1) Service industries tend to have larger proportions of fixed assets to current assets.
2) a sunk cost is a project-related expense that is dependent upon whether or not the
project is undertaken.
3) The President of the United States and the Fed formulate a program of fiscal policy.
4) When taxes and general revenues fail to meet expenditures, a budgetary deficit
occurs.
5) The Treasurys major influence through its borrowing to finance federal deficits is on
the supply rather than demand for loanable funds.
6) The output of goods and services in an economy is referred to as the gross domestic
product.
7) Whenever the net present value of a project is positive, the profitability index is
greater or equal to 1.0.
8) Bondholders have priority claims over equity holders to a firms assets and cash
flows.
9) Liquidity ratios indicate the ability to meet short-term obligations to creditors as they
mature or come due.
10) Short-term financing offers greater flexibility than long-term financing.
11) All of the following statements are correct except:
a.The firms optimum debt/equity mix maximizes the firms cost of capital, which in turn
helps the firm to maximize shareholder wealth
b.A firms mix of debt and equity used to finance its assets defines the firms working
capital structure
c.A nonoptimal capital structure with either too much or too little debt leads to lower
financing costs, and the firm will likely reject some capital budgeting projects that
could have increased shareholder wealth with an optimal financing mix
d.A projects NPV represents the decrease in shareholders wealth from undertaking a
project; thus, a lower weighted average cost of capital gives higher project net present
values and results in higher levels of shareholder wealth
None of the above statements are correct
12) Which of the following statements factors contributed to the 2007-2009 financial
crisis?
a.The cultural shift that allowed the public to spend now and pay laterrather than their
parents or grandparents philosophy of save now, spend later led to increases in
consumer debt levels
b.U.S. government officials engaged in efforts to expand home ownership by
encouraging lenders to make mortgage loans available to a broader spectrum of
individuals
c.Federal fiscal policy also became simulative, with increased government spending
and the passage of tax cuts in 2002
d.The Federal Reserve adopted an expansionary monetary policy characterized by very
low interest rates
e.all of the above
13) The ___________________ Exchange (ICE) serves the global markets for
agricultural, credit, currency, emissions, energy and equity index markets.
a.Italian
b.Indianapolis
c.Istanbul
d.International
e. none of the above
14) Independent brokers who handle the commission brokers overflow are called:
a.specialists
b.registered traders
c.floor brokers
d.all the above
15) Under conditions of purchasing power parity (PPP), a country with a relatively
_______ expected inflation rate will have its currency _______ relative to a country
with a relatively _______ inflation rate.
a.higher, depreciate, lower
b.lower, depreciate, higher
c.higher, appreciate, lower
d.lower, appreciate, higher.
16) All of the following statements are correct except:
a.The internal growth rate measures how quickly a firm can increase its asset base over
the next year using outside funds
b.The retention rate represents the proportion of every $1 of earnings per share that is
retained by the firm; in other words, it is equal to one plus the dividend payout ratio
c.The sustainable growth rate measures how quickly the firm can grow when it uses
only debt financing to keep its capital structure constant over time
d.The internal and sustainable growth rate relationships suggest that there are three
measurable influences on growth: working capital policy, total asset turnover, and the
firms borrowing rate
e.None of the above statements are correct
17) On the balance sheet, retained earnings represents
a.net profits for the current year
b.net profits for the current year minus preferred stock dividends
c.cash reinvested in fixed assets to support growth
d.the cumulative total of earnings reinvested in the firm
e.none of the above
18) In order to borrow $100,000 for a 5% loan on a discount loan basis with a 5%
compensating balance; the firm will actually have to borrow:
a.$110,000
b.$111,111
c.$100,000
d.$90,000
19) Which of the following statements is correct?
a.Capital budgeting is the process of identifying, evaluating, and implementing a firms
financing strategies
b.Capital budgeting seeks to identify projects that will reduce a firms competitive
advantage and by so doing decrease shareholders wealth
c.By its nature, capital budgeting involves short-term projects
d.Capital budgeting projects usually require small initial investments and may involve
acquiring or constructing plant and equipment
e.none of the above statements are correct
20) The process of allocating funds among competing investment opportunities is
referred to as:
a.capital expenditures
b.initial cash flow analysis
c.long-term forecasting
d.capital budgeting
21) All of the following methods can be used to estimate the cost of debt except:
a.If the firm targets an A rating (or any other bond rating), a review of the yields to
maturity on A-rated bonds in the business section of the local newspaper can provide an
estimate of the firms current borrowing costs
b.The firm can solicit the advice of personal financial planners on the cost of issuing
new debt
c.If the firm has debt currently trading, it can send a survey to current owners of its
bonds to find out what rate the firm should offer
d.A firm can seek long-term debt financing from a wealthy individual; preliminary
discussions with the individual will indicate a ballpark interest rate the firm can expect
to pay on its borrowing
e.None of the above statements are correct
22) On the income statement, net profit after tax is defined as:
a.operating profit minus operating expenses
b.operating profit minus cost of goods sold
c.operating profit minus interest
d.operating profit minus total expenses
e.none of the above
23) The travelers letter of credit is usually used by:
a.purchasing agents making purchases in foreign countries
b.individuals traveling abroad
c.importers banks
d.correspondent banks, in order to reduce shipment of gold between countries
24) When referring to a downward sloping yield curve:
a.as maturities shorten, interest rates decline
b.as maturities shorten, interest rates rise
c.as maturities lengthen, interest rates remain the same
d.as maturities lengthen, interest rates rise
25) A limited liability company (LLC):
a.must register with the SEC to sell securities to the public
b.is an ongoing entity, even if one of the owners leaves
c.has a limited number of shareholders
d.all the above
e.none of the above
26) For corporations, the principal-agent relationship usually refers to the relationship
between:
a.buyers-sellers
b.owners-managers
c.manager-customer
d.owner-bankers
27) In response to the financial crisis of 2007-2009, the yield spread between Aaa
corporate bonds and treasury bonds:
a.widened
b.narrowed
c.remained the same
d.none of the above
28) If the APR is 12% and interest is compounded monthly, then the EAR is:
a.12.00%
b.1.00%
c.12.68%%
d.none of the above
29) Which of the following statements is most correct?
