Unlike a vertical merger, a horizontal merger expands the market share of the acquiring
firm.
A sum of money promised you at a time in the future is worth only as much as you
would have to put in a bank today to have that sum available at that point in time.
The incremental cash flows of a new venture tend to be easy to visualize, because the
project is readily seen as separate and distinct from the existing business.
Changes in the rate of inflation is an element of unsystematic risk.
Money market securities are generally more liquid than capital market securities.
Liquidity risk refers to the chance that an investor will incur a loss because it’s hard to
sell the bond of a company that isn’t well known.
Another name for a financial asset like a stock or a bond is a security.
The three most important financial statements are the balance sheet, income statement,
and statement of retained earnings.
Economists forecast the following inflation rates for the next four years:
What inflation adjustment should be included in the interest rate on a three-year loan
made today?
A.3%, because that’s the rate at the time the loan is made and borrowers won’t pay any
more
B.4%, because that’s the average expected inflation rate over the life of the loan
C.6%, because that’s the rate that will exist when the lender is loaning the money out
again
D.6%, because at a lower rate the lender will have lost purchasing power by the time it
lends the money out again
A parent or holding company operates acquired businesses as:
A.divisions of a larger corporation which is the holding company itself.
B.fully integrated parts of the acquiring firm.
C.separate legal entities.
D.a and c.
With a coupon rate of 8% and a current market price of $955.17, the bond’s current
yield, assuming six years to maturity, is:
A.8.38%.
B.8.00%.
C.9.00%.
D.None of the above
A compensating balance arrangement between a firm and its bank:
A.increases the return on the loan to the bank.
B.forces the firm to keep a minimum balance in its checking account.
C.increases the cost of the loan to the firm.
D.All of the above
The individual on the exchange floor who supervises trading in a stock and ensures that
the market remains orderly is called a(n):
A.institutional investor.
B.floor broker.
C.security analyst.
D.designated market maker.
Relaxation of credit policy results in:
A.an increase in credit sales.
B.a decrease in credit expenses.
C.a decrease in investment in receivables.
D.b and c
E.All of the above
The best justification for a merger is:
A.synergies.
B.stability.
C.the CEO’s drive and enthusiasm.
D.internal growth.
Which of the following statements is most correct?
A.Bonds are non-amortized debt.
B.Bonds are promissory notes and serve as legal evidence of debt.
C.Bondholders are creditors of the companies that issue the bonds.
D.Both a. and b. are correct.
E.All of the above are correct.
A friend offered to pay you $3,000 for each of the next three years beginning one year
from now, $5,000 for each of the succeeding three years, and a lump sum of $10,000
one year thereafter. The interest rate is 10%. How much are these expected future sums
worth today?
A.$30,909
B.$21,935
C.$17,447
D.None of the above
The Eurodollar market is created by:
A.U.S. dollars on deposit in European banks.
B.Rich Europeans investing in U.S. assets.
C.Rich Americans investing in European assets.
D.Foreign banks lending their deposits of U.S. dollars.
Match the following:
1>Risk-free rate A. The earning power of money
2>Maturity risk B. A sustained increase in the general level of prices
3>Pure interest rate C. Short-term investments present less risk than
long-term investments
4>Inflation D. The rate of interest exclusive of any risk premiums
Which of the following is associated with the Sarbanes-Oxley Act?
A.PCAOB now monitors the activities of public accounting firms.
B.Auditing firms should provide clients with management consulting.
C.Audit manager’s tenure with one client should be limited to five years.
D.Firms in the same industry should review each other’s accounting records.
If a firm issuing additional common equity can estimate the return investors require on
its stock (ke) at 12% and knows that flotation costs are about 18%, its component cost
of equity capital for the new funds will be:
A.30.0%
B.14.2%
C.13.6%
D.14.6%
If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest
compounded annually, determine how much the CD will be worth at the end of 4 years.
A.$13,600
B.$45,730
C.$14,640
D.$15,958
A $300,000.00 thirty year mortgage has a monthly payment of $1,798.65. Over the life
of the mortgage, how much money do you pay in interest?
A.$245,876.98
B.$347,514.00
C.$647,514.00
D.$300,000.00
MACRS applies to:
A.land.
B.equipment.
C.buildings.
D.Both b and c
An example of an opportunity cost is:
A.an idle plant that could be sold if it is not used for the new project.
B.the cost of incremental working capital.
C.the cost of a market study done last year.
D.a and b
A firm has a $5 million revolving credit agreement with its bank at 1.5% over prime
with a commitment fee of .5% unborrowed balance. What is the total cost of borrowing
in a month when the prime rate is 8% if the firm borrowed $2 million prior to the
beginning of the month and takes down an additional $1 million two thirds through the
month on the 21st? (Correct answers may differ due to rounding.)
A.$21,875
B.$20,833
C.$20,417
D.$19,583