For a security to help diversify a portfolio, the asset
a. must generate a greater return than the average return on the portfolio
b. should not be sensitive to changes in security prices
c. should have a return that is negatively correlated with the return on other securities in
the portfolio
d. must be a debt instrument if the portfolio consists primarily of stocks
The International Monetary Fund
a. buys foreign securities
b. can lend a country currencies to meet a surplus in its merchandise trade balance
c. holds a pool of currencies
d. developed to help the Federal Reserve control U.S. investments abroad
Convertible preferred stock
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
Which of the following decreases the firm’s net working capital?
a. distributing a stock dividend
b. paying accrued wages
c. selling inventory on credit
d. increasing the allowance for doubtful accounts
A firm should make an investment if the present value of the cash inflows is
a. less than zero
b. greater than zero
c. less than the cost of the investment
d. greater than the cost of the investment
To determine the break-even level of output, management must know
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
The margin requirement for a futures contract is a
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 3
Excess cash may be invested in short-term money market securities such as
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A firm currently has sales of $2,000,000 and does not offer credit. Management expects
sales to rise to $2,500,000 if it offers customers thirty days to pay. Which of the
following will probably happen?
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Small margin requirements for futures contracts implies
a. 1 and 3
b. 1 and 4
c. 1, 2, and 3
d. 1, 2, and 4
If a stock’s price is $90 and the stock is split three for one, the price becomes
a. $90
b. $60
c. $45
d. $30
A cash budget differs from an income statement because the cash budget
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
The higher the debt ratio,
a. the lower is the use of financial leverage
b. the greater is the use of financial leverage
c. the lower are the firm’s total assets
d. the greater are the firm’s total assets
Dividends are paid on the
a. declaration date
b. ex dividend date
c. date of record
d. distribution date
Bonds may be retired prior to maturity by
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all three
Credit default swaps
a. increase a debtor’s obligations
b. reduce the risk of loss to the seller of the swap
c. are purchased in anticipation of a default
d. are sold in anticipation of a default
Dividends may be paid in
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
A union contract suggests that labor costs may be
a. variable
b. fixed
c. a non-cash expense
d. undetermined
Factoring is selling
a. accounts payable
b. accounts receivable
c. notes payable
d. inventory
The increased use of financial leverage may
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
No load mutual funds
a. have no selling fees
b. pay no cash dividends
c. have no administrative expenses
d. have a fixed portfolio
Underestimation of the level of assets needed may
a. cause the firm to increase sales
b. cause the firm to have excess financing
c. cause the firm to have insufficient finance
d. result in higher earnings
The primary assets of life insurance companies include
a. life insurance
b. corporate securities
c. municipal securities
d. insurance policies
Which of the following statements are true concerning stock index futures?
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
If the net present value is positive,
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
Increased operating leverage is associated with additional risk because
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 3 and 4
Which of the following is not a financial intermediary?
a. New York Stock Exchange
b. Washington Savings and Loan
c. First National City Bank
d. Merchants Savings Bank
The shares of mutual funds are bought
a. in the secondary markets
b. from closed-end investment companies
c. from commercial banks
d. from the mutual fund
Commercial banks lend excess reserves for one day in the
a. stock market
b. federal funds market
c. reserves market
d. over-the-counter market
Operating leverage
a. is affected by the demand for the product
b. results from use of fixed instead of variable costs
c. is the result of using debt financing
d. is associated with less risk and more certainty
Over-estimation of the required level of assets will
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
The cash budget excludes
a. wages and salaries
b. interest received
c. accrued taxes owed
d. mortgage payments
Anticipation of inflation discourages
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 3 and 4
Equity includes
a. cash
b. investments
c. retained earnings
d. assets
If deposits are withdrawn from a commercial bank, it may obtain reserves by
a. acquiring an asset
b. borrowing in the federal funds market
c. lending funds in the federal funds market
d. liquidating a liability
Fill in the table using the following information.
What happens to the rate of return on the stockholders’ investment as the amount of
debt increases? Why did the rate of interest increase in case C?
Issuing new stock or borrowing from a bank is a cash inflow.
If a company calls a bond and retires it, the use of financial leverage is reduced.
The SEC sets the margin requirement.
A pension plan that invests in the stock of IBM or Verizon does not perform the
function of a financial intermediary.
You purchase a home for $100,000 with a 20-year mortgage at 12%. If you make
annual mortgage payments that pay the interest and reduce the principal, by how much
is the loan reduced at the end of the first year?
If interest rates fall, the prices of existing bonds also fall.
Total revenue equals price times quantity.
At expiration an option will sell for its intrinsic value.
The coefficient of variation divides an investment’s standard deviation by the internal
rate of return.
The more a firm earns on additional sales, the less will be the need for external finance.
If the demand for a currency exceeds the supply, the currency will be devalued under a
system of freely fluctuating exchange rates.
The shares of mutual funds tend to sell for a discount from their net asset value.
NYSE is a system for providing bid and ask prices for over-the-counter (OTC) stocks.
If the valuation of a stock is $10 and its price is $13, the investor should establish a
short position in the stock.