1) Firms with cyclical sales should employ a high degree of leverage.
2) Translation exposure occurs because of changes in foreign exchange rates.
3) In determining the optimum capital structure, it is assumed that the firm will raise
capital in the optimum proportions every year.
4) Municipal securities are called “tax-exempt” because no federal taxes must be paid
on interest received.
5) The financial managers of the firm decide on its cost of capital for financing projects.
6) In analyzing ratios, the age of the firm’s assets need not be considered.
7) In times of recession, retained earnings decline as a percent of internal funds.
TRUE
57.2008 was a unique year in the credit markets because lenders, in traditional times,
provided no net new funds to credit markets.
8) Risk premiums are higher for riskier securities, but the risk premium cannot be
higher than the required rate of return.
9) Pro forma income statements and balance sheets refer to projected financial
statements.
10) Heavy use of long-term financing can generate more profit for the company during
a tight money period.
11) Large well-established investment bankers often distribute new issues on a
best-efforts basis.
12) As a general rule, it is desirable to finance the permanent assets, including
“permanent current assets,” with long-term debt and equity.
13) A lower dividend payout ratio will decrease the firm’s need for borrowing.
14) Under generally acceptable accounting principles, two companies with identical
operating results may not report identical net incomes.
15) The call feature is usually advantageous to the bondholder.
16) The value of bonds will move opposite general market interest rates.
17) One advantage to an issuer of commercial paper is that the issuer eliminates the
need for maintaining compensating balances and credit lines with a commercial bank.
18) “Credit default swaps” are one of several tools that Congress and the President of
the United States have jointly developed to ease the financial crisis that began in 2008 .
19) The whole area of investment banking is becoming more competitive.
20) Which of the following is NOT a characteristic of market stabilization?
A.It may last up to 30 days
B.It may be difficult to achieve
C.It is often illegal
D.It can protect the underwriting syndicate as well as investors
21) The major difficulty in most insider-trading cases has been
A.that lenient judges have simply released the guilty individuals
B.that insider trading, even though illegal, actually serves a beneficial economic and
financial purpose
C.that inside trades have not been legally well-defined
D.inside trades actually have a beneficial effect on the wealth of all stockholders
22) The term debenture refers to
A.long-term, secured debt
B.long-term, unsecured debt
C.the after-acquired property clause
D.a 100-page document covering the specific terms of the offering
23) The benefits of social responsibility often include
A.a better reputation
B.higher short-term earnings
C.lower expenses
D.None of the options
24) Risk may be integrated into capital budgeting decisions by
A.adjusting the standard deviation of possible outcomes
B.determining the expected value
C.adjusting the discount rate
D.adjusting the time horizon
25) Which of the following is an internal source of funds?
A.Cash flow from depreciation (tax shield)
B.Net loss
C.Repurchase of debt securities
D.Bank loan
26) A bond with a coupon rate of 6.5%, maturing in 10 years at a value of $1,000 and a
current market price of $950, will have a yield to maturity (using the approximation
formula) of
A.between 6% and 6.5%
B.between 6.5% and 7%
C.between 7% and 7.5%
D.between 7.5% and 8%
27) Which of the following does a bond’s rating NOT depend on?
A.The corporation’s debt-to-equity ratio
B.The corporation’s size
C.The ability of the firm to make interest payments
D.The coupon rate on the bond
28) When comparing common stock of the same company, it is fair to say that
A.all shares, no matter how many classes, are all created with the same equal rights
B.companies sometimes have two different classes of shares with unequal rights to
dividends and votes
C.the Securities and Exchange Commission allows only one class of common stock
D.investors are indifferent between class A and class B shares
29)
Refer to the figure above. The firm’s return on equity is ____.
A.75%
B.26.8%
C.13.4%
D.15%
30) Total stockholders’ equity consists of
A.preferred stock and common stock
B.common stock and retained earnings
C.common stock and capital paid in excess of par
D.preferred stock, common stock, capital paid in excess of par, and retained earnings
31) A correlation coefficient of zero indicates
A.the projects have the same expected value
B.there is no correlation and no risk reduction when the projects are combined
C.there is no correlation, but there is some risk reduction when the projects are
combined
D.theprojects have the same standard deviation
32) Match the following with the items below:
1>self-liquidating assets
2>tight money
3>level production
4>trade credit
5>liquidity
6>market segmentation theory
7>working capital management
8>”permanent” current assets
9>term structure of interest rates
10>point of sales terminals
11>expected value
12>expectations hypothesis
13>fixed assets
14>”temporary” current assets
A. Long-term interest rates reflect the average of expected short-term rates over the life
of the long-term security.
B. The financing and management of the current assets of the firm.
C. Assets that are assumed to be long term in nature.
D. Current assets that will not be reduced or converted to cash within the normal
operating cycle of the firm.
E. Depicts in graphical form the relationship between interest rates and maturities for
securities of equal risk.
F. Financing provided by sellers or suppliers in the normal course of business.
G. Time period in which financing may be difficult to find and interest rates may be
quite high by normal standards.
H. Equal monthly production used to smooth out production schedules and employ
manpower and equipment more efficiently.
I. A representative quantity from a probability distribution arrived at by multiplying
each outcome times the associated probability and summing the values.
J.Current assets that will be reduced or converted to cash within the normal operating
cycle of the firm.
