1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its
accounts receivable as security, it must execute an assignment of these accounts to the
bank.
2) The identification stage in capital budgeting involves finding potential capital
investment opportunities and identifying whether a project involves a replacement
decision and/or revenue expansion.
3) A negotiable CD is a marketable receipt issued by a bank in exchange for a deposit of
funds.
4) An expected decline in a currency may lead to an attempt to accelerate collection of
accounts receivable with funds transferred quickly to another country.
5) Expansion projects involving new areas and product lines are usually associated with
greater cash inflow uncertainty.
6) The minimum acceptable rate of return for a project is the return that generates
sufficient cash flow to pay investors their expected return.
7) The size of the accounts payable is affected by the level of the firms cost of goods
sold and the average payment period.
8) Consumption is reflected by the sum of personal consumption expenditures and
government purchases of goods and services.
9) The greatest level of risk reduction through diversification can be achieved when
combining two securities whose returns are perfectly negatively correlated.
10) The estimated cash inflows are affected by the sales forecast and customer payment
patterns.
11) Because the cost of capital is used to evaluate future investment proposals, it is
important to flotation costs because such costs would be incurred if a firm were to raise
new capital to fund proposed projects.
12) The President of the United States formulates budgetary and fiscal policy, but
Congress must enact legislation to implement these policies.
13) The price for which the owner is willing to sell the security is called the:
a.bid price
b.spread
c.ask price
d.limit price
14) Dun & Bradstreet serves as:
a.an agency for rating the bonds of businesses and governmental bodies
b.the principal rating agency for commercial paper
c.a research and advisory facility for stocks and bonds
d.a general credit reporting agency covering all fields of business activity
15) If one were to rank different assets from highest to lowest the basis of average
historical return, the ranking would be:
a.long-term corporate bonds, large company stocks, long term government bonds, small
company stocks, US Treasury bills
b.small company stocks, large company stocks, long-term corporate bonds, long term
government bonds, US Treasury bills
c.US Treasury bills, long term government bonds, long term corporate bonds, large
company stocks, small company stocks
d. none of the above
16) Which of the following statements is most correct?
a.There is an inverse relation between the present value interest factor of an annuity and
the future value interest factor of an annuity, i.e., one is the reciprocal of the other
b.The future value of an ordinary annuity can be determined as the product of the
annual payment and the appropriate future value interest factor for an ordinary annuity
c.If a bank uses daily compounding for a savings account, the nominal rate will be
greater than the effective annual rate
d.Each of the above statements is equally true
17) Assume a firm is developing, manufacturing, and selling a basic software package
at $300 per copy. Raw material and direct labor total $100 per unit. Fixed costs are
$150,000. If unit sales are 3,000 per year, what will be the break-even point in units?
a.375 units
b.500 units
c.750 units
d.800 units
18) Net income is:
a.equal to cash flow
b.profits remaining after income taxes are paid
c.unavailable to the owners of the business
d.none of the above
19) If a firm issues 10,000 shares of common stock with a par value of $5 and for a
sales price of $15, what amount would be recorded in the paid-in capital account?
a.$10,000
b.$15,000
c.$50,000
d.$100,000
20) What would be the future value of a loan of $1,000 for two years if the bank offered
a 10% interest rate compounded semiannually?
a.$1,720
b.$1,960
c.$1,200
d.$1,216
21) Which of the following is not considered to be a basic theory used to explain the
term structure of interest rates?
a.expectations theory
b.loanable funds theory
c.liquidity premium theory
d.market segmentation theory
22) 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, call option
c.sales agent, option premium
d.option writer, option price
e. none of the above
23) The syndicate dissolves:
a.when members elect to do so
b.30 days after securities issue
c.when the lead investment banker decides
d.the syndicate never dissolves
24) Which one of the following activities is not a major component of the short-term
cash operating cycle?
a.manufacturing process
b.selling effort
c.collection period
d.asset investment decisions
25) Variations in operating income over time because of variations in unit sales, price,
cost margins, and/or fixed expenses are called:
a.business risk
b.exchange rate risk
c.purchasing power risk
d. financial risk
e. none of the above
26) $100 is received at the beginning of year 1, $200 is received at the beginning of
year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited
at 12 percent, their combined future value at the end of year 3 is ________.
