1) The marginal tax rate is the rate paid on the last dollar of income.
2) An annual report contains descriptive information on operating and financial
performance during the past year, a discussion of current and future business
opportunities, and five year projected stock prices and shareholder returns.
3) A nation with relatively lower interest rate levels than other countries will have a
relatively stronger currency.
4) Partnership income is taxed at the partnership income tax rate.
5) One of the reasons open market operations are conducted virtually every business
day is to implement changes in the money supply called for by the Federal Open
Market Committee.
6) If required reserves are larger than the total reserves of an institution, the difference
is called excess reserves.
7) The annual percentage rate (APR) overstates the true or effective interest cost.
8) Financial planning begins with a sales forecast for one or more years.
9) A business should begin with a vision or mission statement that is consistent with the
planned overall strategy.
10) Most of the limited liability company shareholders must take active roles in
managing the company.
11) The balance of payments is a summary of all economic transactions between one
country and the rest of the world.
12) The degree of operating leverage measures the sensitivity of operating income to
changes in the level of output.
13) A positive NPV suggests that a project produces sufficient cash flows to cover not
only its initial cost, but also all financing costs.
14) A strong-form efficient market is one in which prices reflect all public knowledge,
including past and current information.
15) At very low interest rates, the Rule of 72 does not approximate the compounding
process well.
16) The annual percentage rate is the true opportunity cost measure of the interest rate.
17) The internal growth rate measures how quickly a firm can grow when it uses both
internal equity and debt financing to keep its capital structure constant over time.
18) The U.S. Treasury is responsible for refinancing the outstanding debt of the
government.
19) A clean draft is accompanied by an order bill of lading along with other papers such
as insurance receipts, certificates of sanitation, and consular invoices.
20) Government purchases include expenditures for goods and services by the federal
government.
21) Because of portfolio effect, the most significant factor related to the risk of any
investment is its:
a.standard deviation
b.coefficient of variation
c.effect on the risk of the portfolio
d.unsystematic risk
22) All of the following statements are correct except:
a.The tax deductibility of debt becomes more important to firms with large nondebt tax
shields such as foreign tax credits granted by the U.S. government to firms that pay
taxes to foreign governments
b.As the debt/total asset ratio falls, or as earnings become less volatile, the firm will
face higher borrowing costs, driven upward by bond investors requiring higher yields to
compensate for additional risk
c.The static tradeoff hypothesis states that firms will balance the advantages of equity
(its lower cost and tax-deductibility of dividends) with its disadvantages (greater
possibility of bankruptcy and the value of explicit and implicit bankruptcy costs)
d.Agency costs increase the optimal level of debt financing for a firm above the level
that would be appropriate if agency costs were zero
e.None of the above statements are correct
23) Dollar-denominated bonds that are issued in the United States by a foreign issuer
are called:
a.Eurodollar bonds
b.foreign bonds
c.Yankee bonds
d.global bonds
24) A firm has a minimum desired cash balance of $120,000. Any cash shortfalls will be
made up with short-term financing. The net cash flow for January is $80,000 and the
beginning balance for that month is $15,000: short-term financing requirements that
month will be:
a.-$120,000
b.$25,000
c.$215,000
d.cannot determine from this information
25) The _____________ policy states that dividends will vary based upon how much
excess funds the firm has from year-to-year, whereas under a ________________
policy the firm pays a constant percentage of earnings as dividends, so as earnings rise
and fall so does the dollar amount of dividends.
a.constant payout ratio, residual dividend
b.residual dividend, constant payout ratio
c.constant dividend, variable payout ratio
d.variable payout ratio, constant dividend
e.none of the above
26) An area of finance that involves financial planning, asset management and
fund-raising decisions to enhance the value of businesses is called:
a.financial management
b.investments
c.financial institutions
d.financial markets
e.none of the above
27) The risk of having a bond issuer request the bond back from the bondholder thus
forcing the bondholder to reinvest the proceeds at a lower interest rate is called:
a.call risk
b.reinvestment rate risk
c.interest rate risk
d.none of the above
28) Creditworthiness reflects:
a.an individual borrowers capacity to pay
b.collateral or security to the lender
c.character
d.a, b, and c above
e.neither a, b, nor c above
29) Which one of the following is not a primary market function of investment bankers?
a.originating
b.underwriting
c.selling
d.making loans
30) A decrease in the supply for loanable funds accompanied by an increase in demand
will cause interest rates to:
a.increase
b.decrease
c. stay the same
d.not enough information to tell
31) An aggressive portfolio would have a beta of:
a.1
b.0
c.less than 1
d.more than 1
32) A bond that allows investors to force the issuer to redeem the bond prior to maturity
is called a:
a.convertible bond
b.callable bond
c.debenture bond
d.putable bond
33) Intervention by central banks in the flexible exchange rate system is called:
a.clean float
b.flexible float
c.dirty float
d.usage of Special Drawing Rights
34) The payback period concept is best explained by which of the following?
