1) Operating-change restrictions gives the bank a right to revoke the line of credit if any
major changes occur in a firm’s financial condition or operations.
2) The various causes that increase the chances of business failures are current ratio of
1.33, solvency ratio of greater than 20%, and rapid decrease in days’ sales outstanding.
3) The required return on a bond is likely to differ from the stated interest rate for either
of two reasons: 1) economic conditions have changed, causing a shift in the basic cost
of long-term funds, or 2) the firm’s risk has changed.
4) Financial managers administer the financial affairs of all types of businesses such as
private and public, large and small, and profit seeking and not for profit.
5) The sales forecast and various forms of operating and financial data are the key
outputs of the short-run (operating) financial planning.
6) Cash budget is a statement of a firm’s planned inflows and outflows of cash that is
used to estimate its long-term cash requirement.
7) The importance and widespread use of transfer pricing in international trade makes
capital budgeting in MNCs very difficult unless the transfer prices that are used
accurately reflect actual costs and incremental cash flows.
8) The expectations theory suggests that the shape of the yield curve reflects investors
expectations about future interest rates.
9) Pecking order is a hierarchy of financing beginning with retained earnings, followed
by debt financing, and finally external equity financing.
10) Derivatives are used by corporations as a useful tool for managing certain aspects
of a firm’s risk.
11) Net operating profit after taxes (NOPAT) represents a firm’s earnings before interest
and after taxes.
12) Generally accepted accounting principles are authorized by the Financial
Accounting Standards Board (FASB).
13) Operating leverage measures the effect of fixed operating costs on the relationship
between ________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) EBIT and dividend
14) The two basic measures of liquidity are ________.
A) inventory turnover and current ratio
B) current ratio and quick ratio
C) gross profit margin and ROE
D) current ratio and total asset turnover
15) Which of the following securities is a government issue?
A) eurodollar deposits
B) repurchase agreements
C) certificate of deposits
D) federal agency issues
16) The purpose of the restrictive debt covenant that imposes fixed assets restrictions is
to ________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investment alternatives
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) prevent the firm from liquidation and ensure its ability to repay the debt
17) A corporation sold a fixed asset for $100,000. This is ________.
A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds
18) If the P/E paid for a target company is less than the P/E of the acquiring company,
the effect on the earnings per share of the acquired company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
19) A corporation is considering expanding operations to meet growing demand. With
the capital expansion the current accounts are expected to change. Management expects
cash to increase by $10,000, accounts receivable by $20,000, and inventories by
$30,000. At the same time accounts payable will increase by $40,000, accruals by
$30,000, and long-term debt by $80,000. The change in net working capital is
________.
A) an increase of $10,000
B) a decrease of $10,000
C) a decrease of $90,000
D) an increase of $80,000
20) Which of the following is true of changes in cash discount period?
A) If a firm decreases its cash discount period, the sales are expected to decrease, the
bad debts are
expected to increase, and the profit per unit is expected to increase
B) If a firm decreases its cash discount period, the sales are expected to increase, the
bad debts are expected to increase, and the profit per unit is expected to decrease
C) If a firm increases its cash discount period, the sales are expected to decrease, the
bad debts are expected to decrease, and the profit per unit is expected to increase
D) If a firm increases its cash discount period, the sales are expected to increase, the
bad debts are expected to decrease, and the profit per unit is expected to increase
21) A firm is evaluating an investment proposal which has an initial investment of
$5,000 and cash flows presently valued at $4,000. The net present value of the
investment is ________.
A) -$1,000
B) $9,000
C) $4,000
D) -$4,000
22) An efficient portfolio is one that ________.
A) guarantees a predetermined rate of return
B) maximizes return for a given level of risk
C) consists of a single asset, which gives maximum return
D) maximizes return at all risk levels
23) As the risk of a stock investment increases, investors’ ________.
A) return will increase
B) return will decrease
C) required rate of return will decrease
D) required rate of return will increase
24) ________ are secured by stock and/or bonds that are owned by the issuer.
A) Mortgage bonds
B) Equipment trust certificates
C) Collateral trust bonds
D) Subordinated debentures
25) A merger involving the purchase of a specific product line, rather than the whole
company is ________.
A) an operating merger
B) a financial merger
C) a selective lines merger
D) a variation of the strategic merger