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The return on a portfolio of stocks is the average of the returns on the stocks in the portfolio weighted by the percentage of the portfolio’s value invested in each stock. The formula for determining the degree of operating leverage […]

When accounts receivable are pledged as collateral rather than factored, the lender assumes the default risk on the receivables. Personal computers have changed the nature of financial planning. Armed with a PC and the right software, just about anyone can […]

All of the following constituencies would be considered stakeholders of a business except: A.management and employees. B.suppliers and creditors. C.the local community in which the business operates. D.stockholders. E.All of the groups listed above are stakeholders. If the equity multiplier […]

Determine how much you would be willing to pay for a security that pays $60 annually indefinitely (a perpetuity), assuming you require an 8 percent return on this investment. A.$480 B.$743 C.$1,000 D.$750 An agreement between a commercial bank and […]

Financial risk, which makes a firm’s ROE and EPS more volatile, exists only if the firm has some debt financing (leverage). The concept of risk aversion from portfolio theory, applies to capital budgeting because firms prefer to undertake less risky […]

The treasurer is in charge of accounting while the controller supervises most other financial functions. EBIT-EPS analysis shows the advantage/disadvantage of different levels of leverage as a function of profitability measured in terms of EBIT. Answer: TRUE To evaluate a […]

It can be argued that there are no economic benefits to shareholders from a conglomerate merger. If a project’s NPV is greater than zero, its IRR must be equal to the cost of capital. Answer: FALSE An amortized loan is […]

Cumulative voting makes it possible for minority shareholders to gain representation on the board of directors. Commercial paper is an example of marketable securities. Answer: TRUE If a firm has missed one or more dividends on cumulative preferred stock, it […]

One reason that investors may assign a different value to a stock is due to differences in the appropriate discount rate to use in solving for present values. The dividend irrelevance theory implies that the firm should follow a residual […]

Brokers and frequent investors are more likely to work with earnings per share and price earnings ratios to predict short-term stock price movements than with growth Models. Capital leases are often called financing leases, because they are a method of […]

The standard deviation is: A.the square of the variance. B.the square root of the variance. C.one-half of the variance. D.twice the variance. Consumer savings equals: A.industrial savings. B.industrial investment. C.financial rewards. D.financial risk. Answer: B. Overstated accounts include: A.items that […]

The term ____ refers to the assets and liabilities required to operate a business on a day-to-day basis. A.capital management B.working capital C.operating capital D.operating management Braebner Corp. orders 500,000 microchips per year at an average cost of $130. The […]

Only project cash flows that are incremental to the rest of the business are relevant for capital budgeting purposes. Transaction costs tend to make tailoring an income stream impractical. Answer: TRUE Companies sometimes create liabilities that exceed their assets when […]

In addition to justifying how capital dollars are spent, capital budgeting provides a basis for choosing among alternative capital projects. The cash conversion cycle is the time it takes to convert a receivable into cash. Answer: FALSE A decrease in […]

The cost of capital is a single rate that reflects the average return paid to investors who provide the firm’s capital. The availability of funds under a line of credit is not guaranteed by the lender. Answer: TRUE Including financing […]

Incremental cash flows associated with capital budgeting projects can include: A.reductions in labor costs. B.reductions in fuel and maintenance costs. C.increased profitability. D.All of the above Project A has a payback period of 8 years, while Project B has a […]

Donoho Corp. issued 20-year, $1,000 par bonds eight years ago with a 10% coupon paying semiannually that are now selling for $1,152.47. Estimate the cost of retained earnings assuming investors generally demand a 5% risk premium on equity over the […]

Market values are appropriate because new projects are generally funded with newly raised money. The components of a firm’s capital are debt, common equity, and preferred stock. Answer: TRUE It is important to understand that money like any other commodity […]

The weights applied to the various components of a firm’s cost of capital are based on the current composition of a firm’s capital structure. A revolving credit agreement is a guaranteed line of credit. Answer: TRUE An opportunity cost must […]

Financial assets are valuable because they give owners rights to future cash flows. Replacement projects tend to require the same elements as new ventures, but generally require less new equipment and facilities. Answer: FALSE Carrying costs represent those expenses that […]

If a product has a contribution margin of 40% and has a price of $5.00 per unit, how many units must be sold to breakeven assuming a fixed cost of $800,000.00? A.1.6 million B.0.4 million C.0.6 million D.0.9 million A […]

