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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.
2) In general, a firms return on assets will be less than its return on equity.
3) Marketable securities may be held for speculative motives.
4) The need for current funds increases when there is an upswing in the business cycle
or the sales cycle of an industry.
5) The maturity premium is the compensation that investors demand for holding
securities that cannot easily be converted to cash without major price discounts.
6) The maintenance margin is the minimum margin to which an investment may fall
before a margin call is placed.
7) A firms net income over some period is the same as its cash flow.
8) When accounts receivable are factored: 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 the firm, which then submits the payment to the bank;
and interest is charged on the loan.
9) In general, research has shown that the performance of tracking stocks has exceeded
that of parent company stocks.
10) Ratios standardize balance sheet and income statement numbers, thus minimizing
the effect of firm size.
11) If a financial asset has a historical variance of 4% squared, then its standard
deviation must be 16%.
12) Many convertible bonds possess a call deferment period which is a specified period
of time after the issue during which the bonds cannot be called.
13) The profitability index is the least preferable method to use to evaluate capital
budgeting projects because it does not take the time value of money into account.
14) As the interest rate increases, present value decreases.
15) Which of the following statements is false?
a.During the past couple of decades, generally high fixed-rate mortgage loan interest
rates and the desire to extend housing ownership to more individuals in the U.S., the
use of adjustable-rate mortgages grew in usage
b.An adjustable-rate mortgage (ARM) has an interest rate that changes or varies over
time as set by the Federal Reserve
c.The interest rate on an ARM is often adjusted annually to reflect changes in treasury
bill rates (or other interest rate benchmark)
d.Lenders typically offer ARMs with variable interest rates for one to five years with a
provision to switch to a fixed-rate over the remaining life of the ARM
e.all of the above statements are true
16) Capital budgeting is
a.the process of identifying, evaluating, and implementing a firms working capital
requirements
b.the process of identifying, evaluating, and implementing a firms management
objectives
c.the process of identifying, evaluating, and implementing a firms strategic plans
d.the process of identifying, evaluating, and implementing a firms financing
requirements
e.none of the above statements are correct
17) Personal consumption expenditures (PCE) does not include:
a.individual expenditures for durable goods
b.individual expenditures for nondurable goods
c.individual expenditures for services
d.all the above are included
18) Which one of the following ratios indicates the average number of days that sales
are outstanding?
a.average payment period
b.average collection period
c.quick ratio
d.interest coverage
19) Chrysler has a bond outstanding with eight years remaining to maturity, a coupon
rate of 5%, and semiannual payments. If the market price of the Chrysler bond is
$729.05, what is the yield to maturity?
a.7%
b.9%
c.10%
d.11%
20) Primary groups of policy makers that are actively involved in achieving a nations
economic policy objectives include all of the following EXCEPT:
a.the Federal Reserve System
b.the President
c.Congress
d.all of the above are primary policy makers
21) Which of the following statements is false?
a.The multiplying capacity of primary deposits is hindered by cash leakages from the
banking system
b.The monetary base is defined as bank reserves plus currency held by the nonbank
public
c.In contrast to the other transactions that affect reserves in the banking system, open
market operations are entirely at the initiative of the Federal Reserve
d.All the above statements are correct
22) The list of financial institutions that either failed or were merged with other firms or
bailed out by the federal government during financial crisis of 2007-2009 include all of
the following except:
a.Lehman Brothers
b.American International Group
c.Merrill Lynch
d.Washington Mutual
e.All of the above firms failed, merged or were bailed out
23) Foreign exchange markets may be described as:
a.specific locations in major industrial cities
b.major financial centers connected by good communications systems
c.money markets outside of the United States
d.facilities of central banks for foreign exchange
24) BP has an operating cycle of 120 days, an average collection period of 40 days, and
an average payment period of 30 days. Based on this information, BPs average age of
inventory is ________ days.
a.50
b.60
c.70
d.80
e.none of the above
25) An order for immediate purchase or sale at the best possible price is called a:
a.market order
b.limit order
c.stop loss order
d.margin order
26) When the market interest rate is the same as the coupon rate for a particular quality
of bond, the bond will be priced:
a.below its par value
b.at its par value
c.above its par value
d.The bond price cannot be determined
27) _____________ is when a broker constantly buys and sells securities from a clients
portfolio in an effort to generate commissions. Rather than making decisions that are in
the clients best interest, frequent commission-generating trades may be made by
brokers with selfish motives.
