The term working capital refers to the assets and liabilities required to operate a
business on a day to day basis.
Holding all other variables constant, a decrease in the cost ratio would cause the times
interest earned ratio to increase.
Using simulation has a few drawbacks. Individual cash flows have to be estimated
subjectively which can be difficult.
Financial markets include money markets and capital markets.
In a consolidation, all of the combining firms cease to exist as separate corporations.
Net book value is equal to market value less accumulated depreciation.
The intentional lowering of the value of a nation’s currency relative to others is called a
devaluation.
In an acquisition a new firm is formed from the assets of the combining firms.
Compensating balances can be stated as a percentage of the loan outstanding under a
line of credit.
Stock splits confer no direct economic benefit on shareholders. They do, however, keep
share price within a “trading range” that makes the stock accessible to small investors,
which is likely to exert a mild upward pressure on price.
In the corporate tax system, higher-income taxpayers pay targeted rates on their whole
incomes.
If the Wall Street Journal showed the following information for a stock in the last two
days, the Net Change column on the second day would read +1.00.
Carrying excess cash is convenient but expensive because cash earns little or no return.
MIRRs are generally lower and more realistic than the IRRs.
An investment has a payback period of 5 years and a useful life of 10 years. If all other
variables are held constant, which of the following changes would reduce the payback
period?
A.An increase in the investment’s cost
B.An increase in the investment’s useful life
C.An increase in the cash inflows in years 1 and 2
D.An increase in the cash inflows in years 9 and 10
E.None of above
Alabama Power has preferred stock that pays an annual dividend of $9.44. If the
security has no maturity, what is its value to an investor who wishes to obtain a 9
percent rate of return?
A.$84.96
B.$104.89
C.$95.34
D.$94.40
An agreement under which creditors accept partial payment in settlement of their
claims is a:
A.subordination.
B.composition.
C.extension.
D.funding.
What does it mean for a new business loan to be collateralized?
A.Should the business fail, the loan is simply not repaid.
B.The lender may sell a specific asset to recover the loan.
C.The borrower does not pay interest on the loan.
D.The borrower only pays interest when the entire loan is due.
A stock is selling for $20.00 (P0). The projected selling price one year from now (P1) is
$22.50, and the projected dividend payment one year from now (D1) is $1.00. What is
the expected return on an investment in the stock made today?
A.12.50%
B.5.00%
C.15.56%
D.17.50%
Which of the following is true of commitment fees?
A.Commitment fees are in the neighborhood of one quarter of 1% per year.
B.Commitment fees are approximately three-fourth of 1% per year.
C.Commitment fees are usually half of the risk-free rate.
D.Commitment fees are in the neighborhood of the risk-free rate.
A(n) _____ is a situation that tempts people to act in immoral and unethical ways.
A.agency problem
B.arbitrage
C.moral hazard
D.oversight
EBIT is also called:
A.net profit.
B.operating profit.
C.pretax profit.
D.gross profit.
Capital refers to funds acquired for use over long periods of time for the purpose of:
A.acquiring long-lived assets such as machinery, land, buildings, etc.
B.getting businesses started.
C.financing permanent working capital.
D.All of the above
Which of the following is not a common tax base?
A.Income
B.Wealth
C.Marital status
D.Consumption
If a dividend increases, but leads to a stock price decrease, what theory would best
explain such a reaction by the market?
A.Expectations Theory
B.Signaling Theory
C.Dividend Preference Theory
D.Residual Dividend Theory
Holding all other variables constant, an increase in the ____ will increase the future
value of an annuity.
A.annuity payment
B.rate of interest
C.number of periods
D.Both a & b
E.All of the above
Everything else held constant, the price of a share of stock should drop by
approximately the amount of the dividend on the:
A.declaration date.
B.ex-dividend date.
C.record date.
D.payment date.
A project requires an initial outlay of $100,000, and is expected to generate annual net
cash inflows of $28,000 for the next 5 years. Determine the payback period for the
project.
A.0.28 years
B.1.4 years
C.3.57 years
D.17.86 years
Which of the following is true of bonds?
A.A subordinated debt ranks higher in priority for payment of principal than senior
debt.
B.A convertible bond pays a higher interest rate than a traditional bond.
C.A junk bond pays a higher interest rate than rates paid by strong companies.
D.A junk bond usually has priority over a subordinated debt instrument.
A fundamental question in setting dividend policy is:
A.the tax considerations.
B.the amount of growth the firm considers optimal.
C.not violating any restrictive covenants.
D.determining what portion of earnings will be paid out.