1) Agency costs are the tangible and intangible revenues generated by shareholders
because of the actual or potential selfless actions of managers; and agency costs include
explicit, out-of-pocket expenses.
2) Up until the start of the Vietnam War, the international monetary system operated
mostly under a gold standard in which the currencies of major countries were
convertible into gold at fixed exchange rates.
3) During the past 75 years, corporate bonds have provided investors with higher
average annual returns than stocks.
4) The market portfolio is a portfolio that contains all risky assets.
5) A firms efficiency in utilizing resources at its disposal in generating sales would be
measured by profitability ratios.
6) The cost of debt represents the minimum acceptable rate of return to a firm on a
project of average risk.
7) The present value of a $100 annuity deposited for 10 years at 10% is $614.46.
8) Enhancement occurs when a project robs cash flow from the firms existing line of
business.
9) The bond issuer does not necessarily know who is receiving interest payments on
bearer bonds.
10) The success of a business in raising funds for operations depends upon the extent
that profits can be produced from operations.
11) The degree of financial leverage measures the sensitivity of earnings per share to
changes in EBIT.
12) Demand-pull inflation may be defined as an excessive demand for goods and
services during periods of economic expansion as a result of large increases in the
money supply.
13) The return on a portfolio is simply equal to the weighted average return of the
securities that comprise it.
14) The largest proportion of government revenue comes from corporate income taxes.
15) Market value ratios indicate the willingness of investors to value a firm in the
marketplace relative to financial statement values.
16) The balance sheet is a statement of a companys financial position over an
accounting period.
17) The goal of any firm should be the maximization of sales.
18) Organized securities exchanges include the New York Stock Exchange, the
American Stock Exchange, and NASDAQ.
19) Holding demand constant, an increase in supply for one currency relative to another
will cause its value to appreciate relative to that currency.
20) The Federal Reserve System:
a.permits member banks to accept drafts, but restricts the time period involved
b.actively encourages member banks to assist in financing international transactions
c.discourages its member banks from accepting foreign drafts
d.limits the type of international transactions for which member banks may accept
drafts
e.all of the above
21) All of the following methods can be used to estimate the cost of equity except:
a.Unlike debt and preferred stock, cash flows from common equity are not fixed or
known beforehand and their risk is harder to evaluate
b.Firms have two sources of common equity, retained earnings and new stock issues,
and thus two costs of common equity
c.From the shareholders perspective, the opportunity cost of retained earnings is the
return the shareholders could earn by investing the funds in assets whose risk is similar
to that of the firm
d.If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted
return, shareholders would be better off receiving 100 percent of its net income as
dividends
e.All of the above statements are correct
22) Key factors that influence currency exchange rates include all of the following
EXCEPT:
a.supply and demand relationships
b.legal constraints
c.interest rates
d.inflation rates
23) A firm has fixed operating costs of $10,000, the sale price per unit of its product is
$25, and its variable cost per unit is $15. The firm’s operating breakeven point in units
is ________ and its breakeven point in dollars is ________.
a.250; $6,250
b.400; $10,000
c.667; $16,675
d.1,000; $25,000
24) Which item is not included in the calculation for both the quick ratio and the current
ratio?
a.accounts receivable
b.current assets
c.inventories
d.current liabilities
25) Which one the following four basic economic units consistently represents a
savings surplus unit?
a.individuals
b.business firms
c.financial intermediaries
d.governments
e.none of the above
26) Rico bought 100 shares of Banana Republic stock for $24.00 per share on January
1, 2010. He received a dividend of $2.00 per share at the end of 2010 and $3.00 per
share at the end of 2011. At the end of 2012, Rico collected a dividend of $4.00 per
share and sold his stock for $18.00 per share. What was Ricos realized holding period
return?
a.-12.5%
b.12.5%
c.-16.7%
d. 16.7%
e. none of the above
27) The benefits of diversification are greatest when asset returns have:
a.negative correlations
b.positive correlations
c.zero correlations
low positive covariances
28) A decrease in the supply for loanable funds accompanied by a decrease in demand
will cause interest rates to:
a.increase
b.decrease
c. stay the same
d.not enough information to tell
29) A firms stock is expected to pay a $2 annual dividend next year, and the current $50
stock price is expected to rise to $53 over the next year. What is the expected return?
a.8%
b.10%
c.12%
d.15%
30) Assume that these current yields exist: long-term government securities yield 9
percent, five-year Treasury securities yield 8.5 percent, and one-year Treasury bills
yield 8 percent. What type of yield curve is depicted?
