expected return.

I and II only

III and IV only

I, II, and IV only

II, III, and IV only

I, II, III, and IV

QUESTION 34

The geometric average return of 8, 12, 2, and 16 percent is computed as:

(1.08 + 1.12 + 1.02 + 1.16)1/2 – 1

(1.08 + 1.12 + 1.02 + 1.16)1/4

(1.08 × 1.12 × 1.0 × 1.16) × 4 – 1

(1.08 + 1.12 + 1.02 + 1.16) × 1/2

(1.08 × 1.12 × 1.02 × 1.16)1/4 – 1

QUESTION 35

If the financial markets are strong form efficient, then:

only the most talented analysts can determine the true value of a security

only company insiders have a marketplace advantage

technical analysis provides the best tool to use to gain a marketplace advantage

no one person has an advantage in the marketplace

the only true advantage in the marketplace is having insider information

Chapter 11 – Risk and Return

QUESTION 36

Suppose an investor created the following portfolio:

 Amount invested Expected return Beta

Share A $10 000 8% 0.80

Share B $20 000 12% 0.95

Share C $30 000 15% 1.10

Risk-free asset $40 000 5% Beta of risk-free asset

What is the portfolio beta?

0.60

0

0.71

0.95

1.00

QUESTION 37

Consider the following information on two securities.

 Expected return Beta

Security I 10% Market beta

Security II 8% 0.50

What is the risk-free rate?

8%

10%

9%

6%

5%

QUESTION 38

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is called the:

market risk premium

beta coefficient

standard deviation

asset mean

security’s alpha

QUESTION 39

If the reward-to-risk ratio of a security is greater than that supported by the security market line, then the security:

is under-priced in the marketplace

must be trading in a market which is strong-form efficient

is one which compensates investors for unsystematic risk

is one which compensates investors for the total risk associated with that security

must have a beta which is greater than 1.0

QUESTION 40

The slope of the security market line is equal to:

1 minus the risk-free rate of return

the risk-free rate of return plus beta times the market risk premium

the market risk premium

the return on the market

the risk-free rate plus the market risk premium

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