1) The disbursement float is the delay in transferring the means of payment from the
payor (customer) to the payee (the provider of goods or services).
2) Over the counter markets are organized exchanges for trading securities such as the
American Stock Exchange.
3) The risk free rate of interest is the interest rate on a debt instrument with no default,
maturity, or liquidity risks.
4) The operating cycle measures the time it takes between ordering materials and
collecting cash from receivables.
5) Financial assets are claims against the income or assets of individuals, businesses,
and governments.
6) A weak-form efficient market is one in which prices reflect all public knowledge,
including past and current information.
7) The delivery or transmission float is the delay in transferring the means of payment
from the payor (customer) to the payee (the provider of goods or services).
8) Profitability ratios indicate the extent to which assets are used to support sales.
9) The bankers acceptance and the documentary draft involve four principal parties: the
importer, the importers bank, the exporter, and the exporters bank.
10) The federal funds rate is normally several points lower than the Treasury Bill rate.
11) If the cash conversion cycle is shorter, then the firms investment in inventories and
receivables will be smaller.
12) Discounting means that interest earned each year, plus the principal, will be
reinvested at the stated rate.
13) A compensating balance requirement means that a lending institution will require a
borrowing company to keep a certain percentage of the loaned amount on deposit with
that institution.
14) A market order is an order for immediate purchase or sale at the best possible price.
15) In general, securities with higher historical standard deviations have provided
higher returns.
16) Compensating balances decrease the effective cost of borrowing.
17) The liquidity premium is the compensation that investors demand for holding
securities that cannot easily be converted to cash without major price discounts.
18) Budgets are written financial plans utilized in sales forecasts.
19) The bankers acceptance is a draft drawn on and accepted by a bank rather than the
importing firm.
20) The market segmentation theory holds that securities of different maturities are not
perfect substitutes for each other.
21) Financial analysis is designed to cover four areas or dimensions of the firm. Which
one of the following does not belong to these four areas?
a.liquidity ratios
b.asset utilization ratios
c.financial leverage ratios
d.sources and uses of fund ratios
22) The most important reason for directly issuing or using commercial paper dealers
is:
a.the cost of borrowing is generally less than regular bank rates
b.its a profitable alternative to the purchase of Treasury bills
c.the avoidance of compensating balances
d.the convenience and profitability
23) If the nominal interest rate is 8% and the risk-free rate is 3%, the expected inflation
rate must be:
a.3%
b.5%
c.11%
d.cannot be determined without additional information
24) A contract that gives the owner the option or choice of selling a particular good at a
specified price on or before a specified date is called a (n):
a.call option
b.put option
c.option on a future
derivative option
25) Continuing federal programs that stabilize economic activity are called
a.transfer payments
b.automatic stabilizers
c.social insurance programs
d.none of the above
26) Quotations of foreign exchange rates in the many cities of the world are identical or
nearly so because of:
a.central bank control
b.price fixing
c.clearinghouse activities
d.arbitrage activities
27) Among the six principles of finance, all are included except:
a.All decisions are ultimately financial decisions
b.Higher returns are expected for taking on more risk
c.Diversification of investments can reduce risk
d.Financial markets are efficient in pricing securities
e.all of the above are included
28) Which one of the following transactions or operations is entirely at the initiative of
the Federal Reserve?
a.open market operations
b.change in float
c.change in bank borrowings
d.change in Treasury cash holdings
29) In an effort to stimulate economic activity, Congress and the president passed the
$787 billion _________________________________ in February, 2009 with the funds
to be used to provide tax relief, appropriations, and direct spending.
a.American Reconstruction and Reconfiguration Act of 2009
b.American Real Estate and Reconstruction Act of 2009
c.American Real Estate Reinvestment Act of 2009
d.American Recovery and Reinvestment Act of 2009
e.none of the above
30) All derivative securities always derive their values from:
a.stocks
b.bonds
c.other derivatives
d.neither of the above
31) All of the groups of cash flows from the firms statement of cash flows are also used
in the analysis of project cash flows EXCEPT:
a.cash flow from financing
b.cash flow from investment
c.cash flow from operations
d.all are included
32) Find the annualized cost of a commercial paper issue the has a $1,000,000 face
value, matures in 180 days, has a placement fee of 1.5% and an interest charge of 8.5%
over the 6 month period it is outstanding.
a.10%
b.11.1%
c.23.5%
d.none of the above
33) You have just won a lottery! You will receive $50,000 a year beginning one year
from now for 20 years. If your required rate of return is 10%, what is the present value
of your winning lottery ticket?
