The futures price and the spot price must be equal
a. when the contract is sold
b. when the contract is bought
c. when the contract is canceled
d. when the contract expires
More lenient terms of credit will probably decrease
a. sales
b. risk
c. receivables turnover
d. inventory turnover
The efficient market hypothesis suggests that
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Which of the following is not part of the underwriting process?
a. the prospectus
b. the Federal Reserve
c. the Securities and Exchange Commission
d. the syndicate
Accountants suggest that assets
a. should be valued at market
b. should be valued at cost
c. should be valued at the lower of market or cost
d. should be valued at the higher of market or cost
Which of the following argues against extending credit?
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The purpose of the Federal Reserve is to
a. finance government operations
b. protect investors from bank failures
c. protect deposits from bank failures
d. control the supply of money and credit
The cash budget includes
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Successful use of financial leverage may
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
According to net present value, the reinvestment rate is
a. the net present value
b. the internal rate of return
c. the cost of capital
d. the cost of equity
A specialist
a. stresses one type of investment
b. only buys stock
c. analyzes corporate securities
d. makes a market in securities
American Depository Receipts
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Current assets include
a. plant
b. inventory
c. equipment
d. additional paid-in capital (capital surplus)
The buyer of a put option
a. expects prices to rise
b. expects prices to fall
c. owns the underlying stock
d. does not own the underlying stock
Which of the following increases financial risk?
a. the substitution of equity for short-term debt
b. the substitution of short-term debt for long-term debt
c. the substitution of long-term debt for short-term debt
d. the reduction of cash and marketable securities
The value of a convertible bond as debt depends on
a. the exercise price
b. the call penalty
c. the interest rate
d. the price of the stock
Which of the following is equity?
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
If the futures price of a commodity rises,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
You are given the following information concerning a stock and a call option and a put
option
Price of the stock $42
Strike price (both options) $40
Price of the call $6
Price of the put $3
Expiration date three months
a. What is the call’s intrinsic value?
b. What is the time premium paid for the call?
c. What is the put’s intrinsic value?
d. What is the time premium paid for the put?
e. If the price of the stock declines to $25, what is the maximum amount you could lose
by buying the call?
f. If the price of the stock declines to $25, what is the maximum amount you profit by
buying the put?
g. If after three months the price of the stock is $48, what is the profit (loss) from
buying the call?
h. If after three months the price of the stock is $48, what is the profit (loss) from
selling the put?
The net present value will be larger if
a. the cost of capital is higher
b. there is no salvage value
c. the cost of the investment is lower
d. the firm uses straight-line depreciation
If a firm’s sales increase by 50 percent and inventory was $100,000, according to the
percent of sales method of forecasting inventory will be
a. $100,000
b. $120,000
c. $150,000
d. $175,000
Which of the following is not a source of systematic risk?
a. inflation
b. reduction in the value of the British pound
c. how a firm finances its assets
d. a decline in the Dow Jones industrial average
Risk analysis may be introduced by
a. estimating an investment’s beta
b. using the firm’s cost of capital
c. reducing an investment’s expected life
d. using accelerated depreciation
When commercial banks grant loans,
a. the money supply is reduced
b. the money supply is increased
c. total reserves increase
d. total reserves decrease
An investor may place a limit order that
a. limits the amount of commissions
b. specifies when the stock will be purchased
c. establishes the exchange on which the security is to be bought or sold
d. states a price at which the investor seeks to buy or sell the stock
If a nation has a surplus in its current account,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
The price of a product is $1 a unit. A firm can produce this good with variable costs of
$0.50 per unit and total fixed costs of $100.
Which is the largest if the interest rate is 10%?
a. present value of $100 after five years
b. present value of $100 annuity for five years
c. future value of $100 annuity for five years
d. future value of $100 after five years
A diversified portfolio reduces
a. unsystematic risk
b. systematic risk
c. purchasing power risk
d. interest rate risk
An investment costs $10,000 and will generate annual cash inflows of $1,770 for ten
years. According to the net present value and internal rate of return methods of capital
budgeting, should the firm make this investment if its cost of capital is (a) 10% or (b)
14%?
When a call option is exercised,
a. the firm issues new stock
b. the writer supplies the stock
c. the firm’s earnings are diluted
d. the option is converted into stock
Small standard deviations for cash inflows
a. reduces an investment’s net present value
b. increases an investment’s internal rate of return
c. increases the firm’s cost of capital
d. implies more certainty
Corporations are obligated to pay cash dividends if they generate earnings.
How much additional interest will you earn on $1,000 at 10 percent for 10 years if
interest is compounded semi-annually instead of annually?
A reverse split (e.g., 1 for 2) increases the number of shares the firm has outstanding.
A speculator who expects interest rates to fall enters a contract to buy (i.e., accept
delivery) of Treasury bills.
One advantage offered by options is the potential to increase your return on an
investment.
Financial leverage rises as interest rises.
The interest paid by federal government bonds is not subject to federal income taxation.
If a company paid a dividend of $1 in 2006 and the dividend grows annually by 7
percent, what will be the dividend in 2011?
Cross-section analysis refers to comparing a firm to other firms in its industry.
The volatility index is often interpreted as an index of investor fear.
Federal income taxes favor the retention of earnings over the distribution of earnings.
Additional paid-in capital is a current asset.
The President of the United States appoints the Board of Governors of the Federal
Reserve.
The lower the firm’s tax rate, the larger is the incentive to use preferred stock instead of
bonds.
A convertible bond may be converted at the firm’s option into common stock.
Credit policy requires establishing both the terms and the collection procedures.
The future value of an ordinary annuity will exceed the future value of an annuity due.
Increasing the speed with which receivables are collected has no impact on the cash
budget.