True/False
1. The sole proprietor has unlimited liability; his or her total investment in the business, but not
his or her personal assets, can be taken to satisfy creditors.
T/F
2. Time-value of money is based on the belief that a dollar that will be received at some future
date is worth more than a dollar today. T/F
3. Holders of equity have claims on both income and assets that are secondary to the claims of
creditors. T/F
4. The possibility that the issuer of a bond will not pay the contractual interest or principal
payments as scheduled is called maturity risk. T/F
5. The breakeven point in dollars can be computed by dividing the contribution margin into the
fixed operating costs.
T/F

6. The ________ is the extent of an asset's risk. It is found by subtracting the pessimistic
outcome from the optimistic outcome
a)
b)
c)
d)

Return
Standard deviation
Probability distribution
range

7. ________ measure(s) the risk of a capital budgeting project by estimating the NPVs
associated with the optimistic, most likely, and pessimistic cash flow estimates
a)
b)
c)
d)

simulations
risk-adjusted discount rates
sensitivity analysis
multiple regression analysis

8. If a firm uses an aggressive financing strategy,
a)
b)
c)
d)

it increases return and increases risk.
it increases return and decreases risk.
it decreases return and increases risk.
it decreases return and decreases risk.

9. The two major sources of short-term financing are

a)
b)
c)
d)

a line of credit and accounts payable.
accounts payable and accruals.
a line of credit and accruals.
accounts receivable and notes payable.

10. At the operating breakeven point, ________ equals zero.
a)
b)
c)
d)

sales revenue
fixed operating costs
variable operating costs
earnings before interest and taxes

PROBLEMS (PLEASE SHOW WORK)
11. Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual endof-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her investments,
how much must she deposit at the end of each year?
a) $3,975
b) $6,475
c) $5,000
d) $4,513

12. Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8
percent interest rate. The original principal amount was
a) $31,000.
b) $30,000.
c) $25,000.
d) $20,000.
13. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual
coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar
risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt
bond is ________.
a)
b)
c)
d)

$791.00
$1,000
$1,052.24
$1,113.00


14. Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A
and B. The relevant cash flows for each project are given in the table below. The cost of
capital for use in evaluating each of these equally risky projects is 10 percent.

Initial Investment

Project A
$350,000

Project B
$425,000

Year Cash Inflows (CF)
1
2
3
4
5
6

$140,000
165,000
190,000
100,000
75,000
50,000

$175,000
150,000
125,000

The NPVs of projects A and B are ________.
A) $95,066 and $56,386, respectively.
B) $56,386 and $95,066, respectively.
C) -$56,386 and -$95,066, respectively.
D) none of the above.

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