1) The EPS/EBIT indifference level represents the level of Assets at which the firm
would be indifferent between two different capital structures because they both result in
the same level of EPS.
2) A documentary draft is a draft that is accompanied by an order bill of lading and
other documents.
3) The balance sheet equation or accounting identity can be written as: assets equal
liabilities minus owners equity.
4) A firm with total debt to total assets of 50% and an interest coverage ratio of 0.5
times would appear to be safely utilizing financial leverage.
5) The European Economic Organization (EEO) is an organization of twelve European
countries that agreed to have a common overall monetary policy and the euro as their
common currency.
6) The dividends paid on stock issued by corporations in the United States are tax
deductible to the issuing corporation.
7) Arbitrage is the simultaneous buying of securities in one market and selling them in
another to make a profit from price differences in the two markets.
8) Diversification occurs when we invest in several different assets rather than just a
single one.
9) Manufacturing companies tend to be the largest users of accounts receivable
financing.
10) The international monetary system consists of institutions and mechanisms that
foster international trade, manage the flow of financial capital, and determine currency
exchange rates.
11) The ratio of debt to stock market equity has generally been lowest for the largest of
U.S. firms.
12) A government raises funds to pay for its activities in two ways: levies taxes or prints
money for its own use.
13) An assets beta can be estimated by regressing its returns against the returns for the
market portfolio.
14) Required reserves are the minimum amount of total reserves that a depository
institution must hold.
15) If net working capital is negative, current assets are partially financed by the firms
long-term debt.
16) The net present value and internal rate of return methods will always agree on
whether a project enhances or harms shareholder wealth.
17) An option contract is a derivative security that obligates the owner to purchase the
underlying asset at a specified price on a specified day.
18) The net profit margin is calculated as the firms earnings before interest and taxes
divided by net sales.
19) Which of the following statements is correct?
a.Capital budgeting is the process of identifying, evaluating, and implementing a firms
investment opportunities
b.Capital budgeting seeks to identify projects that will reduce a firms competitive
advantage and by so doing decrease shareholders wealth
c.By its nature, capital budgeting involves short-term projects
d.Capital budgeting projects usually require small initial investments and may involve
acquiring or constructing plant and equipment
e.none of the above statements are correct
20) Your subscription to Consumer Reports is about to expire. You may renew it for $24
a year or, instead, you may get a lifetime subscription to the magazine for a onetime
payment of $400 today. Payments for the regular subscription are made at the beginning
of each year. Using a discount rate of 5%, how many years does it take to make the
lifetime subscription the better deal?
a.25 years
b.28 years
c.30 years
d.40 years
21) Which one of the following is not a marketable government security?
a.Treasury stock
b.Treasury bill
c.Treasury note
d.Treasury bond
22) Debt management includes all of the following except:
a.the types of securities to sell
b.the interest rate patterns to use
c.the types of refunding to carry out
d.all of the above
23) 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 fail
e.none of the above
24) During the 2007 – 2009 financial crisis, some of the very largest financial
institutions were deemed as being too big to fail because their failure would cause
cascading negative repercussions throughout the U.S. and many foreign economies. As
a result, the Federal Reserve
a.moved to reduce liquidity in the monetary system and increased its target federal
funds rate to above .25 percent
b.worked with the U.S. Treasury to help facilitate the separation of financially weak
institutions with institutions that were financially stronger
c.both a and b are true
d.none of the above are true
25) Suppose Ningbo Steel had sales revenue of $10,000 sales revenue, cost of goods
sold of $5,000, operating expenses of $3000, interest expense of $1,000, a tax rate of
20%, and 1,000 shares of common stock outstanding. Based on this information,
earnings per share was:
a.$1.20
b.$1.00
c.$0.80
d.$0.40
e.none of the above
26) The method that calculates the ratio of the present value of the positive cash flows
of a project to the absolute value of the present value of the negative cash flows is
called the:
a.internal rate of return
b.profitability index
c.net present value
d.payback period
27) Which of the following statements is most correct?
a.The financial crisis and recession of 20072009 had little effect on the ability of
borrower firms to obtain short-term financing and for firms with surplus funds to invest
in short-term instruments
b.The financial crisis and recession of 20072009 had strong effects on the ability of
borrower firms to obtain short-term financing and for firms with surplus funds to invest
in short-term instruments
c.The financial crisis and recession of 20072009 had strong effects on the ability of
borrower firms to obtain short-term financing but made it easy for firms with surplus
funds to invest in short-term instruments
d.The financial crisis and recession of 20072009 had little effect on the ability of
borrower firms to obtain short-term financing but made it easy for firms with surplus
funds to invest in short-term instruments
e. none of the above
28) The present value of an annuity of $5,000 to be received at the beginning of each of
the 6 years at a discount rate of 4% would be:
a.$26,210
b.$27,258
c.$3,950
d.none of the above
29) All of the following forms of organization are taxed at the owners personal tax rate
EXCEPT:
a.proprietorship
b.LLC
c.subchapter S corporation
d.partnership
e.all of the above assess taxes at the owners personal rate
30) The correlation between the return on the risk-free asset and the return on a risky
asset is always:
a.1
b.0
c.1
d.0.5
31) Which of the following would not be a source of funds?
