1) The operating profit margin is calculated as the firms earnings before interest and
taxes divided by net sales.
2) Working capital includes a firms marketable securities, accounts receivable,
inventories, and mortgage debt.
3) Permanent current assets reflect the minimum investment level in cash, accounts
receivable, and inventories needed to support sales.
4) Underpricing represents the difference between the aftermarket stock price and the
initial offering price.
5) The return provided by a $100 annuity deposited for 10 years that results in a future
value of $614.46 is -11.45%.
6) The claims of collateralized bondholders are junior to the claims of debenture
holders.
7) The most desirable form of business organization in terms of ease of start-up is a
proprietorship.
8) Business will increase long-term borrowing if they forecast a decrease in interest
rates.
9) If standard deviation is used to measure the risk of stocks, one problem that arises is
the inability to tell which stock is riskier by looking at the standard deviation alone.
10) The secondary markets provide pricing information and liquidity to investors.
11) Primary deposits are deposits that add new reserves to a bank while obtuse
secondary deposits are deposits that were borrowed from the reserves of primary
deposits.
12) A partnership is a form of business organization when two or more people own a
business operated for profit.
13) Compensating balances at a commercial bank are:
a.net differentials of balances with correspondent banks
b.maintained by Federal Reserve for services rendered
c.account balances required in connection with unsecured business loans under bank
lines of credit
d.required vault-held reserves as an alternative to reserves held by Federal Reserve
Banks
14) Holding demand constant, a decrease in the supply of loanable funds will result in a
(n) ___________ in interest rates.
a.increase
b.decrease
c.increase or decrease
d.none of the above
15) Which of the following statements is most correct?
a.the liquidity preference theory holds that interest rates are determined by the supply of
and demand for loanable funds
b.the loanable funds theory and the liquidity preference theory are incompatible with
each other because one is right and the other is wrong
c.finding the yield to maturity on a corporate bond is comparable to finding the internal
rate of return
d.the market segmentation theory holds that securities of different maturities are perfect
substitutes for each other
16) In the statement of cash flows, retained earnings are reported as two separate line
items, which are __________ and ___________.
a.revenues and expenses
b.assets and liabilities
c.depreciation and amortization
d.net profits and taxes
e.none of the above
17) The corporate planning tool that develops project plans that fit well with the firms
plans is often referred to by the following acronym:
a.MOGS
b.SMOG
c.OMGS
d.GOMS
e.none of the above statements are correct
18) A primary focus of the Economic Stabilization Act of 2008, which became know as
the ___________________________, was to allow the U.S. Treasury purchase up to
$700 billion of troubled or toxic assets held by financial institutions.
a.Troubled Asset Reduction Program (TARP)
b.Toxic Asset Recovery Program (TARP)
c.Troubled Area Relief Program (TARP)
d.Toxic Area Recovery Program (TARP)
e.none of the above
19) A current yield on a corporate bond is calculated as:
a.coupon interest amount divided by par value
b.coupon interest rate times the par value
c.coupon interest amount divided by the current price
d.coupon interest rate times the current price
20) Suppose you were going to save $1,000 per year for three years at a 10% interest
rate compounded annually, with the first investment occurring today. What would be
the future value of this investment?
a.$2,124
b.$2,310
c.$3,641
d.$3,812
21) A potential investment pays $10 per year indefinitely. The appropriate discount rate
for the potential investor is 10%. The present value of this cash flow is calculated by:
a.multiplying $10 by the appropriate present value factor
b.dividing $10 by 10
c.multiplying $10 by the present value factor of an annuity
d.dividing $10 by .10
22) Permanent current assets are:
a.accounts receivable that have become bad debts
b.inventories that have become obsolete
c.the level of current assets equal to fixed assets
d.the level of current assets needed to support sales
23) Which of the following statements is false?
a.The process of channeling savings into investment through the use of a financial
institution or intermediary results in no real economic value
b.During the early years of the history of the United States, foreigners purchased
significant volumes of federal government securities
c.The single most important use of funds raised in the credit markets is by the
household sector
d.All of the above statements are false
24) Your current bank is paying 6.25% simple interest rate. You can move your savings
account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank
paying 6% compounded semi-annually. To maximize your return you would choose:
a.your current bank
b.Harris Bank
c.First Chicago bank
d.you are indifferent, because the effective interest rate for all three banks is the same
25) _________________________ was created to help economic growth in developing
countries.
a.The World Bank
b.The International Monetary Fund
c.The Export-Import Bank
d.The Agency for International Development.
