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1) The EPS/EBIT indifference level represents the level of EBIT at which the firm
would be indifferent between two different capital structures because they both result in
the same level of EPS.
2) Bond issues of a single firm can have different bond ratings if their security
provisions differ.
3) Interest rates generally fall during periods of economic expansion and rise during
economic contraction.
4) Money has a time value so long as interest is earned by saving or investing money.
5) The operating cycle is the inventory conversion period plus the accounts receivable
period.
6) The most desirable form of business organization in terms of ease of start-up is a
corporation.
7) Convertible preferred stock has a special provision that makes it possible to convert
it to common stock of the corporation, generally at the stockholders option.
8) Mutually exclusive projects are projects that are not in direct competition with one
another.
9) Savings are impacted only by cyclical movements in the economy.
10) The fourth market is a market for large blocks of listed stocks that operate outside
the confines of the organized exchanges.
11) The Rule of 72 is an estimate of how long it would take to double a sum of money
at a given interest rate.
12) Lowering a firms credit standards or customer credit quality will cause the average
collection period to lengthen.
13) The nominal rate of interest is equal to the real rate of interest plus an inflation
premium plus the default risk premium plus the maturity risk premium plus the liquidity
risk premium.
14) The basic motives for holding money rather than investments are the:
a.transactions motive and the precautionary motive
b.transactions motive and the liquidity preference motive
c.treasury motive, the pecuniary motive, and the speculative motive
d.transactions motive, the precautionary motive, and the liquidity preference motive
e.none of the above
15) Open market operations differ from discounting operations in that they are:
a.initiated by member depository institutions
b.designed to be of significance only to large city banks
c.initiated by the Federal Reserve
d.initiated by the U.S. Treasury
16) Bonds that have coupons that are literally clipped and presented, like a check, to the
bank for payment, and where the bond issuer does not know who is receiving the
coupon payments are called:
a.registered bonds
b.coupon bonds
c.bearer bonds
d.none of the above
17) The yield curve or the term structure of interest rates is typically downward sloping
when:
a.short-term Treasury interest rates are lower than long-term Treasury interest rates
b.short-term and long-term Treasury interest rates are the same
c.long-term Treasury interest rates are lower than short-term Treasury interest rates
d.long-term Treasure interest rates are higher than short-term Treasury interest rates
18) Primary groups of policy makers that are actively involved in achieving a nations
economic policy objectives include all of the following EXCEPT:
a.the Supreme Court
b.Senate staffers
c.lobbyists
d.the joint chiefs
e.none of the above are involved
19) Ningbo Shipping has prepared the coming year's pro forma balance sheet and has
estimated that external financing required would be -$230,000. The firm should prepare
to
a.repurchase common stock totaling $230,000
b.pay off an existing loan in the amount of $230,000
c.accumulate an additional $230,000 of cash on its books
d.invest in marketable securities totaling $230,000
e.all of the above
20) 2/10 net 30 MOM 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
21) Of the following forms of business organization, which have the advantage of
limited liability but no stockholders?
a.proprietorships
b.partnerships
c.corporations
d.limited partnerships
22) Which of the following statements is most correct?
a.The Dow Jones Industrial Average is market-value weighted
b.The Dow Jones Industrial Average is a good benchmark by which to measure the
performance of investment managers
c.The 500 stocks comprising the S&P 500 are the largest 500 firms
d.The 60 largest capitalization stocks in the S&P 500 account for over half of the
market value of the index
23) The effect on revenues and expenses from variations in the value of the U.S. dollar
in terms of other currencies is called:
a.interest rate risk
b.business risk
c.purchasing power risk
d. financial risk
e. none of the above
24) 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 were defaulting on their home mortgages in increasing numbers due to
falling home prices and increasing unemployment
e.Business firms and financial institutions, who had borrowed heavily during years of
tight money and high interest rates, were faced with their own financial difficulties as
economic activity increased markedly
25) Financial statements that must be included in the annual report include the:
a.income statement
b.balance sheet
c.statement of cash flows
d.all of the above
e.none of the above
26) The accumulation of reserves in insurance and pension funds is referred to as what
type of savings?
