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1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its
accounts receivable as security, it eliminates the need for a credit investigation.
2) Savings surplus occurs when an economic unit has current income that exceeds its
direct investment in real assets.
3) Indirect financing is financing created by an intermediary that involves separate
instruments with lenders and borrowers.
4) Working capital is essentially a firms current assets and consists of cash, accounts
receivable, inventories, plant and equipment.
5) Similar to the net present value method, there is a formula to determine the
proportions of debt and equity a firm should use to finance its assets.
6) Political risk is the risk associated with possible slow or negative economic growth,
as well as with the likelihood of variability.
7) The balance sheet equation or accounting identity can be written as: assets equal
liabilities plus owners equity.
8) Future returns and risk cannot be predicted precisely from past measures.
9) An instrument requiring immediate payment is classified as a time draft.
10) An owner of a business may not assign life insurance as collateral for a short-term
loan.
11) The typical capital budgeting project involves a large up-front cash outlay, followed
by a series of smaller net cash outflows.
12) Which of the following would not be included on the balance sheet?
a.dividends paid
b.retained earnings
c.surplus account
d.common stock
13) Which of the following is a source of cash?
a.an increase in an asset account
b.a decrease in an asset account
c.a decrease in a liability account
d.a decrease in an equity account
e.none of the above
14) All of the following methods can be used to estimate the cost of debt except:
a.If the firm targets an A rating (or any other bond rating), a review of the yields to
maturity on A-rated bonds in Standard & Poors Bond Guide can provide an estimate of
the firms current borrowing costs
b.The firm can solicit the advice of investment bankers on the cost of issuing new debt
c.If the firm has debt currently trading, it can use public market prices and yields to
estimate its current cost of debt
d.A firm can seek long-term debt financing from a bank or a consortium of banks;
preliminary discussions with the bankers will indicate a ballpark interest rate the firm
can expect to pay on its borrowing
e.All of the above statements are correct
15) Asset management ratios do not measure which of the following:
a.productivity of fixed assets in terms of sales
b.how current assets are used in the generation of sales
c.how efficiently inventory is being managed
d.all of the above are measured by asset management ratios
16) ________________ is the study of how individuals, institutions, governments, and
businesses acquire, spend, and manage financial resources.
a.financial markets
b.financial institutions
c.finance
d.financial management
17) Compensation for those financial debt instruments that cannot be easily converted
to cash at prices close to estimated fair market values is termed:
a.liquidity premium
b.market risk premium
c.maturity premium
d.none of the above
18) The largest providers of short-term financing are:
a.commercial banks
b.commercial finance companies
c.factors
d.none of the above
19) Using the DuPont system of analysis and holding other factors constant, decrease in
total asset turnover will result in ________ in the return on equity.
a.an increase
b.a decrease
c.no change
d.an undetermined change
20) Major participants in the secondary mortgage markets include all of the following
except:
a.mortgage companies
b.depository institutions such as banks and credit unions
c.Ginnie Mae
d.Fannie Mae
e.all of the above are participants
21) Your company owns land in a busy shopping district. If the chair of the companys
board of directors thinks they can build a plant on that land and that the land will incur
no additional cost, the chair fails to take into account:
a.capital expenditures
b.opportunity costs
c.sunk costs
d.depreciation
22) Two risky assets can be combined to lower the overall risk of a portfolio. This
principle is commonly referred to as
a.blending
b.asset allocation
c.dissection
d.portfolio segmentation
e.none of the above
23) In an efficient market which of the following would not be expected to cause a
quick price change in the stock of a company?
a.an unexpected announcement by a major competitor
b.higher than predicted earnings announcement
c.unexpected death of CEO
d.all the above would be expected to cause a quick price change
24) In future value or present value problems, unless stated otherwise, cash flows are
assumed to be
a.at the end of a time period
b.at the beginning of a time period
c.in the middle of a time period
d.spread out evenly over a time period
25) You borrow $10,000 to pay for your college tuition. The loan is amortized over a
three-year period with an interest rate of 18%. What is your remaining balance at the
end of year two?
