The reliability of the current ratio as a measure of liquidity can be reduced by:
A.a surplus of marketable securities.
B.accounts receivable that are paid in advance.
C.inventory that will not sell.
D.the use of trade credit to finance current assets.
E.None of the above
The market risk premium is a reflection of the investment community’s level of risk
aversion. It is calculated by:
A.subtracting the return on the market from the risk-free rate.
B.multiplying the beta of a stock by the result of subtracting the risk-free rate from the
return on the market.
C.subtracting the risk-free rate from the return on the market.
D.multiplying beta of a stock by the expected return on the market.
When comparing two equal-sized investments, the ____ is an appropriate measure of
total risk.
A.standard deviation
B.coefficient of variation
C.correlation
D.disjointed variance
Which of the following does not cause accounting profit and cash flow to differ?
A.Depreciation
B.Sales made on credit
C.Payroll expense
D.Inventory purchased, but not yet sold
Small business plans differ from large company plans in that:
A.small business plans normally do not discuss strategic planning at all.
B.small business plans usually don’t include short-term forecasts.
C.small business plans don’t generally discuss the decision to choose the business they
are in over others.
D.Both a and b
E.All of the above
Which of the following assumptions was not part of the original Modigliani and Miller
Model?
A.Securities trade in perfectly efficient capital markets.
B.Securities trade with no transaction costs.
C.Income taxes are fixed.
D.Rates for borrowing do not change regardless of the amount borrowed.
E.Rates for borrowing are the same for investors and companies.
Bennett Corp did well this year. Its industry is booming and everyone expects it to
continue to do so. Bennett paid a dividend that was 15% higher than last year’s.
Surprisingly the price of Bennett’s stock dropped immediately after the dividend was
announced. What’s going on?
A.Stockholders are cashing in on the good times and taking their profits while they can.
B.Investors expected a bigger dividend increase, which was factored into the stock’s
price. They were disappointed by a mere 15%, and adjusted their opinions of the stock
downward.
C.Nothing unusual is going on. Stocks move up and down, sometimes randomly. In this
case the dividend just happened to coincide with a brief downturn.
D.Investors probably expected a stock split and were disappointed when they didn’t get
it.
Consider a project with an initial investment and positive future cash flows. As the cost
of capital is increased, the:
A.IRR remains constant while NPV increases.
B.IRR decreases while NPV remains constant.
C.IRR remains constant while NPV decreases.
D.IRR increases while NPV remains constant.
E.IRR decreases while NPV decreases.
Given the following information, determine Salem Company’s net fixed assets.
Sales = $10,000,000
Total asset turnover = 4 times
Current ratio = 2.40
Current liabilities = $500,000
Total assets = current assets + fixed assets
A.$1,200,000
B.$4,800,000
C.$1,300,000
D.Cannot be determined
Although bond principal is technically not repaid until maturity, sinking funds reduce
bondholder risk by requiring the borrower to make periodic payments to a bank for
principal retirement. The same can be accomplished by:
A.randomly calling in bonds for earlier retirement.
B.issuing serial bonds which spread the principal repayment over a number of years.
C.Either of the above
D.None of the above
Frazier Fudge, Inc. is considering 2 mutually exclusive projects with the following cash
flows. Which project should be accepted? Assume a cost of capital of 10%.
A.Project X because NPV is $27.4
B.Project Y because NPV is $31
C.Project X because IRR is 13.7%
D.Project Y because IRR is 12.2%
Which of the following statements is false?
A.The most commonly used index with which to measure risk is the standard deviation.
B.The standard deviation measures the average deviation of the various outcomes from
the expected rate of return.
C.The variance is the square root of the standard deviation.
D.The greater the volatility, the larger the standard deviation.
E.All of the above statements are correct.
As the ex-dividend date passes:
A.the market price of the stock drops by about 150% of the amount of the dividend.
B.brokers suspend sales of the stock for two business days to avoid arguments between
buyers and sellers over who gets the dividend.
C.an investor who purchases the stock prior to the ex-dividend date receives the
dividend and an investor who purchases the stock after the ex-dividend date does not.
D.All of the above