Introduction to Finance: Markets, Investments, and Financial Management 14th Edition

1) Capital budgeting is the process of identifying, evaluating, and implementing a firms investment opportunities. Answer: T Answer: T Answer: T 2) Standard deviation is stated in the same units of measurement as those of the data from which they were generated. Answer: T Answer: T Answer: T 3) Internally generated funds for financing new asset investments come

1) Research suggests that a portfolio of 20 or 30 different stocks has eliminated most of the portfolios systematic risk. Answer: F Answer: F Answer: F 2) The operating cycle measures the time between when a firm pays its suppliers for inventory and when it collects cash from customers on a sale of the

1) Nonfinancial information plays no part in capital budgeting. Answer: F Answer: F Answer: F 2) The prime rate is the interest rate the bank charges its most creditworthy customers. Answer: T Answer: T Answer: T 3) Net working capital indicates the percentage of current liabilities to current assets. Answer: F Answer: F Answer: F 4) A weak-form efficient market is a

1) Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds. Answer: F Answer: F Answer: F 2) Incremental cash flows represents a projects cash flows summed together with the firms other cash flows to get a total firm view of the project. Answer: F Answer: F Answer: F 3) Operating leverage affects

1) Two basic tools that can be used to reduce the consequences of managers making self-serving decisions include offering managers stock options and offering managers restricted stock. Answer: T Answer: T Answer: T 2) In general, a firms return on assets will be less than its return on equity. Answer: T Answer: T Answer: T 3) Marketable securities

1) A NPV profile shows how NPV varies given alternative IRRs. Answer: F Answer: F Answer: F 2) Asset management ratios indicate the ability to meet short-term obligations to creditors as they come due. Answer: F Answer: F Answer: F 3) Special Drawing Rights are international reserve assets created by the International Monetary Fund that can be drawn

1) The primary market is a market in which securities are traded among investors. Answer: F Answer: F Answer: F 2) In actual practice, most corporate bonds pay interest four times a year. Answer: F Answer: F Answer: F 3) For any firms given growth strategy, its dividend decision directly affects its capital structure decision. Answer: T Answer: T Answer: T 4)

1) Service industries tend to have larger proportions of fixed assets to current assets. Answer: F Answer: F Answer: F 2) a sunk cost is a project-related expense that is dependent upon whether or not the project is undertaken. Answer: F Answer: F Answer: F 3) The President of the United States and the Fed formulate a program

1) The operating profit margin is calculated as the firms earnings before interest and taxes divided by net sales. Answer: T Answer: T Answer: T 2) Working capital includes a firms marketable securities, accounts receivable, inventories, and mortgage debt. Answer: F Answer: F Answer: F 3) Permanent current assets reflect the minimum investment level in cash, accounts receivable,

1) Agency costs are the tangible and intangible revenues generated by shareholders because of the actual or potential selfless actions of managers; and agency costs include explicit, out-of-pocket expenses. Answer: F Answer: F Answer: F 2) Up until the start of the Vietnam War, the international monetary system operated mostly under a gold standard in

1) Nations that export more than they import will have a trade deficit. Answer: F Answer: F Answer: F 2) The variance or standard deviation measures the risk per unit of return. Answer: F Answer: F Answer: F 3) Cannibalization occurs when a project robs cash flow from the firms existing line of business. Answer: T Answer: T Answer: T 4) A

1) As the number of periods increases, present value increases. Answer: F Answer: F Answer: F 2) A firms business risk is measured by its variability in EBIT over time. Answer: T Answer: T Answer: T 3) The operating profit margin is calculated as the firms net income divided by net sales. Answer: F Answer: F Answer: F 4) One advantage of

1) The two basic sources of loanable funds are current the expansion of deposits by depository institutions and the generation of reserves through net capital inflows. Answer: F Answer: F Answer: F 2) Treasury bonds may be issued with any maturity but generally have an original maturity in excess of one year. Answer: F Answer: F Answer:

1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation. Answer: F Answer: F Answer: F 2) Savings surplus occurs when an economic unit has current income that exceeds its direct investment in real assets. Answer: T Answer:

