Ratio analysis involves taking a set of numbers out of the financial statements and
forming ratios with them.
Ordinary annuities differ from annuities due in that annuities due occur at the ends of
time periods while ordinary annuities occur at the beginning.
Preferred stock is designed to attract investors who want less risk and assured voting
rights.
If one country continually exports more to another than it imports from that country, the
first country is said to have a trade surplus relative to the other.
A prospectus may contain a price range for the IPO stock and not the exact offering
price.
A debt to equity ratio of 2:1 suggests that for every dollar the firm has in equity, it has
two dollars of long-term debt.
Retained earnings should be used to provide equity financing if stockholders have
preference for capital gains.
Financial theory was originally a branch of economics.
The returns investors receive are related to but not equal to the firm’s component costs
of capital.
A stock’s beta coefficient is developed by plotting the historical relationship between
the stock’s return and the market’s return.
The underlying reason that leverage may increase stock price is that under certain
conditions:
A.it increases risk, which in turn requires a larger return on equity.
B.it improves performance measured in terms of EBIT and EPS.
C.it improves performance measured in terms of ROE and EPS.
D.it is cheaper to raise new debt than it is to raise new equity.
The use of fixed-cost financing is referred to as:
A.operating leverage.
B.a leveraged buyout.
C.financial leverage.
D.combined leverage.
Zylon Inc. plans net income of $10 million next year and typically pays 40% of its
earnings in dividends. Its capital structure is one third equity and two thirds debt with
no preferred stock. Zylon’s MCC curve will break at:
A.$ 4,000,000.
B.$ 6,000,000.
C.$12,000,000.
D.$18,000,000.
All of the following are characteristics of proprietorships except:
A.ease of formation.
B.income treated as part of the sole proprietor’s income for tax purposes.
C.ease of raising additional money for expansion.
D.unlimited life.
Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease
arrangement. The lease requires AA to make annual lease payments of $500,000 at the
beginning of each of the next 12 years. Determine the present value of the lease
payments if AA’s cost of funds is 14 percent.
A.$2,830,000
B.$13,635,500
C.$6,000,000
D.$3,226,200
The most likely outcome a random variable may take is referred to as the:
A.average value.
B.mean.
C.expected value.
D.All of the above
A portfolio investment is:
A.building businesses in another country.
B.direct investment in another economy.
C.buying the securities of foreign companies.
D.Indirect investment in an international business.
The profitability index (PI) is particularly useful in comparing mutually exclusive
projects:
A.with different IRR’s.
B.of different lengths.
C.of different sizes.
D.where the IRR and NPV select different projects.
E.in all of the above situations.
Capital rationing requires that companies:
A.always select the projects with the highest IRR’s.
B.always select projects that fit within their capital constraints.
C.may reject some projects that have an IRR higher than the cost of capital.
D.Both b. and c. are correct.
E.All of the above are correct.
The major audiences for a firm’s business plan are:
A.the firm’s own management.
B.outside investors.
C.neither a nor b.
D.both a and b.
Which is not a bond covenant?
A.Making periodic deposits into a sinking fund
B.Retiring a portion of the bond issue periodically
C.Specifying a minimum level of taxation
D.Specifying a minimum level for the times interest earned ratio
Which of the following would usually be the most credible, positive dividend signal?
A.A dividend increase when earnings are down
B.A dividend increase when earnings are up
C.A dividend decrease when earnings are down
D.A dividend decrease when earnings are up
E.No change in dividends when earnings are way down
Williamson Metals, Inc. paid a dividend last year of $3, and is expecting dividends to
grow at an 18% rate in years 1 and 2 followed by constant growth of 6% per year
thereafter. Similar stocks return 12%. Calculate the value of the stock today.
A.$65.37
B.$73.85
C.$82.91
D.$93.76
Which of the following is true of the credit default swaps (CDSs)?
A.The CDS buyer has to own the debt security.
B.The CDS seller is not government regulated.
C.The CDS seller is required to carry cash reserves to cover losses.
D.The CDS contracts are not traded in secondary market.
Bonds represent a debt relationship between and issuing company that:
A.lends and a buyer who borrows.
B.borrows and a buyer who sells.
C.lends and a buyer who sells.
D.borrows and a buyer who lends.
Money markets deal in:
A.long-term equities.
B.short-term equities.
C.long-term debt.
D.short-term debt.
Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump
sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is
75 years old and wants his money now. He has been offered $140,827 to sell his ticket.
What rate of return is the buyer expecting to make if Joe accepts the offer?
A.less than 1%
B.15%
C.18%
D.12%