Most equity investors are interested in a role as owner.
Small firm planning processes cover the same spectrum with respect to time horizon
and detail as large firm processes.
The optimal capital structure maximizes stock price.
The appropriate discount rate used in NPV calculations in the certainty equivalent
approach is the risk-free rate.
The dividend payout ratio is defined as the ratio of net income minus retained earnings
to net income.
An increase in an asset or a liability account represents a source of funds.
Compensating balances refer to charges that compensate the bank for work it does to
balance customer accounts.
Working capital assets typically include cash, accounts receivable, and inventories. The
liabilities include payables, accruals, and all borrowing regardless of term to maturity,
that is used to fund day-to-day operations.
Spontaneous financing exists because vendors and employees are not generally paid for
their products and services immediately.
Because people are less concerned about the precision of the capital structure than they
are about the accuracy of component costs, a target structure is often combined with the
current component costs in arriving at a WACC.
Criteria for extending credit to new customers usually involve the following issues:
(1) length of time in business
(2) adequate net worth
(3) an acceptable current ratio
(4) a “clean” credit record.
Foreign exchange markets, much like financial markets, are located in specific places
throughout the world, bringing brokers and banks together on a single trading floor.
The simple rules that drive the statement of cash flow are:
A company has a loss of $15,000 this year, a profit of $3,000 last year, a profit of
$8,000 two years ago, and another profit of $2,000 three years ago. It makes sense to
file amended returns for the last three years.
The procedure for a payroll accrual requires identifying the portion of the payroll that
falls after the payday but within the accounting period, and:
A.paying employees that amount.
B.recording the amount as an unusual cost.
C.providing for both the expense and the liability for the unpaid payroll with an accrual
entry when the books a closed.
D.preparing a supporting note on the financial statement as to the amount of the unpaid
payroll.
Members of the general public who have expressed interest in an IPO during the road
show are referred to as:
A.off market investors.
B.auction public.
C.retail investors.
D.insiders.
Maturity risk exists because:
A.long-term bond prices fluctuate more than short-term bond prices when interest rates
change.
B.short-term bond prices are stable.
C.bond prices fluctuate with yield rates in bond markets.
D.short-term bonds are less risky.
How is preferred stock similar to bonds?
A.Constant payment
B.Pays both principal and interest to investor
C.Fixed maturity date
D.Both a & c
E.All of the above
Which of the following best describes how corporations are taxed on dividend income?
A.Like individuals, corporations are taxed on all dividends received.
B.Fifty percent of dividend income received by corporations is tax exempt.
C.Varying amounts of dividend income received by corporations are tax exempt,
depending on the percent of the paying corporation that the receiving corporation owns.
D.In order to avoid triple taxation of earnings, dividend income received by one
corporation from another in which it owns twenty percent stock is 100% tax exempt.
Decision tree analysis shows a project to have several possible outcomes the best of
which has an NPV of $10M calculated over a five year life. This best case path has an
overall probability of occurring of 25%. A real option is available at an initial cost of
$750,000 which will add a single $5M cash inflow to this best case path at its end. The
option doesn’t have a significant effect on the project’s risk. The company’s cost of
capital is 11%. What is the option’s value (to the nearest $1,000)?
A.($8,000)
B.$2,218,000
C.$23,000
D.$56,000
Which of the following would be classified as a use of cash?
A.An increase in depreciation.
B.A decrease in accounts receivable.
C.A decrease in accruals.
D.Both b & c
E.All of the above
If the interest rate is 0%:
A.future amounts have zero present value.
B.future amounts have an infinite present value.
C.the present value of amounts to be received in the future is equal to the sum of those
amounts.
D.the future value of an investment is less than the sum of its cash flows.
Stocks that have high financial rewards are generally accompanied by:
A.high dividend payments.
B.low dividend payments because of internally generated growth.
C.high risk.
D.All of the above
Ken Howard has a two stock portfolio consisting of Acton Inc. and Boron Corp.
Assume the following conditions exist.
What does the SML predict is Ken’s required rate of return for the overall portfolio?
A.15.24%
B.14.93%
C.23.12%
D.20.90%
Companies repurchase their own stock:
A.occasionally as a substitute for a dividend.
B.to take advantage of a temporarily depressed stock price.
C.to restructure capital.
D.All of the above
Responsibilities of the finance department include, but are not limited to:
A.managing the company’s money.
B.providing financial input to general business decisions.
C.looking over everyone else’s shoulder to make sure they’re using money effectively.
D.All of the above
If a firm always pays the same proportion of its earnings out as a dividend, this would
be consistent with which dividend policy?
A.Stable Dividend Policy
B.Target Payout Ratio Policy
C.Small Regular Dividend Policy
D.Regular Dividend Policy with a possible end of year bonus dividend
Which of the following is unique to international investments?
A.Exchange rate risk
B.Political risk
C.Economic risk
D.a and b
E.All of the above
If a bank lends at 10% but requires a 12% compensating balance, what is the effective
interest rate on the loan?
A.10.0%
B.10.8%
C.11.4%
D.12.0%
E.12.6%
You are considering the purchase of a 15-year $1,000 face value bond that pays interest
of $90 annually. If you required a return of 10%, how much should you be willing to
pay for this bond?
A.$873.15
B.$923.94
C.$1,000.00
D.$1,080.60
E.$1,124.65
All of the following are characteristics of S Corporations except:
A.unlimited life.
B.unlimited liability for the stockholders.
C.avoidance of double taxation.
D.ease of raising additional capital for expansion.
The CAPM’s estimate of the component cost of common equity would be increased by
an increase in:
A.the risk-free interest rate.
B.a firm’s beta.
C.the return on the market.
D.b and c
E.All of the above