1) Lenders recognize that holding collateral can reduce losses if the borrower defaults,
but the presence of collateral has no impact on the risk of default.
2) RADRs are popular because they are consistent with the general disposition of
financial decision makers toward rates of return.
3) The standard deviation of a portfolio is a function of the standard deviations of the
individual securities in the portfolio, the proportion of the portfolio invested in those
securities, and the correlation between the returns of those securities.
4) The Sarbanes-Oxley Act of 2002 established the Private Company Accounting
Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of
public corporations.
5) Preferred stock is considered a hybrid security because it blends the characteristics of
both debt and equity.
6) A firm’s capital structure is the mix of short-term liabilities and long-term debt.
7) Notes payable are either spontaneous secured or spontaneous unsecured financing
and result from the normal operations of a firm.
8) A financial analyst is responsible for maintaining and controlling a firm’s daily cash
balances.
9) The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that
U.S.-based companies translate their foreign-currency-denominated assets and
liabilities into dollars using the current rate (translation) method.
10) A nonconventional cash flow pattern associated with capital investment projects
consists of an initial outflow followed by a series of inflows.
11) A tender offer is a formal offer to purchase a given number of shares of a firm’s
stock at a specified price.
12) If a firm has limited funds to invest, all the mutually exclusive projects that meet its
minimum investment criteria should be implemented.
13) A two-tier offer is a tender offer in which the terms offered are more attractive to
those who tender shares early.
14) Which of the following is true of annuities?
A) An ordinary annuity is an equal payment paid or received at the beginning of each
period
B) An annuity due is a payment paid or received at the beginning of each period that
increases by an equal amount each period
C) An annuity due is an equal stream of cash flows is paid or received at the beginning
of each period
D) An ordinary annuity is an equal payment paid or received at the end of each period
that increases by an equal amount each period
15) Which of the following is a forum in which suppliers and demanders of funds can
transact business directly?
A) shadow banking system
B) financial markets
C) commercial banks
D) financial institutions
16) Colin has inherited $6,000 from the death of Grandma Anna. He would like to use
this money to buy his mom Hayley a new scooter costing $7,000, two years from now.
Will Colin have enough money to buy the gift if he deposits his money in an account
paying 8 percent compounded semiannually?
17) The preferred capital structure weights to be used in the weighted average cost of
capital are ________.
A) book value weights
B) nominal weights
C) historic weights
D) target weights
18) In a(n) ________ a lessor owns or acquires the assets that are leased to a given
lessee.
A) operating lease
B) financial lease
C) sale-leaseback arrangement
D) direct lease
19) The higher an asset’s beta, ________.
A) the more responsive it is to changing market returns
B) the less responsive it is to changing market returns
C) the higher the expected return will be in a down market
D) the lower the expected return will be in an up market
20) The problem with the regular dividend policy from a firm’s perspective is that
________.
A) it regularly pays dividends which fluctuate with earnings
B) if the firm’s earnings drop, the dividends may be low
C) even when earnings are low, the company must pay a fixed dividend
D) it increases the shareholders’ uncertainty
21) In the DuPont system of analysis, the return on total assets (asset) is equal to
________.
A) (return on equity) (financial leverage multiplier)
B) (return on equity) (total asset turnover)
C) (net profit margin) (fixed asset turnover)
D) (net profit margin) (total asset turnover)
22) A letter written by a company’s bank to the company’s foreign supplier, stating that
the bank will guarantee payment of an invoiced amount if all the underlying agreements
are met is called ________.
A) a letter of invoice
B) a letter of intent
C) a letter of credit
D) commercial paper
23) ________ are financial instruments that allow stockholders to purchase additional
shares at a price below the market price, in direct proportion to their number of owned
shares.
A) Rights offering
B) Treasury stocks
C) Preemptive rights
D) Proxy statements
24) The call price of a security ________ the security’s par value.
A) is less than
B) is equal to
C) is greater than
D) is less than or equal to
25) The usual capital markets used by U.S.-based MNCs that desire international
ownership of their equity are ________.
A) Western Europe and Japan
B) Mexico and Canada
C) Saudi Arabia and South Africa
D) Liechtenstein and Panama
26) A convertible security that cannot be forced into conversion using the call feature is
________.
A) a general obligation bond
B) a debenture
C) an overhanging issue
D) a noncallable common equity issue
27) Which of the following is considered to be a major or hard currency?
A) the Algerian dinar
B) the Barbadian dollar
C) the Mexican peso
D) the Japanese yen
28) Bonds that can be redeemed at par at the option of their holders either at specific
date after the date of issue and every 1 to 5 years thereafter or when and if the firm
takes specified actions such as being acquired, acquiring another company, or issuing a
large amount of additional debt are called ________.
A) zero coupon bonds
B) junk bonds
C) floating-rate bonds
D) putable bonds
29) A major impetus fueling financial mergers during the 1980s was ________.
A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing
30) When a firm undertakes a merger to improve its sources and supply of raw
materials, this is an example of a ________.
A) financial merger
B) hostile takeover
C) divestiture
D) strategic merger
31) Fixed financial charges include ________.
A) common stock dividends and bond interest expense
B) common stock dividends and preferred stock dividends
C) bond interest expense and preferred stock dividends
D) stock repurchase expense