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1) The variance of a portfolio would be calculated by finding the variances of the
individual components of the portfolio and finding the weighted average of those
variances.
2) If the interest rate is 0% for 10 years, then the present value will be less than the
future value.
3) The account receivable period may be calculated as accounts receivable divided by
sales.
4) Voluntary savings are financial assets set aside for use in the future.
5) Personal savings are savings accumulated on a regular schedule for a specified length
of time by prior agreement.
6) Net exports are exports of goods and services minus imports of goods and services.
7) Long term business funds are obtained by issuing commercial paper and corporate
bonds.
8) EBIT/EPS analysis allows managers to see how different capital structures affect the
earnings levels of their firms.
9) A revolving credit agreement is a commitment in the form of a standby agreement for
a guaranteed line of credit.
10) Firms issue more bonds than equities.
11) A firms cost of capital is discount rate used in the evaluation of capital budgeting
projects using payback and IRR.
12) The future value of a $100 deposit in 10 years at 10% is $259.37.
13) A nation with a relatively lower inflation rate than other countries will have a
relatively stronger currency holding other factors constant.
14) When a government borrows to finance budget deficits, crowding out may occur,
which results in a restriction of available funds for private sector borrowers due to
public sector demand.
15) Limited partners face liability limited to their investment in the firm, but they can
participate in the operations of the firm.
16) It will take approximately 9.6 years for a $100 deposit to result in a future value of
$600 if I can earn 10% on my deposit.
17) The transaction motive for holding cash is the demand for cash needed to take
advantage of unusual cash discounts for needed materials.
18) The liability of all owners in both a limited liability company and a limited
partnership is limited to the owners investment in the company.
19) Which one the following four basic economic units consistently represents a
savings surplus unit?
a.individuals
b.business firms
c.financial intermediaries
d.governments
20) Cash disbursements may include all of the following EXCEPT
a.tax payments
b.rent payments
c.wage payments
d.fixed asset outlays
e.all of the above
21) Cash disbursements may include all of the following EXCEPT
a.tax payments
b.rent payments
c.depreciation expense
d.fixed asset outlays
22) If a firm has current earnings per share of $2 and a degree of financial leverage of 4,
a 10% increase in sales would result in earnings per share of:
a.$2.80
b.$8
c.$2.20
d.cannot tell from this information
23) The goal of the financial manager in a profit-seeking organization is to maximize:
a.the value of perquisites
b.the owners wealth
c.the firm's profits
d.the firm's earnings
e. none of the above
24) Bond ratings are paid for by:
a.the issuing firm
b.the trustee
c.the investment banker
d.none of the above
25) What type of investment occurs when claims to wealth in the form of financial
assets are purchased or when debt obligations are repaid?
a.financial investment
b.real investment
c.contractual investment
d.voluntary investment
26) Assume that a bank must keep reserves of 20% against deposits. The bank receives
a primary deposit of $50,000. What amount of excess reserves can the bank safely lend?
a.$10,000
b.$20,000
c.$40,000
d.$50,000
e.none of the above
27) A saver who chooses securities as a savings medium and desires maximum growth
of principal buys:
a.public utility stocks
b.corporate stocks
c.high-grade corporate bonds
d.government bonds
28) Because of the financial crisis that began in 2008, by the end of 2009:
a.unemployment was in excess of 10 percent
b.many homeowners owed more money on their mortgage loans than the their homes
were worth
c.home mortgage foreclosure rates and personal and business bankruptcies were
increasing
d.over 100 banks in the U.S. had already failed with over 500 more being considered
financially weak
e.all of the above are true
29) The process whereby an underwriting syndicate steps in to buy back securities to
prevent a larger price drop than that which has already occurred is called.
a.market stabilization
b.price normalization
c.dollar cost averaging
d.all the above
e.none of the above
30) The basic requirements for an effective financial system in a developed economy
include:
a.a monetary system
b.a savings-investment process
c.markets for the transfer of financial assets
d. all of the above
31) Portfolio risk is comprised of:
a.systematic and market risk
b.unsystematic and microeconomic risk
c.systematic and unsystematic risk
d.systematic and macroeconomic risk
32) All of the following methods can be used to estimate the cost of equity except:
a.Like debt and preferred stock, cash flows from common equity are fixed
b.Firms have two sources of common equity, retained earnings and new stock issues,
but only one single cost of common equity
c.From the shareholders perspective, the opportunity cost of retained earnings is the
return the shareholders could earn by investing the funds in long-term treasury
securities
d.If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted
return, shareholders would be better off receiving additional shares of stock
e.None of the above statements are correct
33) The primary goal of the financial manager of a profit-seeking organization is to:
a.maximize market share
b.maximize the owners wealth
c.increase sales and profit
have healthy cash flow
34) The ________ is the time period that elapses from the point when the firm makes
the outlay to purchase raw materials on account to the point when payment is made to
the supplier of the goods.
