If the value of the securities that you borrowed money from your broker to purchase
falls, you may receive a:
a. maintenance margin call
b. margin call
c. limit order call
d. specialist call
If a firm has current earnings before interest and taxes of $100,000 and interest expense
of $10,000, its degree of financial leverage would be:
a. 10
b. 1.11
c. .10
d. cannot tell from this information
All of the following methods can be used to estimate the cost of debt except:
a. If the firm targets an “A” rating (or any other bond rating), a review of the yields to
maturity on A-rated bonds in Standard & Poor’s Bond Guide can provide an estimate of
the firm’s current borrowing costs.
b. The firm can solicit the advice of investment bankers on the cost of issuing new debt.
c. If the firm has debt currently trading, it can use public market prices and yields to
estimate its current cost of debt.
d. A firm can seek long-term debt financing from a bank or a consortium of banks;
preliminary discussions with the bankers will indicate a ballpark interest rate the firm
can expect to pay on its borrowing.
e. All of the above statements are correct.
___________________ is a highly regulated document which details the issuers
operations and finances and must be provided to each buyer of a newly issued security.
a. A prospectus
b. An underwriting agreement
c. A best efforts agreement
d. none of the above
If personal consumption expenditures are $1 billion, government purchases are $2
billion, gross private domestic investments are $4 billion and net exports are $5 billion,
then GDP is:
a. $12 billion
b. $8 billion
c. $7 billion
d. $2 billion
Other factors being constant, higher fixed financial costs mean:
a. higher financial leverage
b. higher operating leverage
c. lower combined leverage
d. the degree of financial leverage is equal to 1.0
Which of the following risks would not be faced by investors in domestic bonds?
a. credit (or default) risk
b. interest rate risk
c. reinvestment rate (or rollover) risk
d. exchange rate risk
Which of the following is not a stage in the individual savings life cycle?
a. Career starting/family creating
b. Formative/education developing
c. Death planning
d. Retirement enjoying
e. Wealth building
To accurately compare the rate of return on one investment with another, they should
be:
a. equal in size or dollar amount
b. measured over different time periods
c. measured over equal time periods
d. held for more than one year
The process of allocating funds among competing investment opportunities is referred
to as:
a. capital expenditures
b. initial cash flow analysis
c. long-term forecasting
d. capital budgeting
The branch of government primarily responsible for the formulation of fiscal policy is
the President and his Council of Economic Advisors.
Corporate saving for short-term working capital purposes is the most important reason
for businesses accumulating financial assets.
A firm’s degree of combined leverage is the product of its degree of operating leverage
and its degree of financial leverage
The stand-alone principle focuses on the project’s own cash flows, uncontaminated by
cash flows from the firm’s other activities.
The risk of a portfolio is simply equal to the weighted average variance of the securities
that comprise it.