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1) The use of the weighted average cost of capital assumes that the firm is in its optimum capital structure range and the cost of each component stays constant over the range of financing. Answer: TRUE 2) Firms with bright […]

1) Among several other roles, as a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public. 2) The premium for a warrant would increase if its underlying common stock has […]

1) The payment of a call premium may generally be taken as an immediate tax write-off. 2) The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales […]

1) Markets are efficient when prices adjust rapidly to new information, continuous markets exist. and large dollar trades can be absorbed without large price movements. 2) The Internet has accounted for an acceleration of productivity for “old economy” firms. Answer: […]

1) Life cycle growth analysis can be helpful in determining a firm’s ability to pay dividends. 2) The term “underwriter” is synonymous with risk-taker or risk-bearer. Answer: TRUE 3) Higher interest rates (discount rates) reduce the present value of amounts […]

1) Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and reduce the need for supply chain management. 2) The more short-term financing there is relative to long-term financing, the riskier the financial structure. […]

1) Stock dividends and stock splits have the same impact on retained earnings. 2) Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the receivable to the buyer. Answer: TRUE 3) The advantage of a […]

1) To the individual recipient, preferred stock dividends offer no advantage over common stock dividends. 2) A warrant may carry a speculative premium above intrinsic value if it will not expire until far into the future. Answer: TRUE 3) During […]

1) The European Central Bank that was created with the European Monetary Union has no control over monetary policy but is responsible for clearing transactions between the countries. 2) Stable dividends may cause a higher discount rate for the firm, […]

1) The use of depreciation is an attempt to allocate the past and future costs of an asset over its useful life. 2) The degree of combined leverage is the sum of the degree of operating leverage and the degree […]

1) Investment banks are hesitant to issue bonds when they perceive the interest rate to be low. 2) To find the exact internal rate of return for projects with uneven cash flows, we can interpolate between two present value annuity […]

1) The future rates of currency tend to increase for dates further in the future because of the increasing uncertainty over time. 2) A rapid payback may be important to firms having rapid technological development. Answer: TRUE 3) Cash break-even […]

1) In Stage I of a firm’s life cycle, the firm will pay high dividends to shareholders in order to attract additional investors. 2) The market-determined required rate of return is the appropriate discount rate used in valuation calculations. Answer: […]

1) Under the “modified accelerated-cost-recovery system” (MACRS) of depreciation, cash flow tends to decline with the passage of time. 2) A call provision is a commonly used device by a corporation to force conversion into common stock. Answer: TRUE 3) […]

1) When a company first goes public, a registration statement must be filed with the New York Stock Exchange. 2) Selection of portfolio combinations from the efficient frontier will depend upon our willingness to assume risk. Answer: TRUE 3) Bonds […]

1) To add financial strength and stability, the countries of Greece and Portugal are now considering joining the “Eurozone.” 2) Absolute values taken from financial statements are more useful than relative values. Answer: FALSE[/cpmembership] 3) Per the capital asset pricing […]

1) When a company is obligated contractually to pay interest on debt, it must pay the interest even if it shows no profit for the year, or else it may go bankrupt. 2) The higher the cost of bank financing, […]

1) A firm paying a stock dividend will experience a drop in its earnings per share but its shareholders’ total claim on earnings will increase. 2) The term balance of payments refers to the flow of economic transactions between the […]

1) When choosing portfolios of assets, management should try to achieve the highest possible return at a given level of risk. 2) Short-term interest rates are generally lower than long-term interest rates. Answer: TRUE 3) Financial markets exist as a […]

1) Selling stockholders may receive a price well above current market or book value. 2) When a company defaults on a secured debt, it is rare for the secured asset to be sold and the proceeds distributed to the debtor. […]

1) An increase in accrued expenses results in a cash outflow on the statement of cash flows. 2) Accounting income is based on verifiably completed transactions. Answer: TRUE 3) The rate on Eurodollar certificates of deposit is usually lower than […]

1) Insider trading involves the use of information not available to the general public to make profits from trading in a company’s stock. 2) Most dividends, like interest on corporate bonds, are paid semi-annually. Answer: FALSE 3) A tax loss […]

1) Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. 2) An increase in an asset represents a source of funds. Answer: FALSE 3) The value of a share of stock is the present value of […]

1) The most common partnership arrangement carries limited liability to the partners. 2) In evaluating capital investment projects, current outlays must be judged against the current value of future benefits. Answer: TRUE 3) Generally, once a convertible bond trades at […]

1) Firms with cyclical sales should employ a high degree of leverage. 2) Translation exposure occurs because of changes in foreign exchange rates. Answer: TRUE 3) In determining the optimum capital structure, it is assumed that the firm will raise […]

1) Smaller investment banking houses may handle distributions for relatively unknown corporations on a “best-efforts” basis. 2) Generally, dividends should be changed when a corporation reaches a new level of permanent income. Answer: TRUE 3) In the capital asset pricing […]

1) Ideally, permanent current assets should be financed exclusively with short-term borrowings. 2) According to the expectations hypothesis, the expected value is the sum of the probabilities of all expected events. Answer: FALSE 3) The income statement is the major […]

1) A decrease in bonds payable results in a cash outflow on the statement of cash flows. 2) Maximizing the earnings of the firm is the goal of financial management. Answer: FALSE 3) Agency theory assumes that corporate managers act […]

1) Lease obligations currently appear only in the footnotes of U.S. corporate financial statements. 2) Companies generally prefer to maintain some minimum cash balance. Answer: TRUE 3) The Internet impacts e-commerce by creating a mechanism for improved communications between a […]

1) If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be half the re-order size. 2) Projects that are totally uncorrelated provide more overall risk reduction than negatively […]

1) Because of political risk, it is generally disadvantageous for U.S. firms to list their stocks on the world stock exchanges. 2) The movement of the exchange rate between two currencies can increase the total cost of a loan by […]

1) If an individual’s cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now. 2) The faster a firm’s growth in sales, the more likely it is […]

1) One of several reasons that companies might choose to issue bonds is to shift their capital structure from more equity ownership to more borrowing. 2) The contribution margin is equal to sales price per unit minus total costs per […]

1) Eurodollars are U.S. dollars held on deposit by foreign banks. 2) Even though one project may have superior cash flows, top management may sometimes choose a project that inflates earnings instead of cash flow. Answer: TRUE 3) At historically […]

1) The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods. 2) The purchasing power parity theory states that currency exchange rates […]

1) Shelf registration is most frequently used with new issues of common stock. 2) Antitrust policy can preclude the acquisition of a competitor. Answer: TRUE 3) Commercial paper represents secured short-term borrowing by large companies. Answer: FALSE 4) It is […]

1) Times interest earned is an example of a profitability ratio. 2) The dollar value of common stock issuances exceeds the level of preferred stock issuances and corporate bond issuances. Answer: TRUE 3) Finding out who is ultimately responsible for […]

1) The capital budgeting decisions of a firm will have no effect on the share price of the common stock. 2) Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher […]

1) The modified internal rate of return method assumes that inflows are reinvested at 80% of the internal rate of return. 2) Depreciation is important in calculating projected cash flows because it generates a tax deduction. Answer: TRUE 3) Firms […]

1) Firms with highly volatile and perishable inventory should assume relatively low levels of risk. 2) As inflation in France increases and stays the same in the U.S., the exchange rate of the euro to the dollar will increase. Answer: […]

1) High-risk corporate bonds are as risky as junk bonds. 2) An exporter is able to satisfy foreign demand for a product while avoiding long-term investment, although this method is considered riskier than all other alternatives. Answer: FALSE 3) The […]

1) Only a small amount of security issues are sold on a “best-efforts” basis. 2) A $125,000 credit sale could be a part of a firm’s cash flow from operations if paid off within the firm’s fiscal year. Answer: TRUE […]

1) The expected value is a weighted average of the outcomes multiplied by their probabilities of occurrence. 2) The issuing company desires to have as little underpricing of new securities as possible. Answer: TRUE Underpriced securities will sell rapidly, but […]

