1) In most states, legal capital is measured either by the par value of common stock;
other states, however, define legal capital to include not only the par value of the stock,
but also any paid-in capital in excess of par.
2) By purchasing shares through a firm’s dividend reinvestment plan (or DRIP),
shareholders typically can acquire shares at a value that is below the prevailing market
price.
3) To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise
equivalent noncallable bond.
4) For sales levels below the operating breakeven point, sales revenue exceeds total
operating costs, and earnings before interest and taxes is greater than zero.
5) One strength of payback period is that it fully accounts for the time value of money.
6) Combining negatively correlated assets can reduce the overall variability of returns.
7) The number of outstanding shares of common stock is always greater than or equal
to the number of authorized shares of common stock.
8) In using the cost of capital, it is important that it reflects the historical cost of raising
funds over the long run.
9) Although several economic and political factors can influence foreign exchange rate
movements, by far the most important explanation for long-term changes in exchange
rates is a differing inflation rate between two countries.
10) Accounts payable results from transactions in which merchandise is purchased but
no formal note is signed to show the purchaser’s liability to the seller.
11) The statement of cash flows reconciles the net income earned during a given year,
and any cash dividends paid, with the change in retained earnings between the start and
end of that year.
12) The higher yields on Eurodollar deposits compared with nearly all other marketable
securities, governmental or nongovernmental, with similar maturities are attributable to
(1) the fact that the depository banks are generally less closely regulated than U.S.
banks and are therefore more risky, and (2) some foreign exchange risk may be present.
13) In capital budgeting, risk is generally thought of as the chance that NPV and IRR
will provide conflicting recommendations to management.
14) A capital expenditure is an outlay of funds invested only in fixed assets that is
expected to produce benefits over a period of time less than one year.
15) Scenario analysis is a behavioral approach that evaluates the impact on a firm’s
return through simultaneous changes in a number of variables.
16) A beach house in Southern California now costs $350,000. Inflation is expected to
cause this price to increase at 5 percent per year over the next 20 years before Eric and
Karinna retire from successful careers in commercial art. How large an equal annual
end-of-year deposit must be made into an account paying an annual rate of interest of
13 percent in order to buy the beach house upon retirement?
A) $11,472
B) $4,323
C) $79,977
D) $17,350
17) The rule-setting body, which authorizes generally accepted accounting principles is
the ________.
A) IFRS
B) FASB
C) SEC
D) Federal Reserve System
18) An decrease in the current liabilities to total assets ratio will result in ________.
A) an increase in risk
B) an increase in profit
C) a decrease in risk
D) a decrease in profit
19) Which of the following is a basic characteristic of warrants?
A) It improves the marketability of an issue
B) It is non detachable
C) It increases the required interest rate
D) It has an exercise period shorter than one month
20) ABC company has two bonds outstanding that are the same except for the maturity
date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return
changes by 5 percent, then ________.
A) bond D will have a greater change in price
B) bond E will have a greater change in price
C) the price of the bonds will be constant
D) the percentage price change for the bonds will be equal
21) The ________ of a firm is the amount of time that elapses from the point when the
firm inputs material and labor into the production process to the point when cash is
collected from the sale of the finished product that contains these production inputs.
A) cash conversion cycle
B) average age of inventory
C) operating cycle
D) average collection period
22) When preparing the retained earnings statement, ________ is(are) subtracted in
order to derive at the ending balance of retained earnings.
A) net profits after taxes
B) interest expense
C) depreciation
D) dividends
23) ________ analysis involves the comparison of different firms’ financial ratios at the
same point in time.
A) Time-series
B) Cross-sectional
C) Marginal
D) Technical
24) The purpose of the restrictive debt covenant that limits the distribution of profits to
shareholders is to ________.
A) assure the lender that additional borrowing is constrained or may be subordinated to
the original loan
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) avoid default of payments to bondholders
25) Combining two assets having perfectly negatively correlated returns will result in
the creation of a portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) stabilizes to a level between the asset with the higher risk and the asset with the
lower risk
26) Management has just discovered an excellent investment for which it needs
additional funding. Relative to the discussion on asymmetric information, the firm
should ________.
A) finance with new common stock if management believes the firm is undervalued
B) finance with debt if management believes the firm is undervalued
C) finance with debt if management believes the firm is overvalued
D) finance with preferred stock if the firm is at value