1) The percent of sales method assumes that all assets and all liabilities increase
proportionally with sales, but retained earnings does not.
2) The difference between the asked price and the bid price is known as the spread.
3) Higher liquidity (holding larger cash and marketable securities balances) generally
results in a lower return on equity.
4) Underemployment is a term used to describe hiring employees who work for a
designated foreman or team leader. In this sense they are employed under a specific
individual.
5) The cost of a particular source of capital (debt, preferred stock, common stock) is
equal to the investor’s required rate of return after adjusting for the effects of both
flotation costs and corporate taxes.
6) Trend analysis is the forecasting of the firm’s financial ratios for a future time period
by using its own ratios from previous periods.
7) The U.S. dollar is the most frequently traded currency in foreign currency markets,
accounting for over 40% of total trading.
8) Transactions in the futures markets involve current payments for goods which will be
delivered at some future agreed upon date.
9) DuPont analysis indicates that the return on equity may be boosted above the return
on assets by using leverage (debt).
10) The break-even model assumes that selling price per unit and variable cost per unit
of output are constant over the relevant range of output.
11) Terms of sale are frequently changed by the financial manager in order to increase
sales.
12) One advantage of being listed on the NYSE is that all trades are made in an auction
setting with face-to-face trading between individuals on the floor of the stock exchange.
13) A project with a NPV of zero should be rejected since even the returns on U.S.
Treasury bill are greater than zero.
14) According to the Altman model, multiple discriminant analysis indicates that those
applicants with a Z score below 2.7 have a significant probability of filing for
bankruptcy within a year.
15) Limited liability for a corporation’s common shareholders is a protective provision
that aids the corporation in raising funds.
16) Tim invested $1,000 in a mutual fund paying 8% per year. John invested $500 in
the same fund. If both Tim and John keep their money invested for the same period of
time, Tim will end up with twice as much money as John.
17) The payment of a dividend to current shareholders will have no impact on a
corporation’s share price because the cash paid is not available to future potential
shareholders who may want to buy the corporation’s stock.
18) Artificially low interest rates helped create the housing bubble because low interest
rates (r value) create higher values (higher PVs).
19) The key ingredient in a firm’s financial planning is an accurate sales forecast.
20) The goal of cash management is to hold the minimum amount of cash necessary to
meet the firm’s obligations in a timely manner.