Multiple Choice (choose the best answer)

Solve the following problem. Billy Bob owns a house worth $350,000 and has a $55,000 bank account. Billy Bob owes $270,000 to the bank on a home mortgage loan and has a $12,000 credit card debt outstanding. Calculate Billy Bob's net worth.

a. $135,000

b. $123,000

c. $497,000

d. $37,000

e. $687,000

The existence of a well-functioning stock market facilitates the separation of ownership and management by providing which of the following?

I. Information about shareholder consumption preferences.

II. Information about shareholders other investment opportunities.

III. Information about the value of the firm.

Information about shareholders degree of risk aversion.

a. III only

b. I and III only.

c. I and II only.

d. II, III and IV only.

e. I, II and III only.

Which of the following statements is most correct?

a. the shareholders of a corporation elect managers who in turn select a board of directors to run the business

b. partnerships do not pay corporate income tax

c. a disadvantage of the corporation is unlimited liability

d. incorporation solves the incentive problem between owners and managers

e. none of the above (a., b., c.,d.) are correct

A retired investor invests $35,000 in a commercial bank certificate of deposit. The bank uses the money to make a loan to a new business venture. The money flows through the flow of funds diagram from __________ through __________ to ___________?

a. surplus unit; markets; deficit unit

b. deficit unit; markets; surplus unit

c. surplus unit; intermediary; deficit unit

d. deficit unit; intermediary; surplus unit

e. surplus unit; intermediary; markets

_____________ are financial instruments which derive their value from the prices of one or more other assets.

a. Debt securities

b. Equity securities

c. Derivative securities

d. Fixed income securities

e. Treasury securities

You buy Arthurs Educational Games stock for $50. You expect it will pay a cash dividend at the end of the year of $2, and you expect its price, after paying the dividend, to be $58 at years end. The price at the end of the year is actually $52 (after paying the dividend), and it does pay a $2 dividend. You decide not to sell the stock at the end of the year. Your expected return at the beginning of the year was _________, and your before-tax, achieved rate of return is ___________.

a. 20%; 4%

b. 16%; 4%

c. 8%; 20%

d. 20%; 8%

e. 4%; 4%

Use this information for the following question.

Asset Class	Mean Nominal Return (1926-1998)
Stocks	13.2%
Bonds	5.7%
Bills	3.8%
Inflation	3.2%

To the nearest tenth of a percent, the real return on stocks between 1926 and 1998 was ______, and the real return on bills was ______.

a. 13.2%; 3.8%

b. 9.7%; 0.6%

c. 16.4%; 7.0%

d. 13.2%; 3.2%

e. 16.8%; 7.1%

Rank stocks, bonds and (Treasury) bills from least risky to most risky, in terms of historical volatility of realized returns.

a. stocks, bonds, bills

b. bonds, stocks, bills

c. bills, stocks, bonds

d. bills, bonds, stocks

e. stocks, bills, bonds

Which of the following would increase rates of return on capital in a market economy?

I. people become less risk averse

II. the expected productivity of capital goods increases

III. uncertainty about productivity of capital goods increases

IV. people increase their preference for current consumption over future consumption

a. II and III only

b. I, II, III and IV

c. I, II, and III only

d. II and IV only

e. II, III and IV only

The objective of an investment strategy of indexing is to ______.

a. maximize your portfolios liquidity index

b. maximize your portfolios realized return

c. minimize the risk index of your portfolio

d. match your portfolio return to a broad-based portfolio, such as the Wilshire 5000

e. rank your stocks by size of expected return

As stockholders, we can not rely on the managers of our firm to always appropriately manage the company for us. Which of the following is not a mechanism for helping ensure that the managers of our firm more appropriately manage the company for us.

a. the threat of takeover

b. equity/performance based compensation for managers

c. effective board of director oversight

d. Sarbanes-Oxley penalties

e. Chairman of the Board of Directors also being the Chief Executive Officer

Life annuities are examples of _______________ problems.

a. Moral hazard

b. Adverse selection

c. Principal agent

d. All of the above

e. None of the above

The market for short-term debt (less than one year) is called the __________ market, and the market for long-term debt and equity securities is called the _____________ market.

a. money, capital

b. capital, money

c. fixed income, money

d. derivative, equity

e. money, money

The _____________ is a line depicting the relation between interest rates on fixed income instruments issued by the U.S Treasury and the maturity of the instrument.

a. exchange rate curve

b. short term curve

c. yield curve

d. federal funds curve

Lightscape Inc. has an asset turnover equal to the industry average, but its return on assets is less than the industry average. It must be true that Lightscapes ________ is _________ the industry average.

a. debt to equity ratio; less than

b. return on equity; greater than

c. return on sales; less than

d. return on sales; greater than

e. debt to equity; greater than

______________ are firms whose primary function is to help businesses, governments and other entities raise funds to finance their activities by issuing securities.

a. Closed end funds

b. Investment banks

c. Asset management funds

d. Open end funds

e. Index funds

In the United States, the _______________________ establishes the precise disclosure requirements that must be satisfied for a public offering of securities. a. the IMF

a. The IMF

b. The World Bank

c. The Federal Reserve

d. The Securities and Exchange Commission

e. The International Accounting Standards Board

Interest rate arbitrage is where you borrow at __________ rate and lend at __________ rate.

a. a lower, a higher

b. a higher, a lower

c. a lower, the same

d. a higher, the same

e. The same, the same

The case where there is an imbalance in the exchange of information about a business opportunity is known as _______________.

a. information symmetry

b. information asymmetry

c. information assets

d. (a) and (c)

e. public information

The beginning of year receivables for a firm are $40 million. The receivables turnover for the firm is 4.2 times and its sales are $220 million, calculate the end of year receivables.

a. $64.76 million

b. $104.76 million

c. $144.76 million

d. $272 million

e. $136 million

Assume you are given the following information for Flanders Company:

Return on Assets (ROA): 11%

Return on Equity (ROE): 20%

Total Asset Turnover : 1.5x

Calculate the Return of Sales for Flanders Company.

a. 7.33%

b. 13.33%

c. 1.81%

d. 8.5%

e. 16.5%

Use this financial information to answer questions 22, 23, 24, 25.

WHARTON DATA INC. BALANCE SHEET AS OF YEAR-END (figures in thousands)

Assets	2010	2011	Liabilities and Owners' Equity	2010	2011
Current Assets	9000	????	Current Liabilities	5800	6400
			Long-Term Debt	8000	7800
Net Fixed Assets	11,000	13,200	Owners' Equity	6200	????
Total Assets	20,000	21,400	Total	20,000	????

INCOME STATEMENT 2011 Other Data

Revenues	16,000		Shares Outstanding	200
Less: Costs	12,000		(in thousands)
Less: Depreciation	1,600		Market price per share	$75
Earnings Before Interest and Taxes	????
Less: Interest	800
Net Income Before Taxes	????
Less: Taxes	600
Net Income	????
Dividends	0

22. The 2011 return on assets ratios for Wharton Data Inc. is:

a. 11.59%.

b. 11.21%

c. 4.67%.

d. 4.83%.

e. 7.73%

23. The 2011 times interest earned for Wharton Data Inc. is:

a. 2.0.

b. 3.0.

c. 1.25.

d. 20.0.

e. 0.25.

24. The 2011 current ratio for Wharton Data Inc. is:

a. 1.0.

b. 1.5.

c. 1.28.

d. 0.66.

e. 0.82.

25. The 2011 market to book ratio for Wharton Data Inc. is:

a. 0.375.

b. 0.0.

c. 0.0104

d. 2.08

e. 0.075