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An increase in a current asset or long-term liability produces a cash inflow. If a firm uses short-term sources of finance instead of long-term, its financial risk is increased. Answer: T If a firm has retained earnings, it has an […]

The risk associated with dispersion around an expected value (e.g., expected return) is measured by the a. beta coefficient b. range (i.e., high-low values) c. standard deviation d. debt to total assets (i.e., the debt ratio) A diversified portfolio a. […]

In an underwriting, the firm selling (issuing) the securities forms the syndicate. As the price of the stock rises, the probability that a convertible bond will be called increases. Answer: T An out of the money option will expire at […]

Which is smallest if the interest rate is 10%? a. present value of $100 annuity for five years b. future value of $100 annuity for five years c. present value of $100 after five years d. $100 received right now […]

If management substitutes new common stock for retained earnings, that tends to reduce the cost of capital. The managers of mutual funds have tended to outperform the market consistently. Answer: F When the general public uses money in checking accounts […]

Buying stock on margin a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all three Straight-line break-even analysis implies that a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 3 Answer: […]

Stock repurchases reduce a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 3 and 4 To determine the realized return on an investment, the investor needs to know a. 1 and 2 b. 1 and 3 […]

The dividend-growth model determines what an investor thinks a stock is worth but not necessarily its price. If suppliers want to discourage the use of trade credit, they may shorten the pay period (i.e., offer 2/10, n25 instead of 2/10, […]

If a firm uses accelerated depreciation, its earnings are initially increased. If a corporation operates at a loss, the loss may not be used to offset income from other years. Answer: F The intrinsic value of the put is the […]

A major function of the New York Stock Exchange is to raise money for firms. When funds are deposited in a savings account, the excess reserves of banks are unaffected. Answer: F If a firm’s current assets and current liabilities […]

The current price of a bond is not affected by a. current interest rates b. the risk classification of the bond c. the maturity date d. last year’s interest rates A firm with sales of $5,000 has the following balance […]

A firm has the following investment alternatives: Each investment costs $1,400 and the firm’s cost of capital is 10 percent. a. What is each investment’s internal rate of return? b. Should the firm make any of these investments? c. What […]

A cash budget seeks to determine estimated costs and revenues in order to forecast earnings. When a commercial bank grants a loan, it may decrease the cost of the loan by requiring an origination fee. Answer: F The Open Market […]

AZ’s dividend rose from $1 to $1.61 in five years. What has the dividend’s annual rate of growth? Lower beta coefficients imply the investment may be analyzed on a stand-alone basis. Answer: F A prime reason for leasing is to […]

The lower the rate of interest, the smaller is a. the economic order quantity b. the number of units sold c. the cost of carrying inventory d. the safety stock Money market mutual funds invest in a. corporate bonds b. […]

Debt financing a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4 Which of the following causes a currency inflow? a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 […]

As the firm expands, the spontaneous increase in which of the following is a source of finance? a. equipment b. inventory c. accounts payable d. accounts receivable A financial manager is considering two possible sources of funds necessary to finance […]

The futures price and the spot price must be equal a. when the contract is sold b. when the contract is bought c. when the contract is canceled d. when the contract expires More lenient terms of credit will probably […]

The cost of debt is less than the cost of equity. Since depreciation is a non-cash expense, it has no impact on a firm’s income taxes. Answer: F Short-term financing is an inappropriate source of finance to acquire long-term assets. […]

For a security to help diversify a portfolio, the asset a. must generate a greater return than the average return on the portfolio b. should not be sensitive to changes in security prices c. should have a return that is […]

A major difference between the net present value and internal rate of return is the interest factor. Many bonds have a call feature, which permits the firm to retire the bonds prior to maturity. Answer: T An investor who expects […]

Low P/E stocks indicate that the firm distributes a large proportion of its earnings as cash dividends. If accounts receivable are 15% of sales and sales double, the regression analysis says that accounts receivable will become 30% of sales. Answer: […]

Which of the following reduces the investor’s risk associated with investing in bonds? a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 1, 2, and 3 Convertible bonds have a call feature to a. protect stockholders […]

The cost of retained earnings tends to exceed the cost of issuing new stock because of the flotation costs. Stocks with low beta coefficients have higher required rates of return. Answer: F The higher the “times-interest-earned,” the safer (i.e., more […]

An increase in accounts payable is a cash outflow. If accounts receivable are 20% of sales and the level of sales doubles, the percent of sales says that accounts receivable will be 40% of sales. Answer: F Because interest is […]

The optimal capital structure minimizes the weighted average of the cost of debt and the cost of equity. An origination fee reduces the cost of credit. Answer: F If a person buys a stock for $10 and sells it after […]

If a firm has a need for finance, it may sell an asset and lease it back. The use of margin increases the potential percentage return on an investment in stock. Answer: T The numerical value of the slope of […]

The more frequently interest is compounded, the larger will be the final or terminal amount. Higher rates of interest are associated with greater present values. Answer: F 1X = $200,000 X = $200,000 / 4.1 = $48,780 The person may […]

Greater risk is associated with larger beta coefficients. Accounts receivable are adjusted for doubtful accounts (i.e., accounts that may not be paid). Answer: T If the probability of an investment’s cash inflows is decreased, the firm’s cost of capital should […]

When a convertible bond is called, the bondholder must convert the bond or lose the appreciation achieved by the stock. If accounts receivable are collected, the quick ratio increases. Answer: F Preferred stock dividends are not a legal obligation of […]

The Board of Governors a. manages the nation’s stock of gold b. has the substantive control over the money supply c. controls the U.S. Treasury d. is appointed by the U.S. Treasurer A risky $1,000 investment is expected to generate […]

If the Treasury sells debt that is purchased by the Federal Reserve and uses the funds to purchase military equipment, the excess reserves of the banking system are not affected. If the “times-interest-earned” were 1.5, that implies the interest payments […]

2/10, n30 implies a. a 10% discount if the bill is paid in 30 days b. a 2% discount if the bill is paid in 30 days c. a 10% discount if the bill is paid in 10 days d. […]

The current yield on a bond is the interest (coupon) paid by the bond divided by the market price of the bond. A grower of corn enters a contract to make future delivery of corn to reduce the risk of […]

Since high use of debt is associated with more risk, it may also lower the stock’s price. Your broker recommends that you purchase Good Mills at $30. The stock pays a $2.20 annual dividend, which (like its per share earnings) […]

An increase in the cost of an investment decreases the investment’s cash flows. An annuity of $100 for 10 years is currently less valuable if interest rates are 10% instead of 12%. Answer: F What is the annual rate of […]

The corporate income tax rates increase as earnings increase. In a short sale investors sell stock they own with the intention to buy it back within a short period of time. Answer: F Accounts payable are illustrative of liabilities that […]

The return on an investment in stock depends on both dividends and capital gains. Net working capital is the difference between current assets and current liabilities. Answer: T Blanket inventory loans are illustrative of secured, short-term credit. Answer: T An […]