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
The time value of money suggests
a. that the present is less attractive than the future
b. individuals prefer a dollar in the present to a dollar in the future
c. the present value of an annuity is negative
d. annuities are worth less than lump sums
Which of the following terms of trade credit is the least expensive?
a. 2/10, n30
b. 3/15, n45
c. 3/10, n45
d. 1/10, n45
Secured loans imply
a. specific liabilities support the loan
b. the firm has excessive debt financing
c. the firm is using only long-term debt financing
d. an asset is pledged to support the loan
NPV may be preferred to IRR because
a. IRR makes the more conservative assumption concerning reinvestment
b. NPV makes the more conservative assumption concerning reinvestment
c. IRR excludes salvage value
d. NPV includes salvage value
A firm with sales of $5,000 has the following balance sheet:
The firm earns 5 percent on sales and expects sales to rise to $5,500. The increase may
require additional financing. Regression analysis is used to estimate accounts
receivable, inventory, and trade accounts (payables). These estimated equations are
Management expects to distribute 20% of earnings.
a. Determine the new balance sheet entries for sales of $5,500.
b. Will the firm need external financing to achieve sales of $5,500?
c. Construct the pro forma balance sheet for sales of $5,500. Any new financing should
be obtained by issuing new long-term debt. Any excess funds should be held in cash.
A stock dividend causes the firm’s
a. assets to increase
b. equity to increase
c. liabilities to remain unchanged
d. assets to decrease
If the capital asset pricing model is used, the cost of equity depends on
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Swap agreements
a. transfer ownership
b. transfer liabilities
c. transfer payments
d. transfer tax obligations
Credit policy requires
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
The DuPont system of financial analysis combines
a. profitability and turnover
b. liquidity and turnover
c. profitability and liquidity
d. turnover and coverage
The shares of a load fund
a. sell for the fund’s net asset value
b. are purchased through the secondary markets
c. sell for a discount from the fund’s net asset value
d. sell for a premium over the fund’s net asset value
If the federal government runs a deficit and borrows from commercial banks,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Break-even analysis may be used to show
a. the relationship between debt financing and earnings
b. the level of sales necessary to avoid losses
c. the level of output required to maximize profits
d. the relationship between sales and equity
Profitability ratios measure
a. liquidity
b. leverage
c. performance
d. turnover
The payback period is not concerned with
a. earnings
b. cash inflows
c. the cost of an investment
d. selecting investments
An investment banker
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
If a firm collects its accounts receivable,
a. the current ratio increases
b. inventory turnover increases
c. the average collection period is reduced
d. inventory is reduced
Which of the following bonds are exempt from federal income taxation?
a. zero coupon bonds
b. debenture bonds
c. convertible bonds
d. municipal bonds
A stock split
a. increases equity
b. generates capital gains
c. increases retained earnings
d. does not affect liabilities
If a bond is selling for a discount, that implies
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
A company whose stock is selling for $45 has the following balance sheet:
If the federal government runs a deficit and finances the deficit by borrowing from the
Federal Reserve,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
If equity is negative,
a. debt exceeds total assets
b. total assets exceed debt
c. equity exceeds assets
d. equity exceeds debt
The future value of a dollar
1) increases with lower interest rates
2) increases with higher interest rates
3) increases with longer periods of time
4) decreases with longer periods of time
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The effective cost of debt is reduced because
a. interest is a tax-deductible expense
b. interest is not a tax deducible expense
c. interest is paid before preferred dividends
d. interest is paid after common stock dividends
Credit policy requires establishing
a. the optimal level of inventory
b. the terms of enforcement
c. the minimum level of inventory
d. the average collection period
If the risk-adjusted net present value is positive,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Features (i.e., terms) of a call option include
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
The percent of sales method of forecasting assumes which of the following is constant?
a. inventory as a percent of sales
b. equity as a percent of sales
c. long-term debt as a percent of total assets
d. accounts payable as a percent of total assets
If the initial offer price is too low,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The power to create money is given by the Constitution to the Federal Reserve.
Accountants suggest that assets should always be valued at their market value.
The devaluation (depreciation) of one currency implies the revaluation (appreciation) of
other currencies.
The internal rate of return equates the net present value and the cost of an investment.
The U.S. Treasury creates most of the nation’s money supply.
A 5% stock dividend reduces a firm’s total equity.
If a $1,000 convertible bond may be converted into 25 shares, the exercise price is $50
a share.
All debentures are bonds but not all bonds are debentures.
The sales commission associated with purchasing mutual funds is called a “loading”
fee.
The shares of closed-end investment companies sell for their net asset value.
The primary reason for selling a futures contract (i.e., making a contract to deliver) is
the expectation of higher prices.
Inventory as a percent of sales tends to increase with increases in sales.
If a firm has no sales, it has no costs.
If an investment is riskier, using a higher beta coefficient to analyze the alternative
reduces the investment’s internal rate of return.
One of the major advantages associated with investing in mutual funds is potential
diversification.
If an investment banker makes a best efforts agreement to sell 1,200,000 shares at $10 a
share, the investment banker must sell at least 200,000 shares.
As the use of operating leverage increases, the risk exposure of the firm decreases.