1) A major decision confronting a business firm when purchasing marketable securities
involves a trade-off between the opportunity to earn a return on idle funds during the
holding period and the brokerage costs associated with the purchase and sale of
marketable securities.
2) In the EOQ model, the total cost is minimized at the point where the order costs and
carrying costs are equal.
3) An annuity due is an amount that occur at the beginning of each period.
4) If an asset is sold for book value, the gain on the sale is composed of two parts: a
capital gain and accumulated depreciation.
5) Different projects have different levels of risk. As a result, the acceptance of a
particular project generally has an impact on a firm’s overall risk.
6) In the EOQ model, if carrying costs increase while all other costs remain unchanged,
the number of orders placed would be expected to increase.
7) Zero-balance accounts are checking accounts in which a zero balance is maintained
and the bank automatically covers all checks presented against the accounts.
8) A firm’s operating breakeven point is the level of sales necessary to cover all fixed
operating costs.
9) Diversified investors should be concerned solely with nondiversifiable risk because it
can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.
10) For foreign bonds, interest rates are usually not directly correlated with the
domestic rates prevailing in the respective countries.
11) In U.S., during the past 75 years, on an average the return on small-company stocks
has levelled the return on large-company stocks.
12) The McCain-Feingold Act of 2002 was passed to eliminate many of the disclosure
and conflict-of-interest problems of corporations.
13) The ________ is the compound annual rate of interest earned on a debt security
purchased on a given date and held to maturity.
A) risk premium
B) yield curve
C) risk-free rate
D) yield to maturity
14) Which of the following valuation methods is superior to others in the list since it
considers expected earnings?
A) liquidation value
B) book value
C) P/E multiple
D) present value of the interest
15) A technique that provides an analyst with the information concerning the proportion
of each type of account that has been outstanding for a specified period of time is called
________.
A) credit analysis
B) credit scoring
C) aging of receivables
D) the economic order quantity model
16) Carol’s Dolls has fixed operating costs of $25,000. Its sale price is $55 per doll, and
its variable operating cost is $30 per doll. It sells 3,000 dolls per month. The firm’s
earnings before interest and taxes is ________.
A) $37,500
B) $55,000
C) $75,000
D) $50,000
17) Retained earnings on the balance sheet represents the ________.
A) net profit after taxes
B) amount of proceeds in excess of the par value received from the original sale of
common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm
18) Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in
four equal annual installments. The actual end-of-year payment is ________.
A) $ 942
B) $1,125
C) $1,482
D) $2,641
19) Tangshan China’s stock is currently selling for $160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. Assuming Tangshan China’s
most recent dividend was $5.50, what is the required rate of return on Tangshan’s stock?
A) 7.3%
B) 8.4%
C) 9.5%
D) 10.6%
20) The ________ is a popular approach for evaluating profitability in relation to sales
by expressing each item on the income statement as a percent of sales.
A) retained earnings statement
B) common-size balance sheet
C) common-size income statement
D) profit and loss statement
21) If a firm expects short-term cash surpluses, it can plan ________.
A) long-term investments
B) short-term borrowing
C) short-term investments
D) leverage decisions
22) Risk that affects all firms is called ________.
A) maturity risk
B) unsystematic risk
C) nondiversifiable risk
D) reinvestment risk
23) Fixed assets that provide the basis for a firm’s earning and value are often called
________.
A) tangible assets
B) noncurrent assets
C) earning assets
D) book assets
24) Which of the following is a disadvantage of factoring?
A) ensures an uneven pattern of cash flows
B) eliminates credit and collection departments
C) turns accounts receivable into cash quickly
D) highly expensive source of short-term financing