1) Increases in the cash conversion cycle will lower the firms short-term financing needs. Answer: F Answer: F Answer: F 2) The ratio of long-term debt to GDP for non-financial U.S. corporations declined drastically during the late 1990s. Answer: F Answer: F Answer: F 3) Years of budget surpluses during the Reagan and first Bush presidencies changed into

1) The net present value of an investment is the present value of a projects future cash inflows minus its initial cost. Answer: T Answer: T Answer: T 2) The maturity risk premium is the added return expected by lenders because of the expectation of inflation. Answer: F Answer: F Answer: F 3) Using aggressive approach for financing

1) A bond will sell at a discount if its required return or discount rate is greater than its coupon rate. Answer: T Answer: T Answer: T 2) Because interest compounds, the annual percentage rate formula will overstate the true interest cost. Answer: F Answer: F Answer: F 3) Most bonds currently issued in the United States today

1) Specialists are assigned dealers who have the responsibility of making a market in an assigned security. Answer: T Answer: T Answer: T 2) Shareholder wealth may be defined as the price of a companys stock times the number of shares outstanding. Answer: T Answer: T Answer: T 3) Capital consumption allowances are estimates of the using up of

1) The marginal tax rate is the rate paid on the last dollar of income. Answer: T Answer: T Answer: T 2) An annual report contains descriptive information on operating and financial performance during the past year, a discussion of current and future business opportunities, and five year projected stock prices and shareholder returns. Answer:

1) The disbursement float is the delay in transferring the means of payment from the payor (customer) to the payee (the provider of goods or services). Answer: F Answer: F Answer: F 2) Over the counter markets are organized exchanges for trading securities such as the American Stock Exchange. Answer: F Answer: F Answer: F 3) The risk

1) Financial assets include ownership of land, buildings, machinery, inventory, commodities, and precious metals. Answer: F Answer: F Answer: F 2) In an efficient market, expected and unexpected news should cause stock prices to move up or down. Answer: F Answer: F Answer: F 3) Local governments depend heavily on property taxes for their revenues, while state governments

1) In general, large company stocks are less risky than small company stocks. Answer: T Answer: T Answer: T 2) The branch of government primarily responsible for the formulation of fiscal policy is the President and his Council of Economic Advisors. Answer: T Answer: T Answer: T 3) By multiplying the average sales per day times the inventory

1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank. Answer: T Answer: T Answer: T 2) The identification stage in capital budgeting involves finding potential capital investment opportunities and identifying whether a

1) The EPS/EBIT indifference level represents the level of Assets at which the firm would be indifferent between two different capital structures because they both result in the same level of EPS. Answer: F Answer: F Answer: F 2) A documentary draft is a draft that is accompanied by an order bill of lading and

1) The EPS/EBIT indifference level represents the level of EBIT at which the firm would be indifferent between two different capital structures because they both result in the same level of EPS. Answer: T Answer: T Answer: T 2) Bond issues of a single firm can have different bond ratings if their security provisions differ. Answer:

1) U.S. Treasury bills are sold at a discount through competitive bidding in an annual auction. Answer: F Answer: F Answer: F 2) The Federal Reserve System was not able to regulate money and credit until after World War II. Answer: F Answer: F Answer: F 3) The selection stage involves applying the appropriate capital budgeting techniques to help

1) The variance of a portfolio would be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances. Answer: F Answer: F Answer: F 2) If the interest rate is 0% for 10 years, then the present value will be less than the future

1) The net present value, internal rate of return and payback period methods always agree on which project would enhance shareholder wealth and which would diminish it. Answer: F Answer: F Answer: F 2) Savings surplus occurs when all of an economic units income is not consumed, but held in the form of cash

1) There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace. Answer: T Answer: T Answer: T 2) The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio. Answer: T Answer: T Answer: T 3) The quick ratio is a

1) The aftermarket is the market where securities are subsequently bought and sold after they are initially issued. Answer: T Answer: T Answer: T 2) An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyers bank. Answer: T Answer: T Answer:

1) The profitability index measures the present value of benefits received for each dollar invested. Answer: T Answer: T Answer: T 2) A debt holder may force the firm to abide by the terms of the debt contract even if the result is reorganization or dissolution of the firm. Answer: T Answer: T Answer: T 3) The velocity of