a.Blending
b.Flipping
c.Swapping
d.Churning
e. none of the above
28) Government-held reserves which are invested primarily in the in the obligations of
federal, local, and state governments include:
a.life insurance
b.pension funds
c.retirement funds
d.money market funds
29) U.S. debt management is generally designed to:
a.lower interest rates
b.stimulate economic activity
c.encourage orderly economic growth and stability
d.complement Federal Reserve monetary policy
30) Which one of the following best explains the impact on a firm that accepts a project
with a negative NPV?
a.negative cash flows
b.decrease in the value of the firm
c.high marginal cost of capital
d.low initial returns
31) Most firms that issue dividends try to maintain a consistent _________________.
a.dividend per share
b.dividend payout ratio
c.both policies are frequently employed
d.neither policy is frequently employed
32) The value of a share of stock currently selling for $100 after a 2 for 1 split is:
a.$50
b.$150
c.$200
d.$250
e.none of the above
33) The effective annual interest rate on a loan in which a company borrows $1000,000
for one year at 8 percent and requires a compensating balance of 10 percent is:
a.7.5%
b.8.5%
c.8.9%
d.7.9%
e.none of the above
34) If the variance for Stock A is greater than the variance for Stock B, then the
coefficient of variation for Stock A:
a.is greater than the coefficient of variation for Stock B
b.is less than the coefficient of variation for Stock B
c.is the same as the coefficient of variation for stock b
d.cannot be determined by this information
35) The cost of trade credit involving cash discounts as a form of short-term financing
is:
a.usually greater than the cost of commercial bank credit
b.usually greater than the cost of factoring receivables
c.excessive and to be avoided if at all possible
d.the lowest of any form of short-term financing
36) Various programs of the federal government help stabilize disposable income, and
in turn, economic activity in general. In so doing:
a.income tax rates may be lowered during periods of prosperity and increased during
slack economic periods
b.some programs act on a continuing basis and are described as automatic stabilizers
c.the timing of sale of U.S. savings bonds is instrumental in accomplishing this
objective
d.these programs seldom attain their goals
37) ________________ involves making decisions relating to issuing and investing in
stocks and bonds.
a.Financial economics
b.Financial management
c.Investment management
d.Asset allocation
e.none of the above
38) The time between when a payee sends payment and the funds are credited to the
payers bank account is called the:
a.collection float
b.disbursement float
c.total float
d.transmittal float
39) Ningbo Shipping has prepared the coming year's pro forma balance sheet and has
estimated that external financing required would be $230,000. The firm should prepare
to
a.repurchase common stock totaling $230,000
b.pay off an existing loan in the amount of $230,000
c.do nothing; the balance sheet balances
d.invest in marketable securities totaling $230,000
e.none of the above
40) Which of the following is the best expression of the net preset value (NPV)
acceptance criterion?
a.positive cash flows total greater than negative flows
b.number of positive cash flows exceeds negative
c.payback within one third the life of the project
d.NPV is greater than or equal to zero
41) During the early years of the life stage of a typical corporation, the:
a.volume of physical assets increases slowly
b.firm is unable to establish a strong position with respect to its financial assets
c.corporation is a heavy provider of financial assets
d.need for borrowed capital is small
42) If IBM has a beta of 1.2 when the risk-free rate is 6% and the expected return on the
market portfolio is 18%, the expected return on IBM is:
a.17.2%
b.20.4%
c.22.1%
d.23.6%
43) Assume that Ningbo Steel borrows $1,000,000 for one year under a line of credit
with a stated interest rate of 8.5 percent and a 15 percent compensating balance and that
the firm keeps no money on deposit in its checking account. Based on this information,
the effective annual interest rate on the loan is
a.8.8%
b.8.6%
c.8.4%
d.8.2%
e.none of the above
44) The risk cause by changes in inflation that affect revenues, expenses and
profitability is called:
a.interest rate risk
b.business risk
c.purchasing power risk
d. financial risk
e. none of the above
45) Which of the following securities issues do not require competitive bidding?
a.state government bond issues
b.public utility security issues
c.Federal government bond issues
d.corporate bond issues
46) The effect of ______________ and _______________ on the value of a firms stock
and the wealth of shareholders is zero.
a.stock dividends, stock splits
b.cash dividends, stock dividends
c.cash dividends, stock splits
d.all of the above
e.none of the above
47) Which of the following are typical financing strategies used by businesses?
a.maturity matching, aggressive financing, and conservative financing
b.size matching, aggressive financing, and aggressive financing
c.maturity matching, size matching, and aggressive financing
d.maturity matching, size matching, and conservative financing
