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1) The weighted average cost of capital represents the minimum required rate of return
on a capital-budgeting project and is found by multiplying the cost of each capital
structure component by its appropriate weight and summing the terms.
2) It is possible that the results of financial statement analysis could reflect the
non-financial operations of a firm.
3) If there were no secondary markets for trading between investors, there would be no
primary market for the initial sale of securities.
4) Many callable bonds possess a call deferment period which is a specified period of
time after the issue during which the bonds cannot be called.
5) Interest rates will move from one equilibrium level to another if an anticipated
change occurs that causes the demand for loanable funds to change.
6) The required return, the cost of capital, and the discount rate are actually three
distinctively different concepts.
7) The call price of a callable bond is typically equal to par value plus two years
interest.
8) The President of the United States has no influence over the Federal Reserve System
nor exerts any pressure on the Fed.
9) Rights offerings among public corporations became infrequent in the United States
during the 1980s and 1990s.
10) Economic Risk is the risk associated with the possibility that a national government
might confiscate or expropriate assets held by foreigners.
11) The higher the risk of a project, the higher its risk-adjusted discount rate and thus
the lower the net present value for a given stream of cash inflows.
12) A firms Price/Earnings ratio is always greater than its Price/Book ratio.
13) To maximize shareholder wealth, a financial manager needs to find capital
budgeting projects that have positive net present values.
14) Bond covenants are the best way for bondholders to protect themselves against
dubious management actions.
15) The federal debt is the same thing as the budget deficit.
16) When the net present value for a project is negative, the internal rater of return is
_________ the cost of capital.
a.greater than
b.greater than or equal to
c.less than
d.equal to
17) Which type of bond is currently prohibited from being issued in the United States?
a.bearer bonds
b.unregulated debentures
c.tax avoidance bonds
d.income bonds
18) The basic function served by requiring adequate bank reserves in the monetary
system is to:
a.assure bank liquidity
b.influence the relative profitability of member banks
c.maintain adequate capital for investors
d.impose a burden of risk on bank stockholders
e. none of the above
19) Which of the following are not typical of an accounts receivable loan arrangement?
a.basic interest charge
b.compensating balance
c.fee to cover extra work need for such a loan
d.all the above are typical of accounts receivable loans
20) Which of the following would not normally be discussed when describing a firms
short-term operating cycle?
a.manufacturing process
b.selling effort
c.acquiring financing
d.collection period
21) An investment will mature in 20 years. Its maturity value is $1,000. If the discount
rate is 7%, what is the present value of the investment?
a.$178
b.$258
c.$276
d.$362
22) For a given accounting period, which of the following is likely to represent
primarily variable costs?
a.cost of goods sold
b.general and administrative expenses
c.depreciation expense
d.interest expense
23) Which of the following is not an influence affecting a firms capital structure
choices?
a.corporate control
b.maturity matching
c.timing
d.all the above
24) Which of the following statements is most correct?
a.The financial crisis and recession of 20072009 had little effect on the ability of
borrower firms to obtain short-term financing and for firms with surplus funds to invest
in short-term instruments
b.The financial crisis and recession of 20072009 had no effect on the ability of
borrower firms to obtain short-term financing and for firms with surplus funds to invest
in short-term instruments
c.The financial crisis and recession of 20072009 had strong effects on the ability of
borrower firms to obtain short-term financing but made it easy for firms with surplus
funds to invest in short-term instruments
d.The financial crisis and recession of 20072009 had little effect on the ability of
borrower firms to obtain short-term financing but made it easy for firms with surplus
funds to invest in short-term instruments
e. none of the above
25) _____________ costs are a function of quantity sold, not time.
a.fixed
b.semi-variable
c.operating
d.variable
e.none of the above
26) In general, a firm that secures a bank line of credit pays interest on:
a.the full line of credit
b.only the amount actually borrowed
c.on the unused portion of the line of credit
d.on the amount borrowed as well as on the unused portion of the line of credit
e.none of the above
27) In general, during the business cycle, when economic activity is peaking:
a.interest rates begin to creep higher
b.unemployment levels are low
c.inflation begins to edge higher
d.all of the above
e.not enough information to tell
28) Long-run inflation expectations in the capital markets can be estimated by:
a.subtracting a real return component from the rate on short-term Treasury bills
b.adding a real return component to interest rates on long-term corporate bonds
c.subtracting a real return component from the rate on long-term Treasury securities
d.adding a real return component to interest rates on short-term corporate securities
29) $1,000 invested today at 6% interest would be worth ________ one year from now
a.$1,600
b.$1,066
c.$1,160
d.$1,006
e.none of the above
30) Which of the following statements is most correct?
a.Perfectly negatively correlated series move exactly together and have a correlation
coefficient of -1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of +1.0
b.Perfectly negatively correlated series move exactly together and have a correlation
coefficient of +1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of -1.0
c.Perfectly positively correlated series move exactly opposite one another and have a
correlation coefficient of +1.0 while perfectly negatively correlated series move exactly
in opposite directions and have a correlation coefficient of -1.0
d. Perfectly positively correlated series move exactly together and have a correlation
coefficient of -1.0 while perfectly positively correlated series move exactly in opposite
directions and have a correlation coefficient of +1.0
e. none of the above
31) Which of the following statements is most correct?
