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1) The flotation costs of an initial public offering are comprised solely of direct costs
and the spread.
2) Trade credit may be considered the least formal of all forms of financing.
3) A shock may be defined as an unanticipated change that will cause the demand for, or
supply of loanable funds to change.
4) Financial risk affects the bottom half of the income statement.
5) The values of stocks and bonds are not affected by time value of money concepts.
6) Firms using maturity matching will have current ratios equal to 1.0.
7) The sustainable growth rate measures how quickly a firm can grow when it uses both
internal equity and debt financing to keep its capital structure constant over time.
8) The profitability index is also sometimes referred to as the benefit/cost ratio.
9) The nominal interest rate may include a default risk premium.
10) The cost of capital may be estimated from the historical cost of raising debt and
equity capital.
11) A corporation is a legal entity created under federal law with an unending life and
limited financial liability to its owners.
12) Potential creditors of a firm might analyze financial statements to gauge the firms
ability to make timely payments of interest and principal.
13) The profitability index is calculated by subtracting the net investment from the
present value of the cash flows.
14) Which of the following statements is most correct?
a.Perfectly negatively correlated series move exactly together and have a correlation
coefficient of -1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of +1.0
b.Perfectly negatively correlated series move exactly together and have a correlation
coefficient of +1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of -1.0
c.Perfectly positively correlated series move exactly together and have a correlation
coefficient of +1.0 while perfectly negatively correlated series move exactly in opposite
directions and have a correlation coefficient of -1.0
d. Perfectly positively correlated series move exactly together and have a correlation
coefficient of -1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of +1.0
e. none of the above
15) Ningbo shipping has projected sales in May, June, and July of $500, $600, and
$700, respectively. It makes 20 percent of sales for cash and collects the balance one
month following the sale. Ningbo Shippings total cash receipts in July are
a.$220
b.$200
c.$180
d.none of the above
16) An efficient ______________ that is comprised of a central bank and a banking
system that is able to create and transfer a stable medium of exchange called money.
a.allocation system
b.banking system
c.monetary system
d.market system
e.none of the above
17) 54 .Which of the following factors affects the supply of loanable funds?
a.the volume of savings
b.expansion of deposits by banks
c.attitudes about liquidity
d.all the above
18) Which of the following statements is false?
a.most mutual fund shares are traded on the New York Stock Exchange
b.mutual funds hold assets in the form of corporate and government securities in excess
of $2 trillion
c.the total risk of an asset directly affects the markets return expectations for that asset
d.all of the above statements are false
19) Which of the following marketable securities is sold at a discount throughout
competitive bidding in a weekly auction?
a.U.S. Treasury bills
b.federal funds
c.commercial paper
d.negotiable certificates of deposit
20) Major participants in the secondary mortgage markets include all of the following
except:
a.brokerage firms
b.depository institutions such as banks and credit unions
c.Ginnie Mae
d.Fannie Mae
e.mortgage companies
21) If a firm pays out 30% of its earnings as dividends and has averaged a 20 percent
return on equity, how quickly can the firm grow while maintaining a constant debt to
equity mix?
a.6.4%
b.10.2%
c.16.3%
d.20.0%
e.none of the above
22) The process of balancing savings surplus and savings deficit units by channeling
savings into investment through a financial intermediary does not result in the:
a.individuals receiving safety of principal, liquidity, and a return on their savings
b.business firm anticipating earning a return on its investment in real assets that is lower
than the interest cost on the institution loan
c.intermediary being compensated for facilitating the savings and investment process
d.creation of two types of financial assets and two types of financial liabilities
23) An area of finance that involves the study of organizations or intermediaries that
help the financial system operate efficiently and transfer funds from savers and
investors to individuals, businesses, and governments that seek to spend or invest the
funds in physical assets (inventories, buildings, and equipment) is called:
a.financial management
b.investments
c.financial institutions
d.financial markets
e.none of the above
24) A firm can reduce its cash conversion cycle by
a.increasing its average age of inventory
b.increasing its average collection period
c.decreasing its average payment period
d.increasing its average payment period
e.none of the above
25) A fruit company has 20% returns in periods of normal rainfall and 3% returns in
droughts. The probability of normal rainfall is 60% and droughts 40%. What would the
fruit companys expected returns be?
a.24%
b.10.8%
c.0
d.cannot determine from the information given
26) Which of the following statements is false?
a.If the payback period is greater than the maximum acceptable payback period, accept
the project
b.If the payback period is less than the maximum acceptable payback period, reject the
project
c.If the payback period is greater than the maximum acceptable payback period, reject
the project
d.two of the above are false
27) A statistical concept that relates movements in one set of returns to movements in
another set over time is called:
a.variance
b.standard deviation
c.coefficient of variation
d.correlation
28) If a firm has positive net working capital, the current ratio is:
a.greater than one
b.less than one
c.equal to one
d.not enough information given to tell
29) All of the following statements are correct except:
a.Relevant cash flows are incremental before-tax cash flows, which must be discounted
using an incremental after-tax cost of capital
b.The firms relevant cost of capital is computed from after-tax financing costs
c.A projects incremental cash flows must be discounted at a cost of capital that
represents the incremental or marginal cost to the firm of financing the project, that is,
the cost of raising one additional dollar of capital
d.In estimating the cost of capital, the firms analysts need to evaluate investors expected
returns under likely market conditions and then use these expected returns to compute
the firms marginal future cost of raising funds
e.All of the above statements are correct
30) ___________________________________ has the goal of a creating a single
market for investment services across the European Union as well as creating a single
set of regulations for financial services firms.
