As the firm expands, the spontaneous increase in which of the following is a source of
finance?
a. equipment
b. inventory
c. accounts payable
d. accounts receivable
A financial manager is considering two possible sources of funds necessary to finance a
$10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative
one is a short-term commercial bank loan with an interest rate of 8 percent for one year.
The alternative is a five-year term loan with an interest rate of 10 percent. The firm’s
income tax rate is 30 percent.
a. What will be the firm’s projected earnings under each alternative for the first year?
b. The financial manager expects short-term rates to rise to 11 percent in the second
year. At that time long-term rates will have risen to 12%. What will be the firm’s
projected earnings under each alternative in the second year?
c. What are the crucial considerations when selecting between short- and long-term
sources of finance?
The use of accelerated depreciation
a. initially increases the firm’s profits
b. initially decreases the firm’s taxes
c. discourages investment in plant and equipment
d. increases expenses and decreases cash flow
In the capital assets pricing model, the cost of equity is investors’ required return and
includes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A firm should not make an investment if
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
If a firm leases instead of borrowing, it
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 2 and 4
Which of the following will reduce the required return on an investment?
a. an increase in beta and a reduction in the Treasury bill rate
b. an increase in the Treasury bill rate and a decrease in beta
c. a decrease in the Treasury bill rate and a decrease in beta
d. an increase in the Treasury bill rate and an increase in beta
Times-interest-earned uses
a. gross earnings
b. operating earnings
c. net earnings
d. per share earnings
The regulation of securities markets
a. discourages investing by requiring the registration of investors
b. is enforced by the Federal Reserve
c. protects investors from their own mistakes
d. provides investors with information to make informed decisions
As a firm expands, which of the following is an automatic source of finance?
a. long-term debt
b. accounts payable
c. mortgage loans
d. bank loans
Risk may be incorporated into capital budgeting by
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
If a firm’s fixed costs rise relative to variable costs, ____ and ____.
a. operating leverage, risk increase
b. operating leverage, financial leverage increase
c. financial leverage, risk increase
d. operating leverage increases, financial risk decreases
Regression analysis as a tool to forecast assumes that
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Which of the following is not equity?
a. paid-in capital
b. retained earnings
c. preferred stock
d. debentures
The use of financial leverage
a. alters operating leverage
b. magnifies the impact of changes in sales on operations
c. magnifies changes in operating income relative to changes in revenues
d. implies the volatility of net income is increased
Break-even analysis requires knowing the relationship
a. between sales and earnings
b. between sales and total costs
c. between total revenues and fixed costs
d. between sales and assets
One advantage associated with selling (i.e., writing) a call option includes
a. potential leverage
b. income from collecting dividends
c. income from the sale of the option
d. increased potential for capital gains
If a firm has excess cash that will be needed for a required payment after six months,
these funds should not be invested in
a. commercial paper
b. bankers’ acceptances
c. corporate bonds
d. tax anticipation notes
Investments in investment companies reduce
a. interest rate risk
b. market risk
c. systematic risk
d. unsystematic risk
An increase in investors’ required return should cause the value of a common stock to
a. rise
b. fall
c. remain unchanged
d. remain stable or rise slightly
Which of the following bonds is supported by collateral?
a. convertible bonds
b. income bonds
c. equipment trust certificates
d. debentures
If the futures price falls,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
If a bond is selling for a premium, that implies
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
A convertible bond’s value as stock depends on the
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
No matter which method of depreciation is used,
a. the firm’s earnings are unaffected
b. the cash flow from an investment is reduced
c. the maximum amount that may be depreciated is the cost of the investment
d. only short-term assets may be depreciated
Given the following information, construct the firm’s cash budget for the given months.
A price to book ratio considers
a. profits relative to earnings
b. price of the stock relative to equity
c. profits relative to equity
d. price of the stock relative to earnings
A firm may choose to lease if
a. it is in a lower tax bracket and cannot use the depreciation expense
b. it depreciates the asset
c. the present value of its cash outflows under leasing is larger
d. the asset’s residual value is large
The assets of a typical commercial bank include
a. commercial loans
b. demand deposits
c. common stock
d. equity
The paying of a cash dividend causes the firm’s
a. assets and equity to increase
b. assets to decrease and equity to increase
c. assets and liabilities to increase
d. assets and equity to decrease
When an asset is depreciated,
a. its cost is allocated over a period of time
b. the firm’s earnings and taxes are increased
c. the cash flow from an investment is reduced
d. the cost of the asset is increased to reflect appreciation in its value
Fixed costs
a. are greater than variable costs
b. are paid before variable costs
c. do not change with the level of output
d. do not change with the size of the firm
If interest rates increase,
a. the prices of bonds and preferred stock increase
b. the price of bonds increases but the price of preferred stock decreases
c. the prices of bonds and preferred stock decline
d. the price of bonds decreases but the price of preferred stock increases
If interest rates decline after a bond is issued,
a. the bond’s coupon is decreased
b. the bond’s price falls
c. the yield to maturity will exceed the current yield
d. the current yield will exceed the yield to maturity
Stockholders in S corporations lack limited liability.
Bonds may not be repurchased by the firm prior to maturity.
The smaller the trade discount, the more expensive is the trade credit.
Aging accounts receivable is one means to identify slow paying accounts.
The return on equity represents what the firm is earning on stockholders’ investment in
the firm.
If the Treasury issues new bonds that are purchased by the general public, the money
supply is reduced if the Treasury deposits the funds in the Federal Reserve.
The internal rate of return method of capital budgeting permits a ranking of investment
proposals.
What is the debt/net worth ratio and the debt to total assets ratio for a firm with total
debt of $600,000 and equity of $400,000?
Selling a commodity futures (entering a contract to make delivery) is a long position.
The internal rate of return equates the present value of an investment’s cash inflows and
its cost (outflows).
What is the required return using the capital asset pricing model if a stock’s beta is 1.2
and the individual, who expects the market to rise by 11.2%, can earn 4.4% invested in
a risk-free Treasury bill?
If you purchase Large Oil, Inc. for $36 and the firm pays a $3.00 annual dividend which
you expect to grow at 7.5 percent, what is the implied annual rate of return on your
investment?
If interest rates rise, the prices of existing bonds increase.
In an ordinary annuity, the payments are made at the beginning of the year.
A cash budget enumerates receipts and disbursements.
A financial manager needs to forecast the level of inventory. Currently inventory is 60
percent of sales. If the anticipated level of sales is $20,000, what is the level of
inventory forecasted by the percent of sales method of forecasting? If the equation
relating inventory and sales is I = $789 + 0.54S, what is the level of inventory
forecasted by the regression equation?
When corporations retire (pay off) loans from commercial banks, excess reserves are
increased.
When an individual wants to remove funds from a closed-end investment company, that
investor sells the shares back to the company.