a.$418,250
b.$425,700
c.$444,640
d.$453,850
34) ___________________ is an agreement by the investment banker to sell securities
of the issuing corporation whereby the investment banker assumes no risk for the
possible failure of the flotation.
a.A prospectus
b.An underwriting agreement
c.A best-effort agreement
d.none of the above
35) The current ratio of a firm with current assets of $300,000, current liabilities of
$100,000, and inventory of $100,000 is:
a.1:1
b.2:1
c.3:1
d.4:1
36) If a firm’s fixed financial costs decrease, the firm’s operating breakeven point will
a.decrease
b.increase
c.remain unchanged
d.change in an undetermined direction
37) An efficient ______________ that is comprised of a central bank and a banking
system that is able to create and transfer a stable medium of exchange called money.
a.allocation system
b.banking system
c.investment system
d.market system
e.none of the above
38) Ningbo Steel was extended credit terms of 3/15 net 30 EOM. The cost of giving up
the cash discount, assuming payment would be made on the last day of the credit
period, is 75.26 percent. If the firm were able to stretch its accounts payable to 60 days
without damaging its credit rating, the cost of giving up the cash discount would only
be
a.16.81%
b.16.25%
c.23.90%
d.27.09%
e.none of the above
39) Which of the following statements is most correct?
a.the variance of a portfolio is a weighted average of asset variances
b.the benefits of diversification are greatest when asset returns have zero correlations
c.the market portfolio truly eliminates all unsystematic risk
d.beta is the measure of an assets unsystematic risk
40) A firm with an inventory period of 30 days, an accounts receivable period of 30
days, and an accounts payable period of 90 days has an operating cycle of _____ days.
a.60
b.-60
c.30
d.-30
41) 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%, 2.86% and 0.315 respectively
d. 9.35%, 2.76% and 0.295 respectively
e. none of the above
42) Which of the following financial institutions market seasoned instruments and
securities?
a.brokerage firms
b.finance companies
c.mortgage lenders
d.none of the above
43) Large U.S. corporations of high credit quality can issue or sell short-term
promissory notes called:
a.revolving credit agreements
b.commercial paper
c.trade credit
d.inventory loans
44) All of the following statements are correct except:
a.The tax deductibility of debt becomes less 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 rises, or as earnings become more 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 debt (its
lower cost and tax-deductibility of interest) with its disadvantages (greater possibility of
bankruptcy and the value of explicit and implicit bankruptcy costs)
d.Agency costs reduce the optimal level of debt financing for a firm below the level that
would be appropriate if agency costs were zero
e.All of the above statements are correct
45) A business loan to Joes Hardware Store by a bank represents which of the
following?
a.a liability of the bank and an asset to Joes
b.an asset of the bank and a liability to Joes
c.liability to the bank and capital to Joes
d.liability to Joes and capital to the bank
46) The U.S. Treasury, under the leadership of Treasury Secretary _____________,
played an important role in helping the U.S. survive the 2007-09 financial crisis by
assisting with the acquisition of Bear Sterns by JP Morgan Chase in March 2008 and by
trying to help other financial institutions on the brink of collapse find help through
mergers with financially stronger institutions.
a.Lawrence Summers
b.Timothy Geithner
c.Alan Greenspan
d.Ben Bernanke
e.none of the above
47) 2/10 net 30 translates as
a.2 percent cash discount may be taken if paid in 10 days of shipment; if not paid within
10 days, the net amount is due in 20 days
b.2 percent cash discount may be taken if paid in 10 days of shipment; if not paid
within 10 days, the net amount is due 30 days after the middle of the month
c.2 percent cash discount may be taken if paid in 10 days of shipment; if not paid within
10 days, the net amount is due 30 days after the end of the month
d.2 percent cash discount may be taken if paid in 10 days of shipment; if not paid
within 10 days, the net amount is due in 20 days
e.none of the above
48) Shanghai Shipping is considering investing in a project that requires an after-tax
initial investment of 156 million and is expected to produce after-tax cash inflows of
$40 million for each of the next five years. The firms cost of capital is 8%. Based on
this information, the IRR of the project is _________ percent and the firm should
_________ the project.
a.9.9; accept
b.-9.9, reject
c.8.9, accept
d.-8.9, reject
e.none of the above
49) Federal obligations usually issued for maturities of two to five years are called:
a.Treasury bonds
b.Treasury notes
c.Treasury bills
d.Agency issues
e. none of the above