1) Slow economic growth in investments in another country would be an example of political risk. Answer: F Answer: F Answer: F 2) The stand-alone principle focuses on the projects own cash flows, uncontaminated by cash flows from the firms other activities. Answer: T Answer: T Answer: T 3) Short-term financing sources include bank loans, trade credit, and commercial

1) In general, short-term interest rates are more stable than long-term interest rates. Answer: T Answer: T Answer: T 2) Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky. Answer: T Answer: T Answer: T 3) Transactions motives for holding cash include holding funds to meet unexpected

1) The interest rate that is observed in the marketplace is called a real interest rate. Answer: F Answer: F Answer: F 2) The Fed plays a significant role in tax policy. Answer: F Answer: F Answer: F 3) An order bill of lading is a document given by a transportation company that lists goods to be transported

1) Subordinate debentures are bonds whose claims are subordinate or junior to the claims of those holding debenture bonds. Answer: T Answer: T Answer: T 2) The current account balance shows the flow of income into and out of the United States during a specified time period. Answer: T Answer: T Answer: T 3) The cash conversion cycle

1) Cost-push inflation during economic expansions when demand for goods and services is greater than supply. Answer: F Answer: F Answer: F 2) When accounts receivable are pledged: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to

1) The interest received by individuals on bonds issued by corporations in the United States is not tax deductible to the investor. Answer: T Answer: T Answer: T 2) ADRs, or American Depository Receipts, which are traded on U.S. exchanges, represent shares of common stock that trade on foreign exchanges. Answer: T Answer: T Answer: T 3) Speculative

1) A weakness for a proprietorship is that owners liability for debts of the firm is unlimited. Answer: T Answer: T Answer: T 2) EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another. Answer: T Answer: T Answer: T 3) The Fed closely monitors the Treasury account and takes any

1) The par value of a common stock is an accounting and legal concept that bears no relationship to a firms stock price or book value. Answer: T Answer: T Answer: T 2) Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the

1) The flotation costs of an initial public offering are comprised solely of direct costs and the spread. Answer: F Answer: F Answer: F 2) Trade credit may be considered the least formal of all forms of financing. Answer: T Answer: T Answer: T 3) A shock may be defined as an unanticipated change that will cause the

1) The issuer has no price risk in a firm commitment offering once the offer price is set. Answer: T Answer: T Answer: T 2) The United States economy has little influence on the economies of other nations. Answer: F Answer: F Answer: F 3) An indirect exchange rate quotation is simply the reciprocal of a direct exchange

1) Foreign exchange markets are electronic communication systems connecting the major financial centers of the world. Answer: T Answer: T Answer: T 2) Leverage does not affect EPS for most firms. Answer: F Answer: F Answer: F 3) A trust receipt is an instrument through which a bank retains title to goods until they are paid for. Answer: T Answer:

1) A firm with an inventory period of 100 days and an accounts receivable period of 50 days will have an operating cycle of 150 days. Answer: T Answer: T Answer: T 2) The average collection period is calculated as the year-end accounts receivable divided by the net sales. Answer: F Answer: F Answer: F 3) The default

1) Tax receipts tend to increase during economic downturns. Answer: F Answer: F Answer: F 2) Common stock possesses the lowest claim on the assets and cash flow of the firm. Answer: T Answer: T Answer: T 3) More efficient management of working capital assets will lessen the firms needs for financing. Answer: T Answer: T Answer: T 4) IPO under pricing

1) A travelers letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit. Answer: T Answer: T Answer: T 2) Poison

1) Fixed capital would be defined as the firms fixed assets, which include plant, equipment and property. Answer: T Answer: T Answer: T 2) The minimum required rate of return is a weighted average of the firms cost of various sources of capital. Answer: T Answer: T Answer: T 3) The Treasurys primary checkable deposit accounts for day-to-day

1) The weighted average cost of capital represents the minimum required rate of return on a capital-budgeting project and is found by multiplying the cost of each capital structure component by its appropriate weight and summing the terms. Answer: T Answer: T Answer: T 2) It is possible that the results of financial statement

1) Discounting is an arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value. Answer: T Answer: T Answer: T 2) Cross-sectional analysis is used to evaluate a firms performance over time. Answer: F Answer: F Answer: F 3) Both the operating cycle and the cash conversion cycle can be