a.A monetary base of $5 million and a money multiplier of 5 means that the money
supply will be $1 million
b.The magnitude of the money multiplier today is in the 8 to 9 range
c.The money multiplier is influenced by the publics switching between checkable and
noncheckable deposits at their banks
d.The monetary base multiplied by the money multiplier produces the M3 definition of
the money supply
30) Gross domestic product is equal to the sum of all of the following EXCEPT:
a.personal consumption expenditures
b.net exports
c.government expenditures
d.all of the above are included
31) The theory of ___________________ implies that information is quickly embedded
in prices making it difficult for investors to “beat the market.”
a.stock investing
b.efficient markets
c.portfolio management
d.asset allocation
e.none of the above
32) Firm A has a total debt to total assets ratio of 50% and an interest coverage ratio of
1.0. Firm B has a total debt total assets ratio of 80% and an interest coverage ratio of
10.0. Based on this limited information firm ________ appears to be in ________ debt
management position than firm ________.
a.A, better, B
b.B, better, A
c.A, a comparable, B
d.none of the above
33) In an effort to stimulate economic activity, Congress and the president passed the
$787 billion _________________________________ in February, 2009 with the funds
to be used to provide tax relief, appropriations, and direct spending.
a.American Reconstruction and Reconfiguration Act of 2009
b.American Real Estate and Reconstruction Act of 2009
c.American Real Estate Reinvestment Act of 2009
d.American Reconstruction and Real Estate Act of 2009
e.none of the above
34) Eriez Magnetics purchased goods with a purchase price of $10,000 and credit terms
of 2/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The
firm must pay ________ for the goods.
a.$8,000
b.$9,900
c.$9,000
d.$10,000
e.none of the above
35) Two or more projects that perform the same function are said to be:
a.mutually exclusive projects
b.independent projects
c.joint projects
d.none of the above
36) An order that remains in effect until the end of the day is called a:
a.good-until-canceled order
b.limit order
c.day order
d.stop-loss order
37) Private financial intermediation generally represents an important annual source of
funds supplied to credit markets. Which of the following intermediaries has failed to
supply funds during one or more recent years?
a.commercial banks
b.thrift institutions
c.insurance and pension funds
d.other financial intermediaries
38) Deposits that add new reserves to the bank where they are deposited are called:
a.primary deposits
b.derivative deposits
c.secondary deposits
d.Special Drawing Rights
39) When the net present value is negative, the internal rate of return is __________ the
cost of capital.
a.greater than
b.greater than or equal to
c.less than
d.equal to
e.none of the above
40) If a firm’s sale price per unit decreases, the firm’s operating breakeven point will
a.decrease
b.increase
c.remain unchanged
d.change in an undetermined direction
41) Which of the following markets allow for nighttime trading?
a.American Stock Exchange
b.New York Stock Exchange
c.Chicago Board Options Exchange
d.all the above
e.none of the above
42) Rental or lease payments are included in which one of the following ratios?
a.interest coverage
b.times-interest-earned
c.fixed charge coverage
d.equity multiplier
43) The _________________ is primarily responsible for the amount of money that is
created, although most of the money is actually created by depository institutions.
a.Securities Exchange Commission
b.Federal Treasury
c.Federal Reserve System
d.Financial Asset Oversight Board
44) Which of the following statements is false?
a.The Board of Governors of the Federal Reserve System authorizes member banks to
accept drafts that arise in the course of certain types of international transactions
b.Multinational corporations may engage in foreign exchange management for
speculative purposes, as well as for defensive purposes
c.Arbitrage in the foreign exchange market is the simultaneous purchasing of
commodities or securities in one market and selling them in another where the price is
higher
d. All the above statements are correct
45) A short-term bank loan that is unsecured is referred to as:
a.a line of credit
b.an accounts-receivable loan
c.an inventory loan
d.a life insurance policy loan
46) All other things being equal, an increase in the amount of debt for a firm would:
a.increase the degree of operating leverage
b.decrease the degree of operating leverage
c.have no impact on degree of operating leverage
d.not enough information given
47) In cost-volume-profit analysis, a firm breaks even when its total revenues:
a.equal variable costs
b.equal total costs
c.equal fixed costs
d.are less than the sum of variable and fixed costs