The capital structure is industry specific and not firm specific. That is, all firms in a particular industry will have the same capital structure. Financial risk is defined as the expected variation in EBIT. Answer: FALSE In most companies, the […]

FVFk,nis always greater than 1, whereas PVFk,nis always less than €1. Under just-in-time (JIT) inventory systems, manufacturers shifts the task of maintaining inventory to their suppliers, who in turn shift it to their own suppliers. Answer: TRUE An annuity due […]

Aurand Inc. has outstanding bonds with an 8% coupon paid semiannually. The bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is their yield? A.15.80% B.10.47% C.9.24% D.7.90% E.4.62% A […]

The replacement chain and the equivalent annual annuity methods are designed to evaluate stand-alone projects that have substantially different initial outlays. Money markets deal in short-term government and corporate debt, while capital markets deal in long-term corporate and government debt […]

A real option has a value to the business owner. There is no constant relationship between the spot and the forward exchange rate for a currency. Answer: TRUE Exchange rate risk can be eliminated with a bank contract for delivery […]

A high inventory turnover ratio would be important to a company whose product has a high level of spoilage. Accruals represent spontaneous financing from things such as purchasing inventory on credit. Answer: FALSE The S-corporation was designed to address the […]

Which of the following is true of the accelerated depreciation? A.It makes companies pay more taxes in the early years of an asset€s life. B.It allows companies to charge more depreciation in the early years of an asset€s life. C.It […]

CNN Corporation needs $750,000 and plans to borrow from its bank under the terms of its line-of-credit arrangement. These terms call for a minimum compensating balance of 12 percent. How much will CNN have to borrow to obtain the needed […]

Credit extended in connection with goods purchased for resale is called: A.commercial paper. B.bank loans. C.trade credit or payables. D.commercial credit. Why would a corporation purchase the stock of another corporation? A.To prevent double taxation of its shareholders B.Because dividends […]

Ratio analysis involves taking a set of numbers out of the financial statements and forming ratios with them. Ordinary annuities differ from annuities due in that annuities due occur at the ends of time periods while ordinary annuities occur at […]

The annual effective rate of interest is a function of: A.the annual nominal rate of interest. B.the number of compounding intervals per year. C.the imbedded annuity. D.a and b Large, strong companies frequently resort to commercial paper as a source […]

According to portfolio theory, the most relevant risk for any widely traded individual security is its: A.unsystematic risk. B.standard deviation. C.covariance risk. D.systematic risk. A four-year annuity of $1,000 annual payments at the beginning of each year, with a 10% […]

Capital budgeting involves how companies spend: A.day to day resources. B.money raised in capital markets. C.expenses only. D.large sums on infrequent projects. A combination of companies that compete directly is a: A.conglomerate merger. B.vertical merger. C.horizontal merger. D.takeover. Answer: C. […]

The appropriate discount rate in merger analysis is: A.the acquirer’s cost of capital because a merger is essentially a capital budgeting project. B.the acquirer’s cost of equity because mergers are risky and a rate above the cost of capital is […]

Which of the following would not be an appropriate guideline for determining the interest rate to use in discounting project cash flows in capital budgeting? A.For replacement projects, given that their risk is consistent with that of the present business, […]

What is the IRR for a project that has an initial cost of $400.00 and produces a revenue of $452.00 one year from today? (Hint: calculate the return on the investment) A.11% B.12% C.13% D.14% An automatic bias against high-risk […]

In terms of the capital budgeting process, net cash flows are: A.the net cash outlays required to place a project in service. B.the funds invested in additional assets. C.incremental changes in a firm’s cash flow. D.the outlays that have already […]

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don’s expected return on […]

The primary market is the market for original, first-time issues of securities. A portfolio is a collection of securities. Answer: TRUE An annuity is a series of equal payments separated by equal time intervals. Answer: TRUE The future value factor […]

Motorola has a contract to buy cellular telephones in Japan in 6 months. Payment will be in Japanese yen. What type of exchange rate risk does Motorola face? A.Economic B.Operating C.Transaction D.Translation Stock X paid a dividend of $2.50 yesterday. […]

A taxpayer€s average rate is the rate that will be paid on the next dollar of income. A decrease in financial leverage results in a larger tax liability because interest is tax deductible. Answer: TRUE A sinking fund represent a […]