K. The relative convertibility of short-term assets to cash.
L. Computer terminals in retail stores that may be used for inventory control or other
purposes.
M. Assets that are converted in to cash within the normal operating cycle of the firm.
N. The relationship of short- and long-term interest rates relies on the maturity
preference of various financial institutions.
33) A.lower overtime usage
B.maximum efficiency
C.greater storage space
D.higher use of capacity
34) Which of the following groups is NOT subject to foreign exchange risk?
A.Importers and exporters
B.Investors
C.MNCs
D.All of these options are subject to foreign exchange risk
35) The possibility of experiencing a drop in revenue or an increase in cost in an
international transaction due to a change in foreign exchange rates is called
A.foreign exchange risk
B.political risk
C.translation exposure
D.hedging risk
36) Which of the following is NOT a reason why a company may choose to pledge
accounts receivable?
A.A lower interest rate
B.The borrowing capacity fluctuates with A/R
C.It provides another source of financing for companies with lower credit ratings
D.All of these are reasons for pledging accounts receivable
37) If expected dividends grow at 7% and the appropriate discount rate is 9%, what is
the value of a stock with an expected dividend one year from now of $1.00?
A.$62.88
B.$19.41
C.$29.12
D.$50.00
38) A Monte Carlo simulation model uses
A.random variables as inputs
B.a point estimate
C.the cost of capital
D.portfolio risk
39) A firm’s stock is selling for $62. The next annual dividend is expected to be $3.00.
The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained
earnings?
A.13.84%
B.12.46%
C.12.7%
D.None of these options
40) The most rigorous test of a firm’s ability to pay its short-term obligations is its
A.current ratio
B.quick ratio
C.debt-to-assets ratio
D.times-interest-earned ratio
41) Which of the following is NOT evident during a credit crunch?
A.The Fed tightens the money supply
B.There are higher business requirements for funds
C.A decrease in interest rates occurs
D.Massive withdrawals from savings deposits occur
42) The reason cash flow is used in capital budgeting is because
A.cash rather than income is used to purchase new machines
B.cash outlays need to be evaluated in terms of the present value of the resultant cash
inflows
C.to ignore the tax shield provided from depreciation would ignore the cash flow
provided by the machine, which should be reinvested to replace older machines
D.All of these options
43) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and
needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm
goes with a short-term financing plan, their rate will be 7.5%, and with a long-term
financing plan their rate will be 9%. By how much will their earnings after taxes change
if they choose the more aggressive financing plan instead of the more conservative
plan?
A.$10,800
B.($10,000)
C.($6,000)
D.$6,000
44) Which account represents the cumulative earnings of the firm since its formation,
minus dividends paid?
A.Paid-in capital
B.Common stock
C.Retained earnings
D.Accumulated depreciation
45) The typical merger premium is _______.
A.0-20%
B.40%
C.40-60%
D.60-80%
46) Five rights are necessary to purchase one share of Fogel stock at $50. A right sells
for $4. The ex-rights value of Fogel stock is _______.
A.$70
B.$46
C.$74
D.None of these options
47) The European Monetary Union (EMU), which came into effect in January of 1999
includes
A.Britain, France, Germany, Spain, Italy, and six other European countries
B.The establishment of a new European Central Bank to coordinate monetary policy for
the Eurozone countries
C.A new currency called the euro, which was put into circulation in all EMU countries
D.All of these options
48) Which of the following is not a valid quantitative measure for accounts receivable
collection policies?
A.Average collection period
B.Aging of accounts receivables
C.Ratio of debt to equity
D.Ratio of bad debts to credit sales
49) Prices of existing bonds move _________ as market interest rates move _______.
A.down; down
B.up; up
C.up; down
D.Bond prices don’t move as market interest rates move
50) The statement of cash flows does not include which of the following sections?
A.Cash flows from operating activities
B.Cash flows from sales activities
C.Cash flows from investing activities
D.Cash flows from financing activities
51) Which statement, or statements, are true about depreciation?
A.Depreciation is a non-cash expense that provides tax shield benefits
B.The greater the depreciation expenses in earlier years, the higher the present value of
the project
C.For tax purposes, the MACRS depreciation schedules supersede the old methods of
sum-of-the-years’ digits, double declining balance, and so on
D.All of these are true
52) Under normal operating conditions, the board of directors is elected by
A.the common stockholders
B.the preferred stockholders
C.the bondholders
D.Two of the other answer choices
53) If a firm’s bonds are currently yielding 6% in the marketplace, why would the firm’s
cost of debt be lower?
A.Interest rates have changed
B.Additional debt can be issued more cheaply than the original debt
C.There should be no difference; the cost of debt is the same as the bond’s market yield
D.Interest is tax-deductible
54) A statement of cash flows allows a financial analyst to determine
A.whether a cash dividend is affordable
B.how increases in asset accounts have been financed
C.whether long-term assets are being financed with long-term or short-term financing
D.All of the options
55) If Analog Computers can borrow at 8% for three years, what is the effective rate of
interest on a $1,000,000 loan where a 15% compensating balance is required?
A.11.18%
B.17.27%
C.9.41%
D.None of these options
56) Insider trading occurs when
A.someone has information not available to the public which they use to profit from
trading in stocks
B.corporate officers buy stock in their company
C.lawyers, investment bankers, and others buy common stock in companies represented
by their firms
D.any stock transactions occur in violation of the Federal Trade Commissions
restrictions on monopolies