All of the following statements are correct except:
a. A firm’s business risk is measured by its variability in EBIT over time and is affected
by several factors, including the business cycle, competitive pressures, and the firm’s
operating leverage or its level of fixed operating costs.
b. The degree of financial leverage measures the sensitivity of earnings per share to
changes in EBIT.
c. The degree of combined leverage is the percentage change in gross profit that results
from a 1 percent change in sales volume.
d. The degree of combined leverage is simply the product of its degree of operating
leverage and its degree of financial leverage.
e. All of the above statements are correct.
If you expect the inflation premium to be 2%, the default risk premium to be 1% and
the real interest rate to be 4%, what interest would you expect to observe in the
marketplace on short term treasury securities?
a. 8%
b. 7%
c. 6%
d. 5%
All of the following statements are correct except:
a. Relevant cash flows are incremental before-tax cash flows, which must be discounted
using an incremental after-tax cost of capital.
b. The firm’s relevant cost of capital is computed from after-tax financing costs.
c. A project’s incremental cash flows must be discounted at a cost of capital that
represents the incremental or marginal cost to the firm of financing the project, that is,
the cost of raising one additional dollar of capital.
d. In estimating the cost of capital, the firm’s analysts need to evaluate investors’
expected returns under likely market conditions and then use these expected returns to
compute the firm’s marginal future cost of raising funds.
e. All of the above statements are correct.
___________________________________ has the goal of a creating a single market
for investment services across the European Union as well as creating a single set of
regulations for financial services firms.
a. European Securities Services (ESS)
b. Markets in Financial Instruments Directive (MiFID)
c. Continental Brokerage Services (CBS)
d. Money Market Clearing House (MMCH)
e. none of the above.
When we speak of ex-ante returns, we are referring to historical information or data.
The future value of $100 received today and deposited at 6 percent for four years is
a. $126.
b. $ 79.
c. $124.
d. $116.
The first thrift institutions were:
a. The First and Second Banks of the United States
b. savings banks and Savings and Loans
c. credit unions
d. all the above
Ningbo shipping has projected sales in May, June, and July of $500, $600, and $700,
respectively. It makes 20 percent of sales for cash and collects the balance one month
following the sale. Ningbo Shipping’s total cash receipts in July are
a. $620
b. $520
c. $680
d. none of the above
An aggressive (that is, higher risk) portfolio would have a beta of:
a. 1
b. 0
c. less than 1 but greater than 0
d. more than 1
If a firm has net sales of $400,000, annual cost of goods sold of $315,000, an inventory
turnover of 4.5 times a year, and an accounts receivable turnover of five times a year,
the combined investment in inventories and accounts receivable would be:
a. $64,500
b. $92,000
c. $122,500
d. $150,000
In general, the less net working capital a company has
a. the greater the risk.
b. the lower the risk.
c. the less likely creditors will lend to the firm.
d. none of the above
On the income statement, net profit after tax is defined as:
a. operating profit minus operating expenses
b. operating profit minus cost of goods sold
c. operating profit minus interest
d. operating profit minus total expenses
e. none of the above
Paid-in-capital in excess of par represents:
a. the net proceeds from the original sale of stock
b. the proceeds in excess of par value from the original sale of stock
c. the current market value of the stock
d. the current book value of the stock
e. none of the above
Because depository institutions earn no interest on reserves:
a. profit maximizing behavior motivates them to retain excess reserves to the fullest
extent consistent with their liquidity requirements; and when reserve requirements are
low, this motivation is especially strong.
b. profit maximizing behavior motivates them to lend out excess reserves to the fullest
extent consistent with their liquidity requirements; and when interest rates are low, this
motivation is especially strong.
c. profit maximizing behavior motivates them to retain excess reserves to the fullest
extent consistent with their liquidity requirements; and when interest rates are low, this
motivation is especially strong.
d. profit maximizing behavior motivates them to retain excess reserves to the fullest
extent consistent with their liquidity requirements; and when interest rates are high, this
motivation is especially strong.
e. none of the above
Token coins are:
a. full-bodied coins
b. coins containing metal of less value than their stated value
c. coins containing gold or silver
d. representative full-bodied money
Factoring accounts receivable has all of the following characteristics except:
a. the borrower sells the receivable
b. accounts receivable balances are removed from the balance sheet
c. the customer payment is made to the factor
d. all of the above are characteristics of pledging
The price-to-book ratio measures the market’s value of the firm relative to balance sheet
equity.
Working capital is essentially a firm’s current assets and consists of cash, accounts
receivable, inventories, plant and equipment.
Insurance companies sell shares in their firms to individuals and invest the pooled
proceeds in corporate and government securities.
The degree of financial leverage may be measured by taking the firm’s earnings before
interest and taxes and dividing by earnings before taxes.
The ratio of debt to stock market equity has generally been lowest for the largest of U.S.
firms.
A weak-form efficient market is one in which prices reflect all public knowledge,
including past and current information.
The U.S. Treasury Department is primarily responsible for the amount of money that is
created in the U.S. economy.