1) One way businesses try to overcome the risk associated with new customers is to
access a credit scoring report that will predict the probability of a customer causing
credit problems in the future.
2) Sales projections and the ability to accurately predict the future have a large impact
on cash flow targets.
3) The interest factor for the present value of a single sum is equal to (1 + i)/i.
4) A stock that has a high required rate of return because of its risky nature will usually
have a high P/E ratio.
5) Minimizing cash balances can improve overall corporate profitability.
6) A common stock with a beta of 1.0 is said to be of equal risk with the market.
7) Working capital management primarily involves long-term planning.
8) In estimating the market value of a bond, the coupon rate should be used as the
discount rate.
9) Common stockholders may assign a proxy, or the power to cast their ballot, only
when majority voting is in place.
10) Larger bond issues can lower “liquidity risk,” or the possibility that an investor will
not be able to sell a bond quickly and easily.
11) The “yield to maturity” is the internal rate of return on a bond.
12) Compensating balances are important for banks because their existence allows them
to make loans at lower quoted rates.
13) Capital budgeting decisions involve a minimum time horizon of five years.
14) If market rates of interest change, the “floor value” of a convertible bond can
change.
15) The behavior of various kinds of financial institutions determines the shape of the
yield curve, according to the market segmentation theory.
16) The time value of money concept becomes less critical as the prime rate of lending
increases.
17) If Baxter Unlimited has annual sales of $5,000,000 (80% on credit), and receivables
equal to 35% of credit sales, what is their receivables turnover?
A.3.6 times
B.2.9 times
C.2.3 times
D.4.2 times
18) Which of the following is not a true statement about automated clearinghouses
(ACHs)?
A.Automated clearinghouses are responsible for the check clearing process between
commercial banks and the Federal Reserve Banks
B.Commercial transactions using automated clearinghouses have been growing at close
to 17% per year since 1989
C.Debits drawn on automated clearinghouses cost less than half that of checks
processed through financial institutions
D.The ability to reduce transactions costs and create convenience is driving the growth
of automated clearinghouses
19) Money markets include which of the following securities?
A.Common stock and corporate bonds
B.Treasury bills and commercial paper
C.Certificates of deposit and preferred stock
D.All of the options
20) Solow Corp. has a bond with annual interest payments of $109 maturing in 10 years
at a value of $1,000 per bond. The current market price is $960. What will the nominal
yield be?
A.9.1%
B.12.5%
C.11.5%
D.10.9%
21) The increase in the internationalization of financial markets has led to
A.companies searching the global financial markets for low-cost funds
B.an increase in American Depository Receipts (ADRs) on the New York Stock
Exchange
C.an increase in debt obligations denominated in foreign currency on U.S. corporate
balance sheets
D.All of the options
22) Which of the following best describes the benefits to the borrower of selling
asset-backed securities?
A.Due to the portfolio effect, the borrower can package up low-quality accounts
receivable and sell them for a premium price
B.The borrower trades future cash flows for current cash flows
C.The asset-backed security is likely to carry a high credit rating of AA or better
D.The borrower trades future cash flows for current cash flows and the asset-backed
security is likely to carry a high credit rating of AA or better
23) In the maturity stage, a firm
A.is growing about the same rate as the economy as a whole
B.has returns on assets lower than those of the industry norm
C.loses market share and suffers a decline in profitability
D.pays out all earnings in dividends
24) If an investment project has a positive net present value, then the internal rate of
return is
A.less than the cost of capital
B.greater than the cost of capital
C.equal to the cost of capital
D.indeterminate, because it depends on the length of the project
25) In the past, the study of finance has included
A.mergers and acquisitions
B.raising capital
C.bankruptcy
D.All of the options
26)
Refer to the figure above. Times interest earned for Marni Company is ____.