Match the following: 1>Debentures A. Bonds that are backed by the value of specific assets 2>Subordinated Debt B. Bonds that are not backed by the value of specific assets 3>Secured Bonds C. Bonds having a “junior” position relative to more […]

Most equity investors are interested in a role as owner. Small firm planning processes cover the same spectrum with respect to time horizon and detail as large firm processes. Answer: FALSE The optimal capital structure maximizes stock price. Answer: TRUE […]

The federal government can always avoid default on its issues because of its unique right to: A.change Treasury bond yields to zero at its discretion. B.print money. C.tax. D.wage war. Pace Enterprises’ common stock sells for $29, and its dividends […]

Business projects virtually always involve: A.capital budgets. B.early cash inflows and later outflows. C.early cash outflows and later inflows. D.quick payback periods. Anti-trust legislation: A.is enforced by the Justice Department as well as the Federal Trade Commission. B.no longer applies […]

What entity within the firm has the discretion to issue dividends? A.Board of directors B.CEO C.CFO D.Vice President of Finance If a company has fixed costs of $40,000, a unit selling price of $12, and variable costs of $4 per […]

When interest rates are high, people prefer investments that return cash quickly. Accelerated debt is an anti-takeover strategy in which the target’s debt must be paid off in the event it is taken over. Answer: TRUE Profitable firms can go […]

The world of finance can be divided into three broad areas, the banking system, financial management and investments/financial markets. A privately held, or closely held, company is one in which the stock is held by a few investors and cannot […]

Economies of scale are rarely realized in a horizontal merger. In two successive years, it is possible for a firm to have identical profit and maintain identical levels of assets, but have different return on equity. Answer: TRUE The technical […]

Accounts receivable represents credit sales that have not yet been paid by customers. The fact that exchange rates are continually changing gives rise to the possibility that money may be made or lost on an international transaction because of rate […]

Budgets are usually: A.short-run supplements to the strategic plans. B.quarterly updates to the annual operating plans. C.especially important in stable industries. D.usually done in great detail by small businesses. According to the SML, the risk premium for stock X depends […]

Which of the following is correct? A.Beginning equity + Net income – Dividends – Stock = Ending equity B.Beginning equity + Net income – Dividends + Stock = Ending equity C.Net income – Dividends – Stock = Ending equity D.Beginning […]

Float, or money tied up in the process of check clearing, consists of transit float arising from the administrative functions of the payee that delay the actual deposit of the check and processing float created in the Federal Reserve’s check […]

Stock pricing models do not give precise results due to the uncertainty of future cash flows. In many financial mergers, private equity groups are taking advantage of firms whose market value is less than their intrinsic value. Answer: TRUE Lock […]

Financial planning is the process of projecting a company’s financial statements into the future, and is separate and distinct from the broader activity of business planning. If the expected return on a stock exceeds the return required by investors, the […]

The ____ the standard deviation, the ____ the investment. A.smaller, larger the expected return on B.larger, riskier C.smaller, riskier D.larger, smaller the expected return on Which of the following is a reason why lenders insist on bond indentures? A.To ensure […]

The annual percentage rate considers the effects of periodic compounding. The Securities and Exchange Commission was established to give the investor the support of a state regulatory agency that enforces both reporting and disclosure requirements of companies whose stocks are […]

The level of a firm’s receivables is influenced solely by factors outside the financial managers’ control. The incremental cash flow principle states that the new project’s cash flows should include all increases or decreases in cash flows to the firm […]

You have borrowed $130,000 to buy a new motor home. Your loan is to be repaid over 15 years at 8% compounded monthly. Calculate the total amount of interest you will pay over the life of the loan. A.$47,451 B.$93,677 […]

A firm acquires a competitor in a vertical merger. Typically, firms with high operating leverage will have high debt. Answer: FALSE The time value of money means that a dollar today is worth less than a dollar at any time […]

A firm should not invest in a capital project unless its NPV exceeds the firm’s cost of capital. EBIT measures operating efficiency only, while ROE and EPS measure only financial efficiency. Answer: FALSE The traditional C-corporation, in which the firm’s […]

An Allied Northern preferred stock pays a $3.84 annual dividend. What is the value of the stock at a 9.5 percent return? A.$40.42 B.$42.67 C.$38.40 D.none of the above Financial markets have the basic function of: A.providing liquidity. B.providing signaling […]

