Debt financing
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Which of the following causes a currency inflow?
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
During a period of recession the Federal Reserve
a. 1 and 2
b. 1 and 3
c. 2 and 4
d. 3 and 4
The larger the debt ratio
a. the more equity the firm is using
b. the riskier the firm becomes
c. the larger are the firm’s total assets
d. the smaller is the firm’s use of financial leverage
Which of the following is a cash inflow?
a. an increase in accounts receivable
b. a decrease in inventory
c. distributing cash dividends
d. a decrease in long-term debt
Which of the following is inconsistent with efficient securities markets?
a. stock prices change rapidly in response to new information
b. investors cannot expect to outperform the market consistently
c. bond prices change rapidly in response to new information
d. analysis of financial data will lead to superior investment performance
Corporate federal income tax rates
a. decrease as income increases
b. are the same for all level of corporate income
c. phase out the benefits of lower tax brackets as corporate income increases
d. reach a high of 50 percent for earnings over $18,300,000
Which of the following is part of the underwriting process?
a. the Federal Reserve
b. the Securities Investor Protection Corporation
c. FDIC
d. the originating house
A naked call option writer
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Interest is exempt from federal income taxation on
a. equipment trust certificates
b. zero coupon bonds
c. federal bonds such as savings bonds
d. state of Florida bonds
The present value of a dollar
1) increases with lower interest rates
2) increases with higher interest rates
3) increases with longer periods of time
4) decreases with longer periods of time
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
A beta coefficient for a stock of 0.8 implies
a. an 8% return on the market will cause the return on this stock to be 10%
b. an 8% decrease in the market will cause the return on this stock to be 8%
c. a return of 10% on the market will cause the return on this stock to be 8%
d. a return of 10% on the market will cause the return on this stock to be -8%
A firm does not obtain financial leverage by
a. issuing bonds
b. borrowing from a bank
c. issuing preferred stock
d. issuing common stock
The effective cost of debt depends on
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Liabilities equal
a. assets
b. equity
c. equity minus assets
d. assets minus equity
What is the value of a common stock if
a. the firm’s earnings and dividends are growing annually at 10 percent, the current
dividend is $1.32, and investors require a 15 percent return on investments in common
stock?
b. What is the value of this stock if you add risk to the analysis and the firm’s beta
coefficient is 0.8, the risk-free rate is 9 percent, and the return on the market is 15
percent?
c. If the price of the stock is $35, what is the rate of return offered by the stock? Should
the investor acquire this stock?
The futures price of a metal is $250 an ounce. Futures contracts are for 100 ounces, and
the margin requirement is $3,000 a contract. The maintenance market requirement is
$1,500. A speculator expects the price to rise and enters into a contract to buy the metal.
a. How much must the speculator initially remit?
b. If the futures price rises to $255, what is the profit and return on the position?
c. If the futures price declines to $2.48, what is the loss on the position?
d. If the futures price declines to $2.34, what must the speculator do?
e. If the futures price continues to decline to $2.32, how much does the speculator have
in the account?
The standard deviation measures
a. the dispersion around an average value
b. systematic risk
c. unsystematic risk
d. the security’s high-low prices
Retained earnings
a. have no cost
b. are the firm’s cheapest sources of funds
c. have the same cost as new shares of stock
d. are cheaper than the cost of new shares
The value of a stock may increase if
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Business risk refers to
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
A firm with sales of $1000 has the following balance sheet.
If the firm earns 10 percent after taxes on sales and pays no dividends,
If a bond lacks a conversion feature,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Which of the following argues for extending credit?
a. an increase in sales and an increase in collection costs
b. an increase in bad debt expense and a decrease in collection costs
c. an increase in both carrying costs and in sales
d. an increase in both sales and inventory turnover
At expiration, an option
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
A P/E ratio considers
a. profits relative to earnings
b. price of the stock relative to earnings
c. price of a preferred stock relative to earnings
d. profits relative to equity
If interest rates in general rise,
a. the prices of existing bonds rise
b. the prices of existing bonds fall
c. the prices of matured bonds rise
d. the prices of matured bonds fall
Using the corporate tax rates given in the text (p. 366), what is the corporate income tax
paid on earnings of (a) $1,000, (b) $10,000, (c) $100,000, (d) 1,000,000, and (e)
10,000,000?
Determination of earnings (profits) requires knowing
a. paid-in capital (capital surplus)
b. cash
c. retained earnings
d. depreciation
Business risk refers to
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 2
A firm that guarantees the proceeds from the sale of a new issue of securities is the
a. brokerage firm
b. syndicate
c. underwriter
d. insurance company
Possible advantages of incorporating include
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
If a company defaults on its bonds,
a. subordinated debt is redeemed before senior debt
b. equipment trust certificates have an inferior position to income bonds
c. interest continues to accrue but may not be paid
d. debentures have a superior position to other bonds
An increase in interest rates increases the net present value of an investment.
The higher the ratio of debt to total assets, the smaller is the use of financial leverage.
You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying
the bond, yields decline and you are able to reinvest the interest at only 9 percent. You
reinvest all the interest payments. How much will you have when the bond is retired
after twelve years? What was the annual return you earned on this investment?
The percent of sales method of forecasting assumes that fixed assets vary
proportionately with sales.
As interest rates increase, the firm may call its convertible bonds to avoid paying the
higher interest rates.
According to studies of returns, yields on Treasury bills approximated the rate of
inflation.
Beta coefficients are computed with estimated data concerning the asset’s expected
return.
The price of a new issue is established through the registration process with the SEC.
If a firm misses a payment for a non-cumulative preferred stock, the dividend never has
to be paid.
According to the EOQ model, doubling the sales also doubles the desired level of
inventory.
From the viewpoint of international currency flows, foreign investments in plant and
equipment are no different from investments in foreign securities.
Intermediate term notes sold to the general public are usually secured by collateral.
After investors purchase securities, they must make payment by the settlement date.