Archives: Quiz

Which financial planning assumption does not have supporting detail? A.Sales growth is based on the inflation rate. B.Sales growth is based on the industry average sales growth rate. C.Net income is based on the average net profit margin for the […]

All of the following constituencies would be considered stakeholders of a business except: A.management and employees. B.suppliers and creditors. C.the local community in which the business operates. D.stockholders. E.All of the groups listed above are stakeholders. If the equity multiplier […]

Limited liability may not be an advantage of the corporate form for owner-operated small businesses because: A.a negligent worker can escape liability for his own acts. B.lenders usually demand personal guarantees from the owners of small businesses. C.stockholders participate in […]

You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected? (Round to nearest $) A.Project B because of an EAA of $12,060 B.Project […]

Calculate the amount to be received at the end of year 1 that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a […]

Du Pont analysis breaks a firm’s ROE into components such as profit margin, asset turnover and equity multiplier. As a firm increases the amount spent on the collection of overdue accounts, both the average collection period and the percentage of […]

The dividend controversy is whether paying or not paying dividends affects stock price. Evaluating several possible cash flow scenarios gives a feel for variability of a project’s NPV. Answer: TRUE Commercial failure (as opposed to economic failure) is an issue […]

The difference between the riskiness of debt and equity is relatively constant between companies, and tends to command an additional risk premium of 3% to 5%. A rational investor will make an investment only if he or she believes the […]

Under the fixed rate system, exchange rates were set by international treaty and administered by the International Monetary Fund. The firm’s cost of capital is a weighted average of the specific costs of debt and equity and preferred stock. Answer: […]

Accelerated depreciation follows the half-year convention. That is, assets receive a half-year of depreciation in the 1st year and the remaining half-year of depreciation in the T+1 year where T is the designated life of the asset. A firm’s financial […]

In addition to justifying how capital dollars are spent, capital budgeting provides a basis for choosing among alternative capital projects. The cash conversion cycle is the time it takes to convert a receivable into cash. Answer: FALSE A decrease in […]

The weights applied to the various components of a firm’s cost of capital are based on the current composition of a firm’s capital structure. A revolving credit agreement is a guaranteed line of credit. Answer: TRUE An opportunity cost must […]

An increase in the number of time periods reduces the present value of an annuity if all other variables are held constant. Bank credit is a minor source of short-term financing for firms. Answer: FALSE Investors are given the option […]

Cumulative voting makes it possible for minority shareholders to gain representation on the board of directors. Commercial paper is an example of marketable securities. Answer: TRUE If a firm has missed one or more dividends on cumulative preferred stock, it […]

While the present value of an amount is decreased by an increase in the frequency of compounding, the present value of an annuity is increased. Bond prices respond to changes in the market rate of interest by moving in a […]

If a firm has sales revenue (spread evenly through a 360-day year) of $1,170,000 and accounts receivable of $130,000, its average collection period, or days sales outstanding, is 40 days. When a foreign currency is expected to become more valuable […]

The liquidity preference theory says that the yield curve should be upward sloping because lenders generally prefer long-term loans. An increase in the frequency of compounding will increase the future value of an investment if all other factors are held […]

It is appropriate that the WACC reflect historic costs of capital as the best estimate of what capital will cost during the coming period. The DFL quantifies the effect of leverage, but it can also be thought of as a […]

A U.S. company that wants to buy products from a foreign firm must generally buy that country’s currency first. If a capital budgeting project is a business in a particular field it may make sense to use a beta common […]

A taxpayer€s average rate is the rate that will be paid on the next dollar of income. A decrease in financial leverage results in a larger tax liability because interest is tax deductible. Answer: TRUE A sinking fund represent a […]

If the direct quote shows the Canadian dollar at $.7376, prices stated in American dollars will be higher than the prices for the same goods stated in Canadian dollars. Marketable securities are also referred to as near cash or cash […]

The primary market is the market for original, first-time issues of securities. A portfolio is a collection of securities. Answer: TRUE An annuity is a series of equal payments separated by equal time intervals. Answer: TRUE The future value factor […]

Diversification achieved through a merger can reduce the variability of the earnings of the acquiring firm. Indentures and covenants on borrowing restrict the firm’s business operations, but do not limit its ability to pay dividends. Answer: FALSE A portfolio’s beta […]

A high inventory turnover ratio would be important to a company whose product has a high level of spoilage. Accruals represent spontaneous financing from things such as purchasing inventory on credit. Answer: FALSE The S-corporation was designed to address the […]

Most equity investors are interested in a role as owner. Small firm planning processes cover the same spectrum with respect to time horizon and detail as large firm processes. Answer: FALSE The optimal capital structure maximizes stock price. Answer: TRUE […]