a.cash conversion cycle
b.average payment period
c.average age of inventory
d.average collection period
e.none of the above
35) When retained earnings are used up and new common stock is issued, we know that
the cost of:
a.equity has increased
b.equity has dropped
c.equity is unaffected
d.both common and preferred stock are affected
36) A recent securities transaction report detailed a sale of Tandy stock. The report
appeared as TAN 2s25. How many shares are being reported in this sales transaction?
a.2
b.100
c.200
d.25
37) Reasons for stock repurchases include all of the following EXCEPT:
a.to sell off shares used in management stock option incentive programs, in which
managers can purchase shares of stock at pre-specified prices
b.to use in stock-based acquisitions of other firms
c.the firm has too little cash and sees its own stock as one of its most attractive sales
alternatives
d.all of the above
e.none of the above
38) Which one of the following is not a basic element or component of the percentage
of sales approach to long-term financial planning?
a.asset investment requirements
b.internally generated financing
c.spontaneous increases in current liabilities
d.automatic increases in cash inflows
39) Net working capital is defined as:
a.current assets plus current liabilities
b.current assets less fixed assets
c.current assets less current liabilities
d.current liabilities plus long-term liabilities
40) Which is not a risk of short-term financing?
a.infrequent renewals
b.borrowing costs may rise if short-term interest rates increase
c.bank may not renew loan
d.all the above
e.none of the above
41) Which of the following statements is most correct?
a.More firms fail or suffer financial distress during periods of economic expansion than
during periods of economic recession. Thus, investors tend to require higher premiums
to compensate for default risk when the economy is in a recession or is expected to
enter one
b.More firms fail or suffer financial distress during periods of recession than during
periods of economic expansion. Thus, investors tend to require lower premiums to
compensate for default risk when the economy is in a recession or is expected to enter
one
c.Fewer firms fail or suffer financial distress during periods of recession than during
periods of economic expansion. Thus, investors tend to require higher premiums to
compensate for default risk when the economy is in a recession or is expected to enter
one
d.Fewer firms fail or suffer financial distress during periods of recession than during
periods of economic expansion. Thus, investors tend to require lower premiums to
compensate for default risk when the economy is in a recession or is expected to enter
one
e. none of the above
42) Carol Channing is planning for her son's college education to begin five years from
today. She estimates the yearly tuition, books, and living expenses to be $5,000 per year
for a four-year degree. How much must Carol deposit today, at an interest rate of 8
percent, for her son to be able to withdraw $5,000 per year for four years of college?
a.$20,000
b.$13,620
c.$39,520
d.$11,277
43) Existing firms that are already public and wish to raise additional funds may:
a.sell additional securities by using the underwriting process
b.sell securities to a private party
c.seek competitive bid
d.all the above
e.none of the above
44) The effect of ______________ and _______________ on the value of a firms stock
and the wealth of shareholders is zero.
a.share repurchases, stock splits
b.cash dividends, stock dividends
c.cash dividends, stock splits
d.stock dividends, share repurchases
e.none of the above
45) The most important savings surplus unit in the economy is:
a.the savings of individuals
b.corporate savings
c.U.S. government savings
d.state and local government savings
46) Which of the following statements is false?
a.the price-to-book ratio measures the markets value of the firm relative to balance
sheet equity
b.the equity multiplier ratio is calculated as owners equity divided by total assets
c.the degree of operating leverage measures the sensitivity of operating income to
changes in the level of output
d.all the above statements are correct
47) On the income statement, gross profit is defined as:
a.operating profits minus operating expenses
b.gross profit minus operating expenses
c.sales revenue minus total expenses
d.sales revenue minus operating expenses
e.none of the above
48) The lead investment banker:
a.is elected by members of the syndicate
b.is appointed by the SEC
c.originates and handles a flotation
d.none of the above
49) Open market operations differ from discounting operations in that they are:
a.initiated by member depository institutions
b.designed to be of significance only to large city banks
c.initiated by the President
d.initiated by Congress
e.none of the above
50) In general, inflation was lowest during:
a.1970s
b.1980s
c.1990s
d.none of the above
51) The security market line can be used to determine the expected return on a security
based on the:
a.market rate of return
b.slope of the line
c.systematic risk of that security
risk premium