a.The personal savings rate in the United States, which is personal savings as a
percentage of disposable personal income, remained unchanged at 2.4 percent from
2006 to 2009, due largely the economic stability during the period
b.The personal savings rate in the United States, which is personal savings as a
percentage of disposable personal income, decreased from 4.6 percent to 2.4 percent
from 2006 to 2009, due largely to the fact that individuals began to spend more because
of the economic realities created by the financial crisis of 2007-09
c.The personal savings rate in the United States, which is personal savings as a
percentage of disposable personal income, increased from 10.1 percent to 20.5 percent
from 2006 to 2009, due largely to the fact that individuals began to save more because
of the economic uncertainties created by the financial crisis of 2007-09
d.The personal savings rate in the United States, which is personal savings as a
percentage of disposable personal income, declined from 45 percent to 40 percent from
2006 to 2009, due largely to the fact that individuals began to spend more because of
the economic realities created by the financial crisis of 2007-09
e.none of the above
32) Foreign exporters are usually quite willing to accept U.S. dollars in payment for
goods and services because:
a.of the importance of the dollar in international trade
b.the value of the dollar does not fluctuate
c.they have little alternative
d.it is customary to receive payment denominated in the currency of the importers
country
33) What is the payback period for Sweetbay Supermarkets new project if its initial
after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows
of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in
year 4?
a.4.33 years
b.3.33 years
c.2.33 years
d.none of the above
34) When current savings of an economic unit exceed its direct investment in real
assets, this is referred to as:
a.savings surplus
b.savings deficit
c.savings neutral
d.savings inflation
e.none of the above
35) Holding all other factors constant, if a firm increases its current assets relative to
total assets,
a.it increases return and reduces risk
b.it increases return and increases risk
c.it reduces return and reduces risk
d.it reduces return and increases risk
e. none of above are correct
36) A primary focus of the Economic Stabilization Act of 2008, which became know as
the ___________________________, was to allow the U.S. Treasury purchase up to
$700 billion of troubled or toxic assets held by financial institutions.
a.Troubled Asset Relief Program (TARP)
b.Toxic Asset Recovery Program (TARP)
c.Troubled Area Relief Program (TARP)
d.Toxic Area Recovery Program (TARP)
e.none of the above
37) Ameritech has just issued a $1,000 par value bond that will mature in 10 years. This
bond pays interest of $45 every six months. If the annual yield to maturity of this bond
is 8%, what is the price of the Ameritech bond if the market is in equilibrium?
a.$991.50
b.$1,067.96
c.$1,112.82
d.none of the above
38) In recent years, the United States has been running large trade deficits with both
Japan and China.
39) For most of the remainder of the decade after the September 11th terrorist attacks:
a.the Fed then maintained a high liquidity, low interest rate environment
b.the Fed then maintained a low liquidity, low interest rate environment
c.the Fed then maintained a low liquidity, high interest rate environment
d.the Fed then maintained a high liquidity, high interest rate environment
e.none of the above
40) Bank reserves are not affected by:
a.currency in circulation
b.changes in reserve requirements
c.open market operation
d.changes in the level of deposits of foreign banks at the Federal Reserve banks
41) A (n) ________ portfolio maximizes return for a given level of risk, or minimizes
risk for a given level of return.
a.technical
b.profit maximizing
c.idiosyncratic
d. diverse
e. none of the above
42) ___________________ is an order to sell stock at the market price when the price
of the stock falls to a specified level.
a.A short sale
b.A stop-loss order
c.A limit order
d.Buying on margin
43) The commercial letter of credit is of special usefulness in international transactions
when the:
a.importers credit rating is either weak or not well known
b.exporters credit rating is weak, but the importers credit reputation is strong
c.bank financing the importers transaction has very little confidence in the customers
ability to meet payments
d.exporters bank has little confidence in its customers ability to meet its financial
obligations
44) The largest annual supply of external funds for business corporations comes from
issuance of which one of the following sources?
a.privately placed stocks
b.bonds
c.preferred stocks
d.common stocks
45) Economists have estimated that the inflation rate in the United States and other
countries has averaged in the ________________ range in recent years.
a.2 to 4 percent
b.3 to 5 percent
c.4 to 6 percent
d.5 to 7 percent
e. none of the above
46) Early developments in transportation were ultimately financed by:
a.private promoters
b.current government revenues
c.savings of individuals
d.foreign securities
47) The capital budgeting process consists of all of the following stages except:
a.follow-up
b.selection
c.implementation
d.Development
e.all of the above
48) In the case of independent projects:
a.the financial manager is responsible for choosing the average of these alternatives
since only one can be chosen; selecting one project requires the selection of the other
b.they are to be evaluated based on their expected effect on shareholder wealth; all such
projects that enhance shareholder wealth should be included in the firms capital budget
c.the financial manager is responsible for choosing the best of these alternatives since
only one can be chosen; selecting one project precludes the other from being
undertaken
d.they are to be evaluated based on their past effect on shareholder wealth; all such
projects that enhance shareholder wealth should be included in the firms capital budget
e.none of the above statements are correct
49) Interest earned only on an investments principal or original amount is referred to as:
a.simple interest
b.compound interest
c.discount interest
d.annuity interest
50) The effect of arbitrage activities in foreign exchange markets is to:
a.create disparity among the rates of various currencies
b.maximize exchange rate quotation differentials
c.hinder the otherwise smooth functioning of the exchange markets
d.create wide swings in quotations from period to period
e.none of the above