Virtually all accruals are best guess estimates of obligations arising from merchandise purchases for which vendor invoices have not yet been received. The three broad issues involved in receivables policy are (1) which customers should receive credit and how much, […]

Accelerated depreciation follows the half-year convention. That is, assets receive a half-year of depreciation in the 1st year and the remaining half-year of depreciation in the T+1 year where T is the designated life of the asset. A firm’s financial […]

The liquidity preference theory says that the yield curve should be upward sloping because lenders generally prefer long-term loans. An increase in the frequency of compounding will increase the future value of an investment if all other factors are held […]

A stock’s intrinsic value is based on assumptions about future cash flows made from technical analysis of the firm and the industry. Technical insolvency is a firm’s inability to meet its current obligations. Legal insolvency means the firm’s liabilities exceed […]

The difference between the riskiness of debt and equity is relatively constant between companies, and tends to command an additional risk premium of 3% to 5%. A rational investor will make an investment only if he or she believes the […]

Total return for preferred stock consists of: A.capital gains yield. B.dividend yield. C.dividend yield and the present dividend. D.capital gains yield and dividend yield. It is difficult to trade with a country that has a nonconvertible currency because: A.it is […]

An investment project requires an initial outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine the internal rate of return for the project […]

The drawback in the replacement chain method, arises when a large number of replacements are necessary to obtain equal time horizons for competing projects. The constant growth model assumes dividends will grow at a constant rate that exceeds the market […]

The over-the-counter market differs from the New York Stock Exchange in that: A.the stocks, although publicly traded, are not listed on an exchange. B.only relatively small companies are traded because larger companies are required to be traded on exchanges. C.NASDAQ […]

Du Pont analysis breaks a firm’s ROE into components such as profit margin, asset turnover and equity multiplier. As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of […]

The following is a listing of tax considerations for a family. How much is the their taxable income? A.$36,800 B.$23,200 C.$27,300 D.$24,800 If the debt ratio is 40.00%, then the equity multiplier is: A.60.00%. B.1.67:1. C.1:50:1. D.66.67%. Answer: B. Answer: […]

The following financial information is available on Rawls Manufacturing Company: Rawls can issue new common stock to net the company $44 per share. Determine the cost of retained earnings using the dividend growth model approach. (Compute answer to the nearest […]

DFL equals EBIT / (EBIT – I). A stock dividend differs from a stock split both in terms of its accounting treatment and its impact on stockholder wealth. Answer: FALSE A revolving credit agreement and a line of credit are […]

A project with a negative NPV always has an IRR that’s less than the cost of capital. Certainty equivalent factors can take any numerical value. Answer: FALSE When a new stock is introduced into a portfolio and the “peaks” in […]

If a firm has sales revenue (spread evenly through a 360-day year) of $1,170,000 and accounts receivable of $130,000, its average collection period, or days sales outstanding, is 40 days. When a foreign currency is expected to become more valuable […]

The dollar amount of interest charges is: A.always considered in the net cash flow calculation. B.normally not considered in the net cash flow calculation. C.always considered as a part of the net investment. D.None of the above A $300,000.00 thirty […]

A real option’s value may be more than the amount by which its inclusion in a capital budgeting project increases the project’s expected NPV because the real option may: A.reduce the project’s risk. B.increase the amount the firm makes if […]

An increase in the number of time periods reduces the present value of an annuity if all other variables are held constant. Bank credit is a minor source of short-term financing for firms. Answer: FALSE Investors are given the option […]

Financial leverage affects a firm’s EBIT. Operational or operating plans contain great detail about who is going to do what, commonly over a one-year planning horizon. Answer: TRUE Projects are said to be mutually exclusive when undertaking one precludes doing […]

The MIRR assumes that cash inflows are reinvested at the internal rate of return. Business plans and the information they contain are generally very private, and are not shared with investors or securities analysts. Answer: FALSE By factoring its receivables, […]

_____ ratios measure the ability to meet short-term financial obligations. A.Asset B.Liquidity C.Profitability D.Market Consider the following leverage scenarios: If under certain circumstances, financial leverage enhances performance measured by ROE and EPS, why does shifting from equity into debt have […]

The stock market is really the entire network of investors, brokers, and exchanges all connected together. It is generally best to forecast revenue with unit and price detail. Answer: TRUE In Modigliani and Miller’s model with taxes, a firm’s value […]