a.decrease in an equity account
b.increase in a liability account
c.decrease in an asset account
d.all the above are sources of funds
32) The market for large blocks of listed stocks that operates outside the confines of the
organized exchanges is called the:
a.primary market
b.secondary market
c.third market
d.fourth market
33) The rule-setting body, which authorizes generally accepted accounting principles is:
a.GAAP
b.FASB
c.SEC
d.Federal Reserve System
e.none of the above
34) Sources of short-term financing such as accounts payable, notes payable, and
accruals should be used to finance:
a.all current assets
b.all fixed assets
c.a portion of the current assets needed to support nonseasonal sales levels plus all of
the seasonal build-up in current assets
d.a portion of the fixed assets plus all of the seasonal build-up in current assets
35) Among the six principles of finance, all are included except:
a.Money has a time value
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
36) During the 1980s and 1990s, the United States primarily:
a.imported more than it exported
b.exported more than it imported
c.imported about as much as it exported
d.none of the above
37) The attitude of central banks and commercial banks toward bankers acceptances:
a.has been favorable regarding bankers acceptances as attractive short-term
commitments
b.has never been constructive and has, in fact, been in opposition to their use at times
c.is one of approval provided that before investing in such instruments guarantees can
be obtained from the Export-Import Bank
d.is irrelevant, since they are prevented from investing in such instruments by
regulations or laws
38) The aftermarket is:
a.the over-the-counter market
b.the foreign exchange market
c.the period after a new issue is initially sold to the public
d.none of the above
39) If a firm chooses to take a cash discount, it should
a.pay as soon as possible
b.pay on the last day of the credit period
c.take the discount no matter when the firm actually pays
d.pay on the first day of the discount period
e.none of the above
40) A generous benefactor to the local university plans to make a one-time endowment
which would provide the university with $150,000 per year into perpetuity. The rate of
interest is expected to be 5 percent for all future time periods. How large must the
endowment be?
a.$300,000
b.$3,000,000
c.$750,000
d.$1,428,571
41) If an investor feels the price of a stock will decline in the future, which trade should
the investor undertake?
a.market order
b.buy on margin
c.limit order
d.short sale
42) Which of the following statements is correct?
a.The typical capital budgeting project involves a small upfront cash outlay, followed
by a series of smaller cash inflows and outflows, but the projects cash flows, including
the total upfront cost of the project, are not known with certainty before the project
starts
b.The typical capital budgeting project involves a large upfront cash outlay, followed by
a series of larger cash inflows and outflows, but the projects cash flows, including the
total upfront cost of the project, are not known with certainty before the project starts
c.The typical capital budgeting project involves a large upfront cash outlay, followed by
a series of smaller cash inflows and outflows, but the projects cash flows, including the
total upfront cost of the project, are not known with certainty before the project starts
d.The typical capital budgeting project involves a large upfront cash outlay, followed by
a series of smaller cash inflows and outflows, and the projects cash flows, including the
total upfront cost of the project, are known with certainty before the project starts
e.none of the above statements are correct
43) Economists have estimated that risk free rate in the United States and other
countries has averaged in the ________________ range in recent years.
a.2 to 4 percent
b.3 to 5 percent
c.4 to 6 percent
d.5 to 7 percent
e. none of the above
44) Which of the following statements is false?
a.the major determinant in the long run of the volume of savings is the level of national
income
b.the money market involves obtaining and trading of credit and debt instruments with
maturity of one year or less
c.bond risk premiums follow changes in investor optimism/pessimism about expected
economic activity
d.A high interest rate level but downward sloping yield curve is generally perceived as
being conductive to future economic expansion
45) According to the definitions given in the text, if Stock A has a standard deviation of
4% and Stock B has a standard deviation of 3% which stock is riskier?
a.Stock A
b.Stock B
c.they are equally risky
cannot determine from the information given
46) A contract that obligates the owner to purchase an underlying asset at a specified
price on a specified day is a (n) ____________ contract.
a.option
b.futures
c.hedge
d.derivative
47) Which of the following operating characteristics affect a firms short-term financing
strategy?
a.industry and company factors
b.seasonal variation
c.sales trend
d.cyclical variations
e.all the above
48) Which of the following characteristics is not descriptive of an amortization
schedule?
a.each payment is the same
b.The same dollar amount of interest is paid with each payment
c.payment on principal increases with each total payment
d.balance owed is reduced by each payment
49) Rational investors would consider an investment in a risky business venture only if
they feel the expected return is high enough to justify the
a.greater risk
b.higher cost
c.longer useful life
d.more complex designs
e. none of the above
50) Which one of the following alternatives is commonly used to reduce agency
problems as they relate to corporate control?
a.stock options
b.higher salaries
c.larger perquisites (perks)
d.less restrictive accountability requirements
51) When referring to an upward sloping yield curve, interest rates:
a.are flat across all maturities
b.decrease as maturity increases
c.increase as maturity decreases
d.increase as maturity increases
52) The time it takes between when materials are ordered and cash is collected from
receivables is referred to as the:
a.operating cycle
b.cash conversion cycle
c.assets turnover cycle
d.sales or revenues cycle
53) The secondary securities markets are involved in creating and issuing new
securities, mortgages, and other claims to wealth.
54) An effective financial system is a complex mix of government and policy makers, a
monetary system, financial institutions, and financial markets that interact to expedite
the flow of financial capital from savings into investment.
55) A credit rating indicates the expected likelihood that a borrower will miss interest or
principal payments and possibly default on the debt obligation in the form of a loan,
mortgage, or bond.
56) A mortgage-back security is an investment created by using a house as collateral for
a loan.
57) During the past couple of decades, generally high fixed-rate mortgage loan interest
rates and the desire to extend housing ownership to more individuals in the U.S., the
use of adjustable-rate mortgages grew in usage.
58) Personal finance is the study of how growth-driven performance-focused,
early-stage firms raise financial capital and manage operations and assets.