a.voluntary savings
b.forced savings
c.real savings
d.none of the above
27) What is the NPV for the following project if its cost of capital is 12% and its initial
after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows
of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in
year 4?
a.($1,494,336)
b.$1,494,336
c.greater than zero
d.two of the above
28) AT&T 10-year, $1,000 par value bond is selling at $1,158.91. Interest on this bond
is paid semianually. If the annual yield to maturity is 14%, what is the annual coupon
rate of the AT&T bond?
a.11%
b.15%
c.17%
d.none of the above
29) Brokerage firms do not perform which of the following functions?
a.handle shares of ownership
b.create money
c.market existing securities
d.they perform all the above functions
30) The ability of a firm to meet its short-term debt obligations as they come due is
indicated by which of the following ratios:
a.liquidity ratios
b.asset utilization ratios
c.financial leverage ratios
d.profitability ratios
31) Which one of the following borrowing sectors is the least important in terms of
funds raised in the credit markets?
a.U.S. markets
b.state and local governments
c.households
d.farms
e.corporate
32) Management of current assets does not involve which one of the following areas?
a.cash and marketable securities
b.accounts receivable
c.inventory
d.plant and equipment
33) An example of a collateralized bond is:
a.a bond backed by credit card receivables
b.a debenture
c.a subordinated debenture
d.all the above
34) The life stages of an individual saver include all of the following EXCEPT:
a.the formative/education developing stage
b.the career earning/family creating stage
c.the wealth building stage
d.all are included
35) The internal rate of return concept is best explained by which of the following?
a.rate where NPV is equal to zero
b.point where initial investment has been returned
c.marginal cost of capital
d.average book value
36) Which of the following statements is false?
a.Other factors being constant, higher fixed costs mean a higher operating leverage
b.Corporate bonds and notes provide no voting rights
c.The cost of debt is the minimum acceptable rate of return to a firm on a project of
average risk
d.All of the above statements are true
37) One way a firm can reduce the amount of cash it needs in any one month is to
a.speed up the collection of receivables
b.delay the payment of wages
c.delay the payment of taxes
d.delay the payment of payables
e.all of the above
38) Tangshan Mining 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, would be ________. 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.70.99%; 14.25%
b.70.99%; 15.25%
c.73.26%; 20.09%
d.73.26%; 25.09%
e.none of the above
39) The travelers letter of credit is usually used by:
a.travel agencies
b.individuals traveling abroad
c.importers banks
d.correspondent banks, in order to reduce shipment of gold between countries
e.none of the above
40) All of the following statements are correct except:
a.Relevant cash flows are incremental before-tax cash flows, which must be discounted
using an incremental after-tax cost of capital
b.The firms relevant cost of capital is computed from before-tax financing costs
c.A projects incremental cash flows must be discounted at a cost of capital that
represents the historical cost to the firm of financing the project
d.In estimating the cost of capital, the firms analysts need to evaluate investors
historical returns under past market conditions and then use these past returns to
compute the firms cost of raising funds
e.None of the above statements are correct
41) Eriez Magnetics purchased goods with a purchase price of $10,000 and credit terms
of 2/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The
firm must pay ________ for the goods.
a.$8,000
b.$9,800
c.$9,000
d.$10,000
e.none of the above
42) Which of the following activities is not the responsibility of registered traders?
a.buy and sell stocks for their own accounts
b.pay no commissions
c.match up buy and sell orders
d.all the above
e.none of the above
43) Barach Obama borrows $4,500 at 12 percent annually compounded interest to be
repaid in four equal annual installments. The actual end-of-year payment is
a.$942
b.$1,125
c.$1,482
d.$2,641
44) Special Drawing Rights are a form of reserve asset or paper gold created by the:
a.Federal Reserve System
b.U.S. Treasury
c.commercial banking system
d.International Monetary Fund
45) The average maturity of the marketable debt in the United States:
a.is of little importance, unlike that of private corporations
b.has been constant for the last two decades
c.remains unchanged unless new obligations are issued
d.decreases day by day unless new obligations are issued to offset such decreases