What is the internal rate of return for a project that requires an initial outlay of $92,000 and generates a single cash inflow of $25,750 in 5 years? A.10% B.12% C.15.3% D.13.1% A bond with a face value of $1,000 […]

An LBO is a takeover but not a merger. In a friendly merger, the target’s management and board of directors approve of the deal and cooperate with the acquiring company. Answer: TRUE The administrative reason for holding cash is to […]

Diversification achieved through a merger can reduce the variability of the earnings of the acquiring firm. Indentures and covenants on borrowing restrict the firm’s business operations, but do not limit its ability to pay dividends. Answer: FALSE A portfolio’s beta […]

A U.S. company that wants to buy products from a foreign firm must generally buy that country’s currency first. If a capital budgeting project is a business in a particular field it may make sense to use a beta common […]

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis. Holding all other variables constant, a decrease in the cost ratio would cause the times interest earned ratio to […]

The yield differential between high- and low-quality bonds tends to be larger in recessionary periods. Restrictive covenants increase risk to the bondholder. Answer: FALSE Under dividend preference investors prefer immediate cash to uncertain future benefits. Answer: TRUE An increase in […]

While the present value of an amount is decreased by an increase in the frequency of compounding, the present value of an annuity is increased. Bond prices respond to changes in the market rate of interest by moving in a […]

Stocks with equal stand-alone risk can have opposite risk impacts on a portfolio because of the timing of the variations in their returns. The company’s cost of capital is the average rate it pays its investors for the use of […]

The directors of Almond and Sons met on Friday, February 5. They declared that the first-quarter dividend was to be paid on Friday, April 9, with a record date of Friday, March 12. By what date must you be a […]

Calculate the amount to be received at the end of year 1 that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a […]

The relevance of a sunk cost to the evaluation of a capital budgeting project depends on how recently in the past the cost was incurred. While a firm’s bad debts should rise as it relaxes its credit standards, its ACP […]

In merger analysis, a terminal value represents: A.the estimated value of the target company exactly three years in the future. B.the book value of the target’s assets at the end of the period of cash flow estimation. C.the target’s value […]

Which financial planning assumption does not have supporting detail? A.Sales growth is based on the inflation rate. B.Sales growth is based on the industry average sales growth rate. C.Net income is based on the average net profit margin for the […]

The interest rates we observe in the economy differ from the risk-free rate because of: A.the real rate of interest. B.diversification. C.risk premiums. D.all the above Zeta Inc.€s cost of capital is 12% and the risk-free rate is 5%. It […]

The executive stock option system sets up a conflict of interest that may lead to dishonest financial reporting. The purpose of hedging in forward exchange markets is to limit losses resulting from unexpected future changes in spot exchange rates. Answer: […]

A major disadvantage of the proprietorship form is the difficulty of raising money. The cash budget measures both the timing and amount of a firm’s cash flows. Answer: TRUE Since the component cost of debt is less than the component […]

The cost of capital is the appropriate discount rate in capital budgeting when: A.all the projects are equally risky. B.all the projects have the same risk as the current firm. C.the projects can be ranked from riskiest to least risky. […]

Unlike a vertical merger, a horizontal merger expands the market share of the acquiring firm. A sum of money promised you at a time in the future is worth only as much as you would have to put in a […]

The proprietorship form of organization gives the business owner the protection of limited liability. Basic overheads are usually considered fixed and left out of project analysis. Answer: TRUE Replacement projects are generally expected to save costs without generating new revenue, […]

Since a firm can be viewed as a collection of projects, taking on projects without consideration of their risk can in the long term: A.change the firm’s risk character. B.systematically degrade the firm’s profitability. C.make the firm’s financial results more […]

Falcon’s projected 20X5 sales are $678 and its 20X4 year-end retained earnings were $1,385. If Falcon projects a 7 percent return on sale (ROS) and expects to pay $12 in total dividends in 20X5, forecast 20X5 year-end retained earnings. A.$35.46 […]

You plan to buy a car in one year. It will cost $15,000 at that time. You now have $5,000 in a bank that pays 12% compounded monthly. You will save for the car by making monthly deposits in the […]

A security’s value is equal to the present value of its expected future cash flows discounted by an appropriate rate of return. A merger for diversification is unnecessary from the perspective of stockholders, because they can accomplish the same diversification […]