a.$1,536
b.$672
c.$727
d.$1,245
27) BP has a cash conversion cycle of 80 days, an average collection period of 25 days,
and an average age of inventory of 70 days. Based on this information, BPs operating
cycle is ________ days.
a.85
b.75
c.65
d.55
e.none of the above
28) If a project has a positive net present value, then the profitability index is:
a.greater than one
b.less than one
c.equal to one
d.cannot tell from this information
29) Capital formation refers to the:
a.total accumulation of monetary savings in the nation
b.distribution of savings among thrift institutions
c.total of capital stock accounts with business corporations
d.creation of physical productive facilities
30) If a firm has sales of $100, total expenses (including interest and taxes) of $50, has
a stock that is selling at $50 per share and has 10 share of stock outstanding, then the
firm has a P/E ratio of:
a.2.00
b.1.00
c.10.0
d.0.20
31) Holding all other factors constant, if a firm increases its current liabilities relative to
total assets,
a.it increases return and reduces risk
b.it increases return and increases risk
c.it reduces return and reduces risk
d.it reduces return and increases risk
e. none of above are correct
32) Which of the following statements is most correct?
a.A weaker dollar results in more imports of foreign merchandise since it requires fewer
dollars for purchase
b.A stronger dollar results in fewer imports of foreign merchandise since it requires
fewer dollars for purchase
c.A stronger dollar results in more imports of foreign merchandise since it requires
more dollars for purchase
d.A weaker dollar results in more imports of foreign merchandise since it requires more
dollars for purchase
e.none of the above
33) A decrease in the debt ratio will normally have no effect on:
a.financial risk
b.business risk
c.total risk
d.systematic risk
34) For most of the remainder of the decade after the September 11th terrorist attacks:
a.the Fed then maintained a neutral liquidity, stable interest rate environment
b.the Fed then maintained a low liquidity, low interest rate environment
c.the Fed then maintained a low liquidity, high interest rate environment
d.the Fed then maintained a high liquidity, high interest rate environment
e.none of the above
35) _____________ costs are a function of time (not sales) and are generally
contractual.
a.fixed
b.semi-variable
c.operating
d.variable
e.none of the above
36) If the variance in returns for Stock A is 400% and the expected return is 5%, then
the coefficient of variation is:
a.4
b.80
c..25
d.cannot be determined by this information
37) Which of the following statements is most correct?
a.An inefficient portfolio maximizes return for a given level of risk, or minimizes risk
for a given level of return
b.A single asset is called a portfolio
c.The goal of an inefficient portfolio is to minimize risk for a given level of return
d. Combining negatively correlated assets having the same expected return results in a
portfolio with the same level of expected return and a lower level of risk
e. all of the above
38) Which of the following instruments generates the largest amount of funds annually
in the credit markets?
a.tax-exempt obligations
b.corporate bonds
c.mortgages
d.bank loans
39) During the 2007 – 2009 financial crisis, many major financial institutions and
business corporations were on the verge of collapse or failure; however, some of the
very largest corporations and financial institutions were deemed as being ________
because their failure would cause cascading negative repercussions throughout the U.S.
and many foreign economies.
a.toxic firms
b.boat rockers
c.too large to ignore
d.too big to float
e.none of the above
40) Which of the following types of stocks have the lowest risk to shareholders?
a.common stock
b.cumulative preferred stock
c.non-cumulative preferred stock
d.callable preferred stock
41) 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 units is
a.7,500
b.15,030
c.5,003
d.none of the above
42) The perfect financial storm that developed in 2008, which put the U.S. economy
was on the verge of collapse was characterized by all of the following EXCEPT:
a.The housing price bubble burst in 2006 and began a sharp decline
b.Stock market prices peaked in 2007 and began a sharp decline
c.Many of the mortgage-related debt securities originated and sold to others, or held, by
banks became difficult to value during the perfect financial storm and quickly became
known as troubled or tonic assets
d.Individuals and businesses were defaulting on loans and home mortgages in
increasing numbers due to the weakening economy and falling home prices
e.All of the above were factors
43) Commercial letters of credit are:
a.customarily required by importers of their suppliers
b.negotiable in the money markets of major cities
c.customarily provided by banks to their customers to accommodate their import
activities
d.ordinarily provided by issuing bank at no charge to customers