26) Which of the following expenditures account for the largest part of the Federal
budget?
a.national defense
b.interest on debt
c.direct benefits to individuals
d.none of the above
27) Banking system reserves plus currency held by the nonbank public is referred to as
the:
a.money supply
b.monetary base
c.monetary multiplier
d.monetary requirement
28) When the amount earned on a deposit has become part of the principal at the end of
a specified time period the concept is called
a.discount interest
b.compound interest
c.primary interest
d.future value
29) In recent years, the principal market for bankers acceptances has been:
a.domestic banks
b.domestic business corporations
c.foreign business corporations
d.all of the above
e.none of the above
30) Agency costs may include:
a.costs of auditing financial statements
b.liability insurance for board of directors
c.management perks
d.all the above
e.none of the above
31) The effective annual interest rate on a one-year, $1,000,000, 12% discount loan that
requires a 10% compensating balance is
a.15.4%
b.13.3%
c.13.6%
d.12.0%
e.none of the above
32) The time required for the cumulative cash flows from a project to equal zero is
called the:
a.profitability index
b.cash flow time frame
c.project life
d.payback period
33) Eurodollar bonds are:
a.denominated in Eurodollars
b.extremely long-term obligations
c.scrutinized by the SEC
d.none of the above
34) The perfect financial storm that developed in 2008, which put the U.S. economy
was on the verge of collapse was characterized by all of the following EXCEPT:
a.The housing price bubble burst in 2006 and began a sharp decline
b.Stock market prices peaked in 2007 and began a sharp decline
c.Many of the mortgage-related debt securities originated and sold to others, or held, by
banks became difficult to value during the perfect financial storm and quickly became
known as “tombstone” assets
d.Individuals were defaulting on their home mortgages in increasing numbers due to
falling home prices and increasing unemployment
e.Business firms and financial institutions, who had borrowed heavily during years of
easy money and low interest rates, were faced with their own financial difficulties as
economic activity slowed markedly
35) Primary groups of policy makers that are actively involved in achieving a nations
economic policy objectives include all of the following EXCEPT:
a.the Supreme Court
b.the President
c.Congress
d.all of the above are primary policy makers
36) Which of the following is a correct way to calculate degree of combined leverage?
a.divide DFL by DOL
b.multiply DOL by DFL
c.divide DOL by DFL
d.add DOL and DFL
37) The Public Company Accounting Oversight Board (PCAOB) is
a.a not-for-profit corporation that oversees managers of public corporations
b.a not-for-profit corporation that oversees CEOs of public corporations
c.a for-profit corporation that oversees managers of public corporations
d.a for-profit corporation that oversees CEOs of public corporations
e.none of the above
38) All of the following statements are correct EXCEPT:
a.Capital budgeting analysis is a framework for evaluating all business decisions; it is
not only a tool for the financial types
b.Proper analysis will identify relevant cash flows and an appropriate discount rate to
reflect the risk of the strategy and will compare the benefits and costs of the project by
considering the time value of money
c.Whether the investment is one in a business strategy, building a new warehouse,
seeking fuel efficient methods of doing business, upgrading information technology
systems, or investing in human resources, we should try to quantify the benefits and
cost of these choices in order to evaluate them properly
d.To achieve success over time, a firms managers must identify and invest in projects
that provide positive net present values to maximize shareholder wealth
e.all of the above statements are correct
39) Capital budgeting is
a.the process of identifying, evaluating, and implementing a firms investment
opportunities
b.the process of identifying, evaluating, and implementing a firms 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.all of the above statements are correct
40) Total bank reserves do not include which of the following?
a.deficit reserves
b.excess reserves
c.required reserves
d.all the above are included in total bank reserves
41) Holding supply constant, a decrease in the demand of loanable funds will result in a
(n) ___________ in interest rates.
a.increase
b.decrease
c.increase or decrease
d.none of the above
42) What is the most important overall source of short-term business financing both in
the U.S. and worldwide?
a.lines of credit
b.trade credit
c.notes
d.commercial paper
43) To protect against loss as a result of adverse currency fluctuations, an export firm
may:
a.demand cash settlement
b.sell a millennial contract as a hedge
c.require the customer to make payment in the exporters currency
d.require a government guarantee against currency loss of value
e.none of the above
44) The following factors may affect a bond rating:
a.security provisions
b.indenture provisions
c.expected trends of industry operations
d.all the above
e.none of the above
45) The saving-investment process involves which of the following financial functions:
a.creating and transferring money
b.accumulating savings and lending and investing money
c.marketing and transferring financial assets
d.all of the above
46) If Stock A had a price of $120 at the beginning of the year, $150 at the end of the
year and paid a $6 dividend during the year, what would be the annualized holding
period return?
a.36%
b.30%
c.24%
d.none of the above
47) The principle of finance that “reputation matters” implies that for institutions or
businesses to be successful, they must have the trust and confidence of their customers,
employees, and owners, as well as the community and society within which they
operate.
48) The six principles of finance include (1)Money has a time value, (2) Higher returns
are expected for taking on more risk, (3) Diversification of investments can reduce risk,
(4) Financial markets are efficient in pricing securities, (5) Manager and stockholder
objectives may differ, and (6) Reputation matters.
49) The primary goal of the financial manager in a profit-seeking organization is to
maximize the owners wealth.
50) A sub-prime mortgage is a home loan made to a borrower with a relatively low
credit score indicating the likelihood that loan payments might be missed when due.
51) Securitization is the process of pooling and packaging mortgage loans into debt
securities.
52) A mortgage-back security is an investment created by using a mortgage as collateral
for a loan.
53) The principle of finance that “higher returns are expected for taking on less risk”
implies that rational investors would choose a risky investment only if they feel the
expected return is high enough to justify the greater risk.