External funding requirements can be estimated using an equation called the EFR relationship. The simple concept behind this equation is that funds will be needed to the extent of forecasted: A.growth in assets minus new retained earnings. B.growth in sales […]

The investment opportunity schedule (IOS) and the MCC viewed together identify which capital projects should or should not be undertaken. When an acquiring firm pays too much for an acquisition the real losers are the acquirer’s stockholders. Answer: TRUE Preferred […]

Which of the following would increase risk to the bondholder? A.A call provision B.Change in bond rating from A to AAA C.Secured by specific assets D.Restrictive covenants When a firm factors its accounts receivable as opposed to pledging them, the […]

An investment banker’s role in a merger might include: A.counseling reluctant targets on defensive measures. B.assisting the acquiring company in raising the capital necessary to pay for the target. C.assisting the acquiring company in establishing a value for the target. […]

Limited liability may not be an advantage of the corporate form for owner-operated small businesses because: A.a negligent worker can escape liability for his own acts. B.lenders usually demand personal guarantees from the owners of small businesses. C.stockholders participate in […]

Common stock is considered to be a: A.real Asset. B.financial Asset. C.debt Instrument. D.Both b & c Management’s propensity to overestimate the value of the target company in a merger can lead to: A.financial disaster for the acquiring company. B.a […]

The term of an investment can be described as either: A.long or short, long-term meaning any duration longer than five years. B.intermediate or short, intermediate being any duration longer than one year. C.long, intermediate, or short, intermediate being any duration […]

Mutual funds, pension funds, banks, investment banking firms, and insurance companies are institutional investors. A stock’s total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original […]

In a merger, all but one of the combining firms ceases to exist as a legal entity. International transactions handled on a cash basis are subject to a high degree of exchange rate risk. Answer: FALSE The following is an […]

Policy decisions regarding inventories, accounts receivable, cash balances, and marketable securities can control the amount invested in these assets. A firm’s net working capital reflects the amount of funds required to support its day-to-day routine operations. The word net reflects […]

Estimate the cost of new equity using the Gordon or dividend growth model, if last year’s dividend was $2.00, the anticipated constant growth rate is 5%, the stock’s selling price is $30 per share, and flotation costs are estimated to […]

The essence of finance is the process of raising capital (money), exclusively through the sale of bonds. Both operating leverage and financial leverage involve the substitution of fixed costs for variable costs. Answer: TRUE In the case of a replacement […]

Issuing companies prefer having the option of retiring their debt whenever they wish. Therefore they include call features in their bonds. A company’s cost of capital can be thought of as a required return for all capital budgeting projects that […]

Breakeven analysis is widely used to determine the level of activity a firm must achieve to stay in business in the: A.short run. B.long run. C.short and long run. D.None of these are correct. ____ working capital arises from the […]

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months. The existence of an abandonment option raises a project’s risk. Answer: FALSE The principal purpose of […]

If a firm can buy an item in one market, then sell it later for a profit in another market, the firm has engaged in arbitrage. Although percentage of sales methods (modified and unmodified) give results that are “in the […]

Which of the following is TRUE? A.A bond’s price moves to par value as it approaches maturity. B.Bond ratings measure the maturity risk associated with a given bond. C.Bonds are referred to as amortized debt due to the fact that […]

Most changes in EBIT are due to cost conditions and the effectiveness of management. The consumption and production sectors, have in fact been unable to establish a flow of savings dollars into the hands of producers, so there is a […]

Match the following: 1>Retained earnings A. The accumulated earnings of a company that have not been distributed to shareholders as dividends. 2>Dividends B. Earnings distributed to a firm’s owners 3>Paid in excess C. The amount paid for stock above its […]

Using simulation has few drawbacks since individual cash flows generally are independent and positively correlated. The interest rate on commercial paper normally exceeds the prime rate. Answer: FALSE The term knomrepresents the effective annual rate of interest. Answer: FALSE Not […]

The fixed charge coverage ratio is a more comprehensive version of the times interest earned ratio. Net working capital is the difference between current assets and current liabilities. Answer: TRUE In a consolidation, a new firm is formed from the […]

Under the fixed rate system, exchange rates were set by international treaty and administered by the International Monetary Fund. The firm’s cost of capital is a weighted average of the specific costs of debt and equity and preferred stock. Answer: […]

A recent direct quote for the British pound was $1.6750. How many British pounds can be purchased with $100? A.165.70 B.59.70 C.0.5970 D.16.57 The primary advantage of the proprietor form of business over the corporate form is: A.ease of raising […]

