1) The calculation of the cost of capital depends upon the historical cost of funds.
2) During an economic “boom” period, a shortage of low-cost financing alternatives
exists.
3) Dividends are the active variable in the “marginal principle of retained earnings.”
4) A warrant’s speculative premium equals the market price of the underlying common
stock minus the option price.
5) The most significant purpose of the cash budget is to plan accounts payable
payments.
6) Federal corporate tax rates have changed several times since 1980 .
7) When adjusting for semi-annual compounding of an annuity, the adjustments include
multiplying the periods and annuity payment amount by 2 .
8) An increase in inventory represents a source of funds.
9) Shelf registration has contributed to the concentrated nature of the investment
banking industry.
10) Asset accounts are listed in order of their liquidity.
11)
Refer to the figure above. Megaframe’s current ratio is ____.
A.1.9:1
B.1.625:1
C.1.75:1
D.3.0:1
12) Bond ratings are significantly based on all of the following except for which one?
A.The times interest earned ratio
B.The debt-to-equity ratio
C.The current ratio
D.The return on assets
13) An appropriate capital budgeting process requires that the following steps be taken
in which order?
a) Collection of data
b) Reevaluation and adjustment
c) Evaluation and decision making
d) Search for and discovery of investment opportunities
A.d, a, c, b
B.d, a, b, c
C.d, b, a, c
D.b, d, a, c
14) North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are
required to purchase one share. The value of a right is ________.
A.$0.11
B.$1.11
C.$1.00
D.$1.50
15) Warrants are
A.long-term options to sell shares of the issuing firm’s stock
B.fairly stable, low-risk investments
C.investments whose value is directly related to the price of the underlying stock
D.structured to sell for precisely their intrinsic value
16) A particular country’s pattern of importing more than is being exported is likely to
A.depress that country’s currency
B.depress other countries’ currencies
C.increase the value of that country’s currency
D.More than one of the options
17) As the time period until receipt increases, the present value of an amount at a fixed
interest rate
A.decreases
B.remains the same
C.increases
D.Not enough information is given to tell
18) Follies Bookstore, the only bookstore close to campus, had net income in 2005 of
$90,000. Here are some of the financial ratios from the annual report.
Using these ratios, calculate the following for Follies Bookstore:
a) Sales
b) Total assets
c) Total asset turnover
d) Total debt
e) Stockholders’ equity
f) Return on equity
19) The “call” provision on some bonds allows
A.the bondholder to redeem the bond earlier than maturity, but usually involves a call
premium
B.the corporation to request additional capital contributions from the bondholder
C.the corporation to redeem the bonds earlier than maturity but usually for a premium
over the par value
D.the bondholder to convert the bond into preferred stock
20) Which of the following combinations of investments would provide the firm with
the highest negative correlation?
A.Textiles firm and retail firm
B.Telecommunications firm and Internet firm
C.Soft drink manufacturer and health care firm
D.Airline company and gasoline manufacturer
21) The Haavelmo Widget Corporation has just signed a 60-month lease on an asset
with a six-year life. The lessor will retain the title to the property at the end of the lease,
and the present value of the minimum lease payments is $470,000. The estimated fair
value of the property is $600,000. Is this an operating lease?
A.No
B.Yes
C.Yes, if the company elects to treat the lease as an operating lease
D.More information is required to determine an answer
This is a capital lease. It meets one of the four criteria noted in SFAS #13: The lease
term covers 75% or more of the expected useful life of the assets. 60 mos./72 mos. =
83%. Note that the lease does NOT satisfy the Title Transfer or Lease Payment Present
Value tests.
22) A disadvantage to the investor of a convertible bond is that
A.the stock price may never rise above the conversion price
B.if interest rates rise, the pure bond value (floor price) will decline
C.the interest rate on convertibles is generally one-third below the coupon rate on
straight bonds of similar risk
D.All of these options are disadvantages
23) Which of the following is not considered to be a profitability ratio?
A.Profit margin
B.Times interest earned
C.Return on equity
D.Return on assets (investment)
24) Which of the following is an advantage of floating rate bonds to investors?
A.They allow for locking in a multiplier of the initial investment
B.Their prices tend to be highly stable regardless of interest rate changes
C.They are sold at a deep discount
D.All of these options
25) At the break-even point, a firm’s profits are
A.greater than zero
B.less than zero
C.equal to zero
D.Not enough information is given to determine
26) A&B Enterprises is trying to select the best investment from among four
alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows
follow:
Evaluate and rank each alternative based on a) payback period, b) net present value (use
a 10% discount rate), and c) internal rate of return. For the internal rate of return, please
use Excel’s “IRR” function as described in the text.
27) A long-term debt issue sold simultaneously in several different national capital
markets, but denominated in a currency different from that of the national market where
the issue occurs is called a(n)
A.World bond
B.International capital bond
C.Floating bond
D.Eurobond
28) Floating rate bonds are most likely to be popular with investors when it is
anticipated that
A.interest rates will stay the same
B.interest rates will go up
C.interest rates will go down
D.short-term interest rates will be higher than long-term interest rates
29) The costs of carrying inventory do not include
A.the interest on funds tied up in inventory
B.the cost of warehouse space
C.ordering costs
D.insurance and handling costs
30)
Refer to the figure above. The degree of combined leverage is _____.
A.2.22x
B.1.90x
C.2.95x
D.1.65x
31) Hedging refers to
A.avoiding high-risk investment opportunities
B.a transaction that reduces risk exposure
C.the same thing as asset diversification
D.avoiding the financial futures market
32) The spot rate of the British pound to the dollar is 1.15 (£). The 180-day forward rate
is $1.17. Thus, the approximate annualized forward premium is _________.
A.1.018%
B.3.571%
C.7.273%
D.3.478%
33) If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset
turnover of 1.5x, what is their ROA?
A.10%
B.17%
C.12%
D.6%
34) The relationship between a bond’s price and the yield to maturity
A.changes at a constant level for each percentage change of yield to maturity
B.is an inverse relationship
C.is a linear relationship
D.changes at a constant level for each percentage change of yield to maturity and is an
inverse relationship
35) Mirrlees Corp. has 10,000 7% bonds convertible into 30 shares per $1,000 bond.
Mirrlees has 1,000,000 outstanding shares. Mirrlees has a tax rate of 40%. The average
Aa bond yield at the time of issue was 10%. Compute the “basic earnings per share” if
after-tax earnings are $1,400,000.
A.$0.71
B.$1.25
C.$1.33
D.$1.40
36) Which of the following did not contribute to the financial crisis?
A.The use of market-to-market accounting standards
B.Solid credit ratings from the ratings agencies
C.The extension of credit to high-risk borrowers
D.The merger of JPMorgan Chase and Bear Stearns
E.All of the options contributed to the financial crisis