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
c. 2 and 3
d. all of these choices
If a lease is not capitalized,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Given the following information:
Income earned by a mutual fund is
a. distributed
b. retained
c. reinvested
d. retained and reinvested
An investment’s internal rate of return equates
a. dividend payments and capital gains
b. initial cost and subsequent cash inflows
c. initial cash outflow and the sale price
d. dividend payments and the investment’s cost
When a speculator invests in a financial futures contract, the individual
a. enters a contract to make future delivery
b. enters a contract to accept future delivery
c. either enters a contract to make or to accept future delivery
d. hedges to reduce the risk of loss
Preferred stock and bonds are similar because
a. they both have voting power
b. interest and dividend payments are legal obligations
c. neither interest nor dividends are tax deductible
d. both are a source of financial leverage
The power to create money is given by the Constitution to
a. state governments
b. Congress
c. the Federal Reserve
d. commercial banks
If the reserve requirement for demand deposits is 10 percent, what is the maximum
change in the money supply that the banking system can create if
a. the Federal Reserve puts $1,000,000 of new reserves in the banking system
b. $1,000,000 in cash is deposited in checking accounts
c. IBM borrows $1,000,000 from an insurance company?
To measure risk, the capital asset pricing model uses
a. beta
b. an asset’s standard deviation
c. the volatility of an asset’s cash flows
d. the term during which the asset is held
Which of the following may not be used to secure a short-term loan?
a. inventory
b. accounts receivable
c. equipment
d. retained earnings
The cost of trade credit will decrease if
a. the discount is larger
b. the discount is smaller
c. the length of time decreases
d. the firm increases its inventory
Increased variability of operating income is associated with
a. increased interest expense
b. increased variable cost
c. increased taxes
d. increased fixed costs
When speculators invest in commodity futures, they
a. enter contracts to make future delivery
b. enter contracts to accept future delivery
c. either enter contracts to make or accept future delivery
d. rarely experience losses
Capitalizing a lease
a. reduces income
b. reduces equity
c. increases current assets
d. increases debt
The current yield on a bond is
a. interest paid divided by the bond’s price
b. the bond’s coupon
c. the interest rate stated on the bond
d. the yield over the lifetime of the bond
The yield to maturity on a bond is
a. the interest paid divided by the price of the bond
b. the bond’s coupon divided by the principal amount
c. the price appreciation earned by the bond
d. interest plus price appreciation (or loss) achieved by holding the bond to maturity
Which of the following bonds is supported by collateral?
a. zero coupon bond
b. mortgage bond
c. debenture bond
d. income bond
If a stock is initially offered to the public for $20 in an underwriting but the price
immediately falls to $15,
a. 1, 2, and 3
b. 1, 2, and 4
c. 2 and 3
d. 2 and 4
Two mutually exclusive investments cost $10,000 each and have the following cash
inflows. The firm’s cost of capital is 12%.
The yield on a Treasury bill will increase if
a. the length of time to maturity decreases
b. the premium over its face amount increases
c. bond prices rise
d. the discount increases
Hedging with commodity futures contracts
a. increases price fluctuations
b. reduces the risk of loss from price fluctuations
c. increases the potential return
d. does not require margin delivery
The prime rate is
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The Securities Investor Protection Corporation protects individuals from
a. fraud by corporations
b. making poor investment decisions
c. other investors who fail to make delivery
d. brokerage firm failures
Current liabilities include
a. stock
b. bonds
c. accounts receivable
d. accrued interest payable
If the quote on a stock is reduced,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Which of the following is similar to a short position in a stock?
a. buying a call option
b. buying a put option
c. realizing a short-term capital gain
d. writing a covered call
The use of certainty equivalents means
a. the investment’s cash inflows are certain
b. an investment’s cash inflows are expressed as if they were certain
c. the cost of capital is known
d. the probability of occurrence is certain
Common features of preferred stock include
a. fixed, cumulative dividends
b. variable, cumulative dividends
c. fixed, non-cumulative dividends
d. variable, non-cumulative dividends
The highest credit rating is triple A.
An index fund
a. seeks to match the market
b. seeks to outperform the market
c. is illustrative of a no load fund
d. is illustrative of a closed-end fund
An increase in the cost of capital will
a. increase an investment’s internal rate of return
b. decrease an investment’s internal rate of return
c. increase an investment’s net present value
d. decrease an investment’s net present value
The minimum margin requirement is established by
a. brokerage firms
b. Congress
c. the SEC
d. the Federal Reserve
3/10, n60 implies
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Entering a futures contracts is not speculative because commodity prices are stable.
A stock dividend decreases retained earnings.
An increase in investors’ required return decreases an investment’s internal rate of
return.
The Big-Sox currently have 30,000 spectators per game and anticipate annual growth in
attendance of 9%. If the Big Stadium holds 65,000 people, how long will it take for the
team reach capacity?
Firms whose securities are already publicly held may file a shelf registration for
possible future sales of stocks and bonds.
In order to maximize the value of the firm, the financial manager must determine the
firm’s optimal capital structure.
M-1 includes savings accounts in commercial banks.
If a company went public at $10 per share and the shares immediately upon reaching
the public sell for $13, the $3 windfall gain goes to the underwriter.
Higher interest rates imply faster payback periods.
A risky $500,000 investment is expected to generate the following cash flows:
The probability of receiving each cash inflow is 80, 75, and 70 percent, respectively. If
the firm’s cost of capital is 10 percent, should the investment be made?
If a stock is selling for $90 and is split 3 for 1, the new price of the stock should be $30.
The value of a convertible bond as stock depends in part on the bond’s coupon.
U.S. mutual funds may not hold foreign securities.
One reason why firms use trade credit is that it is a spontaneous source of finance.
If an annuity costs $200,000 and yields 7 percent annually for 5 years, how much cash
can an individual withdraw each year such that the principal is consumed at the end of
the time period?