a.$7,201
b.$4,599
c.$3,898
d.$3,303
26) A firm with total liabilities and owners equity of $100,000 and net sales of $50,000
would have a total asset turnover of:
a.100
b..50
c.2
d.not enough information given
27) In September, 2008 ____________ was acquired by Bank of America and
_____________ declared bankruptcy when no viable financial alternatives surfaced.
a.Bank of America, Washington Mutual
b.Lehman Brothers, Merrill Lynch
c.Citicorp, Smith Barney
d.Morgan Stanley, Chase
e.none of the above
28) If a company can stretch its accounts payable without damaging its credit rating, it
is effectively ___________ the cost of foregoing the cash discount.
a.increasing
b.translating
c.not affecting
d.not able to determine
e.none of the above
29) An agreement whereby an investment banker tries to sell securities of an issuing
corporation, but assumes no risk if the flotation is unsuccessful is called a:
a.due diligence agreement
b.best-effort agreement
c.firm commitment price agreement
d.shelf registration agreement
30) All other things being equal, a decrease in the contribution margin for a firm would:
a.increase the break-even point
b.decrease the break-even point
c.have no impact on the break-even point
d.not enough information given
31) Which of the following statements is most correct?
a.In reaction to the then developing 2007-2009 financial crisis, short-term interest rates
declined sharply and were less than 100 percent by October, 2008
b.In reaction to the then developing 2007-2009 financial crisis, short-term interest rates
declined sharply and were less than 10 percent by October, 2008
c.In reaction to the then developing 2007-2009 financial crisis, short-term interest rates
declined sharply and were less than 5 percent by October, 2008
d.In reaction to the then developing 2007-2009 financial crisis, short-term interest rates
declined sharply and were less than .5 percent by October, 2008
e. none of the above
32) The prudent use of derivatives to hedge, or reduce risk, is similar to the concept of
________________.
a.gambling
b.juggling
c.hiding
d.religion
e. none of the above
33) Which of the following is not a component of the Gordon (or constant dividend
growth rate) model for valuing stocks?
a.next years expected dividend
b.a constant divided growth rate
c.next years expected earnings
a discount rate that reflects the riskiness of the stock
34) Which of the following business organizations do not limit the liability of some or
all of their owners to the extent of their investment in the company?
a.proprietorships and partnerships
b.corporations and proprietorships
c.limited partnerships and proprietorships
d.corporations and limited partnerships
35) The _______________ established the Public Company Accounting Oversight
Board (PCAOB).
a.Smoot-Hawley Act
b.Sarbanes-Oxley Act
c.Gram-Harkins Act
d.McKean-Obama Act
e.none of the above
36) Under the leadership of ______________, during the 2007-2009 financial crisis, the
Treasury was actively involved in trying to help financial institutions on the brink of
collapse find help through mergers with financially stronger institutions.
a.George Bush
b.Alan Greenspan
c.Ben Bernanke
d.Timothy Geithner
e.none of the above are involved
37) Which of the following factors is most correct?
a.Demand-pull inflation traditionally exists during periods of economic expansion when
the demand for goods and services exceeds the available supply of such goods and
services
b.Cost-push inflation occurs when prices are raised to cover rising production costs,
such as wages
c.Speculative inflation is caused by the expectation that prices will continue to rise,
resulting in increased buying to avoid even higher future prices
d.All of the above are correct
e. none of the above are correct
38) All of the following statements regarding capital structure weights in the WACC
equation are correct except:
a.The weights represent a specific intended financing mix
b.These target weights represent a mix of debt and equity that the firm will try to
achieve or maintain over the planning horizon
c.As much as possible, the target weights should reflect the combination of debt and
equity that management believes will minimize the firms weighted average cost of
capital
d.The firm should make an effort over time to move toward and maintain its target
capital structure mix of debt and equity
e.All of the above statements are correct
39) ___________________ are intermediaries, such as banks, insurance companies,
and investment companies that engage in financial activities to aid the flow of funds
from savers to borrowers or investors.
a.Financial Institutions
b.Financial market organizations
c.Federal agencies
d.International financial organizations
e.none of the above