1) Using semi-annual compounding rather than annual compounding will increase the future value of an annuity. 2) A firm’s cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (Kp = […]

1) Investors in high marginal tax brackets usually prefer companies that reinvest most of their earnings, thus creating more growth in earnings and stock prices and deferring taxes into the future. 2) Book value per share and market value per […]

1) A motive for selling stockholders may be the bias against smaller companies. 2) The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds. Answer: FALSE 3) Many attribute the banking crisis of 2008-2009 to problems in […]

1) Regardless of the particular source of funds utilized for a project, the required rate of return, or discount rate, will be the weighted average cost of capital. 2) According to traditional financial theory, the cost of capital curve is […]

1) The payback method considers all cash inflows. 2) Sales minus cost of goods sold is equal to gross profit. Answer: TRUE 3) Increased use of long-term financing is generally a more conservative approach to current asset financing. Answer: TRUE […]

1) Corporations are partially exempt from taxes on dividends received from other corporations. 2) The formula PV = FV(1 + n)i will determine the present value of $1. Answer: FALSE 3) Historically, the real rate of return has been about […]

1) Debt utilization ratios are used to evaluate the firm’s debt position with regard to its asset base and earning power. 2) The statement of cash flows helps measure how the changes in a balance sheet were financed between two […]

1) The interest factor for the future value of a single sum is equal to (1 + n)i. 2) The most widely used currency in the Eurobond market is the euro. Answer: FALSE 3) With a dividend reinvestment plan, an […]

1) “Business risk” relates to the inability of the firm to meet its debt obligations as they come due. 2) The costs of bond refunding are the call premium and the underwriting costs on the old and new bond issue. […]

1) The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. 2) Private placement eliminates the expensive and lengthy registration process with the Securities and Exchange Commission. Answer: TRUE 3) An increase in inflation will cause […]

1) Because ratios are historic, they have minimal value to an investor. 2) During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy. Answer: TRUE […]

1) Possibly the most overlooked part of the capital budgeting process is the search for new opportunities through innovation and creative thinking. 2) The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement. Answer: FALSE The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, […]

1) The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock. 2) The cash savings from reduced dividend […]

1) Profitability ratios allow one to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. 2) The use of “float” has dramatically increased since the Check Clearing for the 21st Century […]

1) The cost of debt, preferred stock, and common equity must all be adjusted for tax implications. 2) Operating leverage works best when volume is increasing. Answer: TRUE 3) It is more likely for financial managers to focus on cash […]

1) One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. 2) Sales projections and the ability […]

1) The calculation of the cost of capital depends upon the historical cost of funds. 2) During an economic “boom” period, a shortage of low-cost financing alternatives exists. Answer: TRUE 3) Dividends are the active variable in the “marginal principle […]

1) Leontief’s Wigs can borrow from its bank at 16% to take a cash discount. The terms of the cash discount are 2/10, net 60 . Leontief’s should borrow from the bank to take the discount. 2) The major suppliers […]

1) The Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities. 2) Forced conversion refers to the corporation calling a convertible bond when the market price of the stock is above […]

1) For most modern corporations, the more cash they have, the better off they are. 2) “Poison pills” are strategies that reduce the value of a firm if it is taken over by a corporate raider. Answer: TRUE 3) Operating […]

1) A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested. 2) The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their […]

1) A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids. 2) The Sarbanes-Oxley Act of 2002 holds a firm’s internal auditors legally accountable for the accuracy of their firm’s financial statements. Answer: FALSE […]

1) A “risky” financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets. 2) The NASDAQ market is the primary market for international securities. Answer: FALSE 3) Risk is not only […]

1) Maintaining a safety stock will always guard against an “EOQ point” from occurring. 2) The potential of a tax loss carryforward has no effect when considering the acquisition of a company. Answer: FALSE 3) Sensitivity analysis helps the financial […]

1) Under a sinking fund provision, money is set aside every year until the bond matures, and then the money is used to repay the principal. 2) Because of changing economic conditions, it is difficult for companies such as Dun […]