a.European Securities Services (ESS)
b.Euro Capital Markets Accord (ECMA)
c.Continental Brokerage Services (CBS)
d.Money Market Clearing House (MMCH)
e. none of the above
31) Pledging accounts receivable has all of the following characteristics except:
a.money is advanced to the borrower as a loan against accounts receivable
b.accounts receivable balances remain on the balance sheet
c.the customer payment is made to the firm, which then submits the payment to the
bank
d.all of the above are characteristics of pledging
32) A stop-loss order:
a.sets a price a broker may not violate
b.stops losses for one trading day
c.is executed at the market once the stop-price loss or a price below it is reached
d.stops losses for 30 days
33) A receivable from the sale of merchandise on the basis of a draft or bill of exchange
drawn against the buyer or the buyers bank is termed a (n):
a.acceptance
b.assignment
c.comaker loan
d.warehouse loan
34) For a given interest rate, as the length of time until receipt of the funds increases,
the present value interest factor
a.changes proportionally
b.increases
c.decreases
d.remains unchanged
35) A (n) ________________ is an extra dividend declared by the firm over and above
its regular dividend payout.
a.strong dividend
b.supplemental dividend
c.extra-large dividend
d.treasury dividend
e.none of the above
36) For most of the remainder of the decade after the September 11th terrorist attacks
the Fed maintained a high liquidity, low interest rate environment, which was
accompanied by:
a.very little borrowing by business firms, financial institutions, and individuals
b.a large increase in overseas investments by business firms, financial institutions, and
individuals
c.a massive divestment of assets by business firms, financial institutions, and
individuals
d.a massive reduction of inventory levels by business firms
e.none of the above
37) A compensating balance on a bank loan effectively ____________ the cost of the
loan.
a.raises
b.lowers
c.has no effect on
d.has an indeterminate effect on
e.none of the above
38) A commercial finance company:
a.has a bank charter
b.may not discount accounts receivable
c.may make loans secured by chattel mortgages
d.none of the above
39) ___________________ are comprised of direct costs, the spread, and underpricing.
a.Commission costs
b.Flotation costs
c.Brokerage commissions
d.none of the above
40) Which of the following phrases make the statement false? As a firm increases its
operating leverage for a given quantity of output, this:
a.decreases its financial leverage
b.changes its operating cost structure
c.increases its business risk
d.increases the variability on earnings per share
41) What is the highest effective rate attainable with a 12 percent nominal rate?
a.12.00%
b.12.55%
c.12.75%
d.12.95%
42) According to the definitions given in the text, if Stock A has a standard deviation of
4% and expected returns of 9%, and Stock B has a standard deviation of 3% and returns
of 1%, which stock is riskier?
a.Stock A
b.Stock B
c.they are equally risky
d.cannot determine from the information given
43) Which of the following statements is most correct?
a.Contractual savings include such things as accumulation of reserves in insurance and
pension funds and deposits to time and savings accounts in commercial banks
b.As savings increased in the United States, there was a change in our status from a
creditor nation to a debtor nation
c.In the U.S. economy, financial assets and financial liabilities are created when
balancing savings surplus and savings deficit units
d.Corporate bonds and stocks are said to be indirect securities, while commercial bank
time deposits would represent primary instruments in terms of the savings investment
process
44) You put $2,000 in an IRA account at Northern Trust. This account pays a fixed
interest rate of 8% compounded quarterly. How much money do you have in five years?
a.$2,914
b.$2,938
c.$2,972
d.$2,999
45) 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.More 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
e. none of the above
46) Which of the following statements is most correct?
a.Combining positively correlated assets having the same expected return results in a
portfolio with the same level of expected return and a lower level of risk
b.Combining negatively correlated assets having the same expected return results in a
portfolio with the same level of expected return and a lower level of risk
c.Combining positively correlated assets having the same expected return results in a
portfolio with a lower level of expected return and a lower level of risk
d. Combining negatively correlated assets having the same expected return results in a
portfolio with a lower level of expected return and a lower level of risk
e. all of the above
47) The principle of hedging calls for the matching of a firms average:
a.liquidity of its assets with its liabilities and equity
b.liquidity of its accounts receivable with its accounts payable
c.maturities of its assets with its liabilities and equity
d.maturities of its sales with its assets
48) Which of the following characteristics of most debt instruments do not cause bond
prices to vary inversely with changes in financial market interest rates?
a.coupon rates
b.maturity dates
c. par redemption values
d.bond rating
e.all of the above cause bond prices to vary inversely with changes in financial market
interest rates
49) Which of the following statements is most correct?
a.A closed-end mortgage bond is one that allows the same assets to be used as security
in future bond issues
b.Positive covenants in a trust indenture restrict or limit the actions the firm can take
c.Retractable bonds can be redeemed prior to maturity by the firm
d.Most of the annual funds raised from security issues come from corporate bond sales
50) Agency costs are:
a.the costs of hiring managers
b.assets minus liabilities
c.common stock price times number of shares outstanding
d.none of the above