A.3x
B.5x
C.80x
D.6x
27) The present value of an annuity table provides a ‘shortcut” for calculating the future
value of a steady stream of payments, denoted as A. The same value can be calculated
directly from the following equation:
28) The price of a convertible bond
A.has downside as well as upside limitations
B.has only upside limitations
C.has only downside limitations
D.has no upside or downside limitations
29) Asset accounts on the balance sheet are listed in order of
A.liquidity
B.profitability
C.size
D.importance
30) A firm with excess cash and few investment alternatives might logically
A.declare a stock dividend
B.split its stock two-for-one
C.repurchasesome of its own shares
D.choose to issue preferred stock
31) Gross profit is equal to
A.sales minus cost of goods sold
B.sales minus (selling and administrative expenses)
C.sales minus (cost of goods sold and selling and administrative expenses)
D.sales minus (cost of goods sold and depreciation expense)
32) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he
promised to repay the loan in 15 equal annual payments. How much are the annual
payments?
A.$3,633
B.$9,250
C.$13,113
D.$15,445
33) To save for her newborn son’s college education, Lea Wilson will invest $1,000 at
the beginning of each year for the next 18 years. The interest rate is 12%. What is the
future value?
A.$7,690
B.$34,931
C.$63,440
D.$62,440
34) Floating rate bonds
A.have interest payments based on some overall market rate
B.have a better capacity for constant market value
C.usually have very broad limits that interest payments cannot exceed
D.All of these options
35) Ten years ago, Stigler Company issued $100 par value preferred stock yielding 6%.
The preferred stock is now selling for $102 per share. What is the approximate current
yield or cost of the preferred stock? (Disregard flotation costs.)
A.7.76%
B.8%
C.5.9%
D.There is not enough information to answer the question
36) If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how
much will he have at the end of the five years assuming a 12% annual return and
quarterly compounding?
A.$40,305
B.$30,000
C.$108,078
D.$161,220
37) Flyrite Company currently has net income of $9 million and 3 million common
shares outstanding, which sell for $33/share. Flyrite has decided to issue new stock to
raise $4,000,000 to expand its operations. Flyrite’s investment banker will sell the stock
for $29 with a spread of 7%. There will be a $60,000 additional registration cost.
a) Calculate the current EPS and P/E ratio.
b) How many shares will have to be sold to net $4 million?
c) Calculate the new EPS and stock price immediately after the sale if the P/E ratio
remains constant. You may ignore the effect of the costs of the new issue on EPS,
assuming instead that they have been accrued against earnings in performing this
before-and-after analysis.
38) The three primary policy variables to consider when extending credit include all of
the following except
A.credit standards
B.the level of inflation
C.the terms of trade
D.collection policy
39) Most firms are able to use ______% debt in their capital structure without
exceeding norms acceptable to creditors and investors.
A.30-50
B.40-60
C.50-70
D.60-80
40) If the price of common stock associated with a convertible bond is less than the
conversion price
A.the bond will sell at its pure bond value
B.the bond will sell at its par value
C.the bond will sell at its conversion value
D.There is not enough information to tell what the bond price will be
41) Which of the following factors do not influence the firm’s P/E ratio?
A.Past earnings
B.Shares outstanding
C.Volatility in performance
D.None of the options
42) The Sarbanes-Oxley Act was passed in an effort to
A.protect small business from large corporations dominating the market
B.ensure that partnerships divide profits among partners in a fair manner
C.guarantee that outside auditors can control corporate accounting practices
D.control corrupt corporate behavior
43) The Nash Corp. is considering four investments. Which provides the highest
after-tax return for Nash Corp. if it is in the 40% federal tax bracket? Assume the tax
rate on dividends is 15%.
A.Treasury bonds at 4%
B.Corporate bonds at 7.5%
C.Municipal bonds at 7.25%
D.Preferred stock at 7.5%
44) The “portfolio effect” in capital budgeting refers to
A.the relationship of stocks to bonds
B.the degree of correlation between various investments
C.the coefficient of variation
D.the risk-adjusted discount rate