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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.
2) Treasury bonds may be issued with any maturity but generally have an original
maturity in excess of one year.
3) Personal consumption expenditures indicate expenditures by individuals for durable
goods, nondurable goods, and services.
4) The profitability index is the ratio between the some of the cash flows and the
projects cost.
5) Estimates of revenues and costs should take the business unit view, rather than the
corporate view.
6) The firms unadjusted cost of debt financing equals the yield to maturity on new debt
issues.
7) The pecking order hypothesis implies that firms have no optimal debt/equity ratios.
8) With compound interest, interest is earned only on the investments principal.
9) Industry characteristics can affect whether the firm chooses an aggressive,
conservative, or maturity matching strategy for financing its assets.
10) Firm value is calculated by adding expected cash flow to the firms cost of capital
under each capital structure.
11) Most market risk can be eliminated through diversification.
12) The interest coverage ratio is a stricter measure of a firms ability to meet its fixed
payment obligations than the fixed charge coverage ratio.
13) Indirect financing involves the use of securities such as corporate stocks and bonds
that represent specific contracts between the savers and borrowers themselves.
14) A line of credit costs the firm only the normal interest for the period during which
money is actually borrowed.
15) The return provided by a $100 annuity deposited for 10 years that results in a future
value of $614.46 is 11.45%.
16) The maturity matching approach is a financing strategy that attempts to match the
maturities of assets with the maturities of the liabilities which they are financed.
17) Floor brokers act as agents to execute customers orders for securities purchases and
sales.
18) All public offerings are regulated by the Securities and Exchange Commission
(SEC).
19) Securities market institutions include:
a.savings banks
b.government credit-related agencies
investment companies and mutual funds
none of the above
20) Positive NPV projects may originate from cost saving projects such as those that
a.create economies of scale
b.create product differentiation
c.generate absolute cost advantages
d.exploit advantages in distribution channels
e.all of the above statements are correct
21) The approximate effective cost (EC) of financing the discount price of trade credit
under terms 2/10, net/30 using a 360 day year is:
a.25%
b.30.1%
c.36.7%
d.42.5%
22) Which of the following statements is most correct?
a.The degree of combined leverage measures the sensitivity of earnings per share in
EBIT
b.A firms business risk is measured by its variability in earnings per share over time
c.A firms degree of combined leverage is the product of its degree of operating leverage
and its degree of financial leverage
d.All the above statements are false
23) Which one of the following is not a basic function of financial management?
a.financial planning and analysis
b.acquiring other business firms
c.asset management
d.raising of funds
24) In the statement of cash flows, retained earnings are reported as two separate line
items, which are __________ and ___________.
a.revenues and expenses
b.assets and liabilities
c.depreciation and amortization
d.net profits and dividends
e.none of the above
25) Greater potential savings would result from a (n):
a.age distribution shift to more teenagers
b.shift to more elderly people in the total population
c.shift to more young married couples
d.shift to more middle-aged families
26) Which of the following forms of organization has an unlimited life?
a.proprietorship
b.LLC
c.subchapter S corporation
d.corporation
e.two of the above have an unlimited life
27) If the Fed wishes to stimulate the economy, it may:
a.lower the discount rate
b.raise reserve requirements
c.sell securities through open market operations
d.raise both the discount rate and the reserve requirements
28) As defined in accordance with efficient markets notions, a weak-form efficient
market would be a market in which asset prices reflect all:
a.current information
b.past information
c.inside information
d.public information
29) _____________ costs are a function of quantity sold, not time.
a.fixed
b.semi-variable
c.operating
d.semi-fixed
e.none of the above
30) Taking advantage of unusual cash discounts or price bargains is an example of the:
a.transactions motive
b.precautionary motive
c.speculative motive
d.leverage motive
31) Which of the following statements is most correct?
a.Extended refunding is one of the new debt-management techniques used to extend the
average maturity of the marketable debt without disturbing the financial markets and
occurs when the Treasury offers the owners of a given issue the opportunity to
exchange their holdings well in advance of the holdings regular maturity for new
securities of longer maturity
b.Investment grade bonds have ratings of Aaa or higher and meet financial institution
(banks, pension funds, insurance companies, etc.) investment standards
c.In reaction to the then developing 2007-2009 financial crisis, short-term interest rates
declined sharply and were less than 100 percent by October, 2008
d.Laddered refunding is one of the new debt-management techniques used to extend the
average maturity of the marketable debt without disturbing the financial markets and
occurs when the Treasury offers the owners of a given issue the opportunity to
exchange their holdings well in advance of the holdings regular maturity for new
securities of longer maturity
e. none of the above
32) The three main sections of the statement of cash flows include all of the following
EXCEPT:
a.cash from saving
b.cash from investments
c.cash from operations
d.cash from financing
e.all are included
33) An area of finance that refers to the physical locations or electronic forums that
facilitate the flow of funds among investors, businesses, and governments is called:
a.financial management
b.investments
c.financial institutions
d.financial markets
e.none of the above
34) Which of the following categories is not considered to be one of the four basic
economic units in the U.S. financial system?