a.marginal cost of capital
b.point where initial investment has been returned
c.rate where NPV is equal to zero
d.accounting rate of return
35) Examples of internal financial data required for project analysis include all of the
following except:
a.investment costs
b.business cycle stages
c.financing costs
d.transportation costs
e.all of the above are included
36) If you buy stock certificates and keep them at the brokerage firm rather than taking
personal possession of them, your stock is in:
a.street name
b.a short sale
c.a limit order
d.none of the above
37) Which of the following characteristics of most debt instruments cause bond prices
to vary inversely with changes in financial market interest rates?
a.coupon rates
b.maturity dates
c. par redemption values
d.all of the above
38) A draft that is accompanied by an order bill of lading and other documents is called
a (n)
a.bill of exchange
b.sight draft
c.time draft
d.documentary draft
39) Sacramento Sandals (SS) has fixed annual operating costs of $75,000. SS retails
each pair of sandals for $14.99 each and the variable cost per pair is $4.99. Based on
this information, the breakeven sales level in dollars is
a.$25,495
b.$12,425
c.$8,995
d.none of the above
40) Price inflation:
a.is relatively unimportant to individuals
b.is considered to be acceptable in the nations quest for high levels of employment
c.levels the playing field and encourages investment by reducing the uncertainty about
future returns
d.is almost always due to financing wars
e.none of the above
41) The seller of an option contract is called a (n) ____________ and the price paid for
the option itself is the called the ___________.
a.option broker, option price
b.sales agent, option premium
c.option writer, option premium
d.option writer, option price
e. none of the above
42) According to Standard & Poors and Fitch, bonds rated ______ and below are
considered to be speculative or junk.
a.BBB+
b.BB+
c.B+
d.CCC
43) The ________________________, the greater the chance of the option becoming
_____________________.
a.shorter the time to expiration, in-the-money
b.longer the time to expiration, in-the-money
c.greater the volatility, in-the-money
d.two of the above are correct.
e. none of the above.
44) Who made the following famous statement: “The governments view of the
economy could be summed up in a few short phrases: If it moves, tax it. If it keeps
moving, regulate it. And if it stops moving, subsidize it.”
a.Alan Greenspan
b.Ronald Reagan
c.Jimmy Carter
d.George Herbert Walker Bush
e.none of the above
45) The interest rate that measures the true interest rate when compounding occurs
more frequently than once a year is called the:
a.annual percentage rate
b.compound rate of interest
c.stated rate of interest
d.effective annual rate
46) A firm has a minimum desired cash balance of $10,000. Any cash shortfalls will be
made up with short-term financing. The net cash flow for January is $3,000 and the
beginning balance for that month is $5,000: The cash balance for the beginning of
February will be:
a.-$2,000
b.$10,000
c.$3,000
d.cannot determine from this information
47) Assume the probability of a pessimistic, most likely and optimistic state of nature is
.25, .55 and .20, and the returns associated with those states of nature are 5%, 10%, and
13% for asset Y. Based on this information, the expected return, standard deviation, and
coefficient of variation for asset Y are:
a.10.50%, 2.96% and 0.395 respectively
b.10.35%, 2.86% and 0.345 respectively
c.9.55%, 2.76% and 0.315 respectively
d. 9.15%, 2.66% and 0.295 respectively
e. none of the above
48) The basic strategies that should be employed by the business firm in managing cash
include all of the following EXCEPT
a.paying accounts payable as late as possible without damaging the firm’s credit rating
b.turning over inventory as quickly as possible while avoiding stock outs
c.operating in a fashion that requires maximum cash
d.collecting accounts receivable as quickly as possible without damaging customer
rapport
e.none of the above
49) Almost all Treasury disbursements are made by:
a.checks drawn directly on the U.S. Treasury
b.check drawn against deposits at commercial banks in large cities
c.drafts drawn on member banks
d.checks drawn against deposits at Federal Reserve Banks
50) Loans by an exporters bank based on the security of a documentary draft:
a.are supported entirely by the strength of the importer
b.are subject to the approval of the importers bank
c.are available only to exporters with strong credit ratings
d.have not only the financial strength of the exporter to support them, but also that of
the importer
51) If a Microsoft January 20 call option with a strike price of $20 was selling for $2.00
and the market price of the underlying Microsoft stock was $25.62, the price of the call
option would be _______________.
a.in-the-money
b.out-of-the-money
c.fairly priced
d.not enough information to tell
52) Which of the following costs serves to compensate the lender for loss of liquidity?
a.administrative costs of making the loan
b.cost of paying for the risk involved
c.cost to offset the likelihood of inflation
d.cost for use of money during the period of the loan