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months. The existence of an abandonment option raises a project’s risk. Answer: FALSE The principal purpose of […]

If a firm can buy an item in one market, then sell it later for a profit in another market, the firm has engaged in arbitrage. Although percentage of sales methods (modified and unmodified) give results that are “in the […]

The drawback in the replacement chain method, arises when a large number of replacements are necessary to obtain equal time horizons for competing projects. The constant growth model assumes dividends will grow at a constant rate that exceeds the market […]

Unlike a vertical merger, a horizontal merger expands the market share of the acquiring firm. A sum of money promised you at a time in the future is worth only as much as you would have to put in a […]

A real option has a value to the business owner. There is no constant relationship between the spot and the forward exchange rate for a currency. Answer: TRUE Exchange rate risk can be eliminated with a bank contract for delivery […]

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis. Holding all other variables constant, a decrease in the cost ratio would cause the times interest earned ratio to […]

The yield differential between high- and low-quality bonds tends to be larger in recessionary periods. Restrictive covenants increase risk to the bondholder. Answer: FALSE Under dividend preference investors prefer immediate cash to uncertain future benefits. Answer: TRUE An increase in […]

Firms typically invest in real assets such as plant and equipment because of the services they provide. The range of possible outcomes for a traditional investment in stock is from -100% to +100%. Answer: FALSE According to MM, in the […]

The executive stock option system sets up a conflict of interest that may lead to dishonest financial reporting. The purpose of hedging in forward exchange markets is to limit losses resulting from unexpected future changes in spot exchange rates. Answer: […]

The MIRR assumes that cash inflows are reinvested at the internal rate of return. Business plans and the information they contain are generally very private, and are not shared with investors or securities analysts. Answer: FALSE By factoring its receivables, […]

When accounts receivable are pledged as collateral rather than factored, the lender assumes the default risk on the receivables. Personal computers have changed the nature of financial planning. Armed with a PC and the right software, just about anyone can […]

The annual percentage rate considers the effects of periodic compounding. The Securities and Exchange Commission was established to give the investor the support of a state regulatory agency that enforces both reporting and disclosure requirements of companies whose stocks are […]

Issuing companies prefer having the option of retiring their debt whenever they wish. Therefore they include call features in their bonds. A company’s cost of capital can be thought of as a required return for all capital budgeting projects that […]

The world of finance can be divided into three broad areas, the banking system, financial management and investments/financial markets. A privately held, or closely held, company is one in which the stock is held by a few investors and cannot […]

Brokers and frequent investors are more likely to work with earnings per share and price earnings ratios to predict short-term stock price movements than with growth Models. Capital leases are often called financing leases, because they are a method of […]

Virtually all accruals are best guess estimates of obligations arising from merchandise purchases for which vendor invoices have not yet been received. The three broad issues involved in receivables policy are (1) which customers should receive credit and how much, […]

Conglomerate mergers don’t generally have significant anticompetitive effects. The optimal capital structures can be precisely calculated with the latest technology. Answer: FALSE Unlike car loans, mortgage loans on real estate generally require larger payments of principal in the early years […]

The treasurer is in charge of accounting while the controller supervises most other financial functions. EBIT-EPS analysis shows the advantage/disadvantage of different levels of leverage as a function of profitability measured in terms of EBIT. Answer: TRUE To evaluate a […]

DFL equals EBIT / (EBIT – I). A stock dividend differs from a stock split both in terms of its accounting treatment and its impact on stockholder wealth. Answer: FALSE A revolving credit agreement and a line of credit are […]

In a merger, all but one of the combining firms ceases to exist as a legal entity. International transactions handled on a cash basis are subject to a high degree of exchange rate risk. Answer: FALSE The following is an […]

Mutual funds, pension funds, banks, investment banking firms, and insurance companies are institutional investors. A stock’s total return is realized from two principal sources, its dividend yield and any gain from the increase in its selling price over the original […]

Stocks with equal stand-alone risk can have opposite risk impacts on a portfolio because of the timing of the variations in their returns. The company’s cost of capital is the average rate it pays its investors for the use of […]

Float, or money tied up in the process of check clearing, consists of transit float arising from the administrative functions of the payee that delay the actual deposit of the check and processing float created in the Federal Reserve’s check […]

The proprietorship form of organization gives the business owner the protection of limited liability. Basic overheads are usually considered fixed and left out of project analysis. Answer: TRUE Replacement projects are generally expected to save costs without generating new revenue, […]

The relevance of a sunk cost to the evaluation of a capital budgeting project depends on how recently in the past the cost was incurred. While a firm’s bad debts should rise as it relaxes its credit standards, its ACP […]