a.downward sloping
b.flat or level
c.upward sloping
d.U shaped
31) All of the following are true regarding mortgage backed securities except:
a.A mortgage-back security is a debt security created by pooling together a group of
mortgage loans whose periodic payments belong to the holders of the security
b.mortgage-back securities never pass through the interest and principal payments to
the owners of the securities
c.Payments on the underlying mortgages are made to the financial institution that
created the mortgage-backed security, and the institution, in turn, pays or passes
through the payments to the investors or owners of the securities
d.In some mortgage-backed securities, the issuer separates or strips the interest and
principal payment streams into separate securities
e.all of the above statements are true
32) Ningbo Shipping has common stock with a market price of $25 per share and an
expected dividend of $2 per share at the end of the coming year. The growth rate in
dividends has been 5 percent and this growth is expected to continue indefinitely. Based
on this information, the cost of the firm’s common stock equity is
a.5%
b.8%
c.10%
d.13%
e.none of the above
33) All of the following are considered futures exchanges EXCEPT:
a.the Chicago Board of Trade (CBOT)
b.The Chicago Mercantile Exchange (CME)
c.the Commodity Exchange (COMEX)
d.all of the above
e.none of the above
34) Suppose a firm just issued a $1,000 par value convertible bond. Its conversion ratio
is 30 and the stock currently sells for $25 per share. Would it make better financial
sense to hold onto the bond or convert it?
a.hold onto the bond
b.convert the bond
c.cant tell from this information
d.none of the above
35) Economists who believe that long-run inflationary bias will continue base their
belief on the following factors:
a.Prices and wages tend to fall during periods of boom in a competitive economy; this
tendency is reinforced by wage contracts that provide escalator clauses to keep wages in
line with prices and by wage increases that are sometimes greater than increases in
productivity
b.During expansions, prices tend to remain stable rather than decrease because major
unions have long-run contracts calling for annual wage increases no matter what
economic conditions are at the time
c.The tendency of small corporations to rely on non-price competition (advertising, and
style and color changes) and to increase output rather than cut prices also keeps prices
stable
d.If prices rise drastically in a field, the government is likely to step in with programs to
make up the shortage of supplies in the market
e. none of the above are correct
36) In general, short-term self-liquidating bank loans are intended to:
a.help recapitalize a company
b.help a company finance merger & acquisitions
c.help a company finance annual shareholder meetings
d.help a company finance investment in capital assets
e.none of the above
37) If the expected returns for Stock A are 3% and this years returns are 3%, next years
returns would be
a.3%
b.6%
c.cannot say for certain
38) All of the following are true regarding mortgage backed securities except:
a.A mortgage-back security is a debt security created by pooling together a group of
mortgage loans whose periodic payments belong to the holders of the security
b.Some mortgage-back securities pass through the interest and principal payments to
the owners of the securities
c.Payments on the underlying mortgages are made to the financial institution that
created the mortgage-backed security, and the institution, in turn, pays or passes
through the payments to the investors or owners of the securities
d.In some mortgage-backed securities, the issuer separates or strips the interest and
principal payment streams into separate securities
e.all of the above statements are true
39) The capital-budgeting process starts with which one of the following stages:
a.development
b.identification
c.implementation
d.selection
40) ______________ behavior refers to how an individual or organization treats others
legally, fairly, and honestly.
a.Principal-agent
b.Stakeholder
c.Responsible
d.Ethical
e. none of the above
41) A hospital received a contribution to its endowment fund of $2 million. The hospital
can never touch the principal, but it can use the earnings. At an assumed interest rate of
9.5 percent, how much can the hospital earn to help its operations each year?
a.$95,000
b.$19,000
c.$190,000
d.$18,000
42) Which of the following constitute default on a bond?
a.nonpayment of par value
b.nonpayment of coupon
c.violation of the indenture
d.all the above
e.none of the above
43) If an individual supplies funds to a business firm by purchasing bonds issued by the
firm, the transaction:
a.creates two types of financial assets and two types of financial liabilities
b.increases the liquidity and safety of principal for the individual
c.initially occurs in the primary market
d.limits the ability of the security to be sold in the secondary market
e.all of the above
44) Shanghai Shipping is considering investing in a project that requires an after-tax
initial investment of 156 million and is expected to produce after-tax cash inflows of
$40 million for each of the next five years. The firms cost of capital is 10%. Based on
this information, the NPV of the project is _________ million and the firm should
_________ the project.
a.$151.63; accept
b.-$151.63, reject
c.$4.37, accept
d.-$4.37, reject
e.none of the above
45) The term ___________ conveys a relationship of equality between the assets of the
business and the sources of funds for their acquisition.
a.statement of cash flows
b.cash transactions statement
c.income statement
d.balance sheet
46) One of the most significant functions of the financial system is the creation of
money, which serves as a medium of exchange.