a.business firms
b.financial intermediaries
c.governments
d.not-for-profit organizations
35) When the market interest rate rises above the coupon rate for a particular quality of
bond and the bond price declines, the new expected yield is called the:
a.coupon rate or yield
b.current yield
c.book value yield
d.net present value yield
36) A decrease in contractual managers salaries will result in:
a.an increase in the degree of financial leverage
b.a decrease in the degree of financial leverage
c.no change in the degree of financial leverage
37) Three reasons we study finance include all of the following except:
a.To make informed economic decisions
b.To make informed personal and business investment decisions
c.To make informed career decisions based on a basic understanding of business
finance
d.To make informed medical decisions
e. all of the above
38) Which one of the following transactions or operations is entirely at the initiative of
the Federal Reserve?
a.using public statements to manipulate the economy
b.change in float
c.change in bank borrowings
d.change in Treasury cash holdings
e. none of the above
39) ________ evidence of the existence of a problem or outstanding management
performance is provided by ratio analysis.
a.Inconclusive
b.General
c.Incomplete
d.Initial
e.all of the above
40) Trades between large institutional investors that take place without the benefits of
brokers or dealers occur in the:
a.primary market
b.secondary market
c.third market
d.fourth market
41) Which of the following factors directly impact the level of interest rates?
a.risk
b.marketability
c.maturity
d.all of the above
42) The ________ is the time period that elapses from the point when the firm makes
the outlay to purchase raw materials on account to the point when payment is made to
the supplier of the goods.
a.cash conversion cycle
b.operating cycle
c.average age of inventory
d.average collection period
e.none of the above
43) An examination of a firms opportunities, strengths, threats and weaknesses is often
referred to by the following acronym:
a.WOTS
b.OSTW
c.STOW
d.TWOS
e.none of the above statements are correct
44) Which of the following statements is most correct?
a.Contractual savings include such things as accumulation of reserves in insurance and
pension funds and deposits to time and savings accounts in commercial banks
b.As savings increased in the United States, there was a change in our status from a
creditor nation to a debtor nation
c.In the U.S. economy, recessions can be avoided with the appropriate fiscal policy
d.Corporate bonds and stocks are said to be indirect securities, while commercial bank
time deposits would represent primary instruments in terms of the savings investment
process
e.none of the above
45) Open market operations differ from discounting operations in that they are:
a.initiated by member depository institutions
b.designed to be of significance only to large city banks
c.initiated by the President
d.initiated by Congress
e.none of the above
46) If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then
the APR is:
a.10.38%
b.10.00%
c.2.50%
d.none of the above
47) A wealthy inventor has decided to endow her favorite art museum by establishing
funds for an endowment which would provide $1,000,000 per year for research. The
scientist will fund the endowment upon her fiftieth birthday 10 years from today. She
plans to accumulate the endowment by making annual end-of-year deposits into an
account. The rate of interest is expected to be 6 percent in all future periods. How much
must the scientist deposit each year to accumulate to the required amount?
a.$1,575,333
b.$736,000
c.$1,264,446
d.$943,396
48) During the onset of the Financial Crisis between 2007 and 2008, an investor would
have earned the greatest return if he or she had invested in
a.only stocks
b.only Treasury bonds
c.a portfolio consisting of 50% stocks and 50% Treasury bonds
d. a non-interest bearing cash account
e. none of the above
49) An effective financial system must have
a.financial markets that hinder the transfer of financial assets among individuals,
institutions, businesses, and governments
b.financial institutions or intermediaries that inhibit capital formation either by
channeling savings into investment in physical assets or by fostering direct financial
investments by individuals in financial institutions and businesses
c.an efficient monetary system that is comprised of a central bank and a banking system
that is unable to create and transfer a stable medium of exchange called money
d.several sets of policy makers who pass laws and inhibit decisions relating to fiscal and
monetary policies
e. none of the above are required