Which of the following is (are) effective in controlling the agency problem? A.Tie a large part of managements’ compensation to company profit B.Offer numerous perquisites C.Employ auditors to periodically review company books D.Both a and c Subordinated debt means debt […]

Both fluctuating exchange rates and deferred payment terms are necessary for foreign exchange risk to exist. By foregoing the prompt payment discount offered in terms of 1/10, net 30, the customer is effectively borrowing at rate of 36.5%. Answer: FALSE […]

Firms typically invest in real assets such as plant and equipment because of the services they provide. The range of possible outcomes for a traditional investment in stock is from -100% to +100%. Answer: FALSE According to MM, in the […]

Strategic planning involves broad thinking about a firm’s mission, and goals. It usually has a time frame or planning horizon of: A.10 to 20 years. B.one to three years. C.five years. D.Any of the above If the Canadian dollar strengthens […]

The overall rationale under which a firm pays dividends is referred to as its: A.dividend practice. B.corporate dividend preference. C.dividend policy. D.payout ratio. The main purpose of a stock split is to: A.give stockholders something that doesn’t cost the company […]

The maturity matching principle says that the maturity of financing should generally match the length of the project it supports. The economic order quantity model attempts to minimize total inventory cost by recognizing the tradeoff between carrying and ordering costs. […]

Which of the following are not financial intermediaries? A.Bank B.Insurance company C.Securities broker D.All are financial intermediaries Which of the following types of mergers would expand the acquiring firm’s market share in its own industry? A.Vertical B.Horizontal C.Conglomerate D.a and […]

If the direct quote shows the Canadian dollar at $.7376, prices stated in American dollars will be higher than the prices for the same goods stated in Canadian dollars. Marketable securities are also referred to as near cash or cash […]

Conglomerate mergers don’t generally have significant anticompetitive effects. The optimal capital structures can be precisely calculated with the latest technology. Answer: FALSE Unlike car loans, mortgage loans on real estate generally require larger payments of principal in the early years […]

The reliability of the current ratio as a measure of liquidity can be reduced by: A.a surplus of marketable securities. B.accounts receivable that are paid in advance. C.inventory that will not sell. D.the use of trade credit to finance current […]

It is appropriate that the WACC reflect historic costs of capital as the best estimate of what capital will cost during the coming period. The DFL quantifies the effect of leverage, but it can also be thought of as a […]

A bond with an annual coupon payment of $100 originally sold at par for $1,000. Market interest rates are currently 12%. This bond would be selling at a ____ in order to compensate ____. A.premium; the purchaser for the below […]

The single most significant reason for an investor to hold a stock that pays no dividends is that favorable tax implications are associated with appreciation in value and capital gains. If a company truly never paid a dividend, there would […]

Convertible bonds allow the issuing company to convert outstanding bonds to shares of common stock when the company deems necessary. The present value of a stock’s projected future cash flows is what the share is worth today. Answer: TRUE All […]

The dividend controversy is whether paying or not paying dividends affects stock price. Evaluating several possible cash flow scenarios gives a feel for variability of a project’s NPV. Answer: TRUE Commercial failure (as opposed to economic failure) is an issue […]

Which of the following represents a real asset? A.Land B.Bonds C.Stocks D.Both a & c E.All of the above Economic Order Quantity (EOQ) increases with an increase in ____. A.carrying cost per unit B.fixed cost per order C.annual demand D.Both […]

Finding the discounted value of $1,000 to be received at the end of each of the next five years requires calculating the: A.future value of an annuity. B.future value of a deferred annuity. C.present value of an annuity. D.present value […]

A firm has a product that sells for $25. The direct cost of manufacturing the product is $15 per unit. The product’s contribution margin is: A.$10. B.40%. C.60%. D.67%. Retained earnings are: A.the only internally generated capital source. B.the least […]

Which of the following is not a part of working capital? A.The short-term credit offered by a supplier. B.The tax that is due within a year. C.The cash held in the cash register for making change on a daily basis. […]

You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected? (Round to nearest $) A.Project B because of an EAA of $12,060 B.Project […]

Loans are said to be self-liquidating if the project the funds support automatically generates the cash to repay the loan. The traditional income statement is intended to measure profits by identifying cash flows in and out of the firm over […]