Archives: Quiz

1) Holding all other factors constant, a firm that is subject to a greater level of business risk should employ more financial leverage than an otherwise equivalent firm that is subject to a lesser level of business risk. 2) Spontaneous […]

1) The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm’s true financial condition. 2) An internal sales forecast is based on the relationships that can be observed between a firm’s sales and […]

1) The lower the fixed-payment coverage ratio, the lower is the firm’s financial leverage. 2) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted […]

1) Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price. 2) An increase in a firm’s risk will always result in a higher […]

1) A functional currency is the currency of the parent company’s country. 2) A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds. […]

1) The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate inside the United States. 2) A compensating balance is a balance in checking account that is equal to a certain percentage […]

1) The claims of the equityholders on a firm’s assets have priority over the claims of creditors because the equityholders are the owners of the firm. 2) The interest rate on a line of credit is normally stated as a […]

1) One of the key inputs to the final credit decision is a credit analyst’s subjective judgment of a firm’s creditworthiness since it can provide a better feel of a firm’s operation than any quantitative figures. 2) The market segmentation […]

1) Most federal agency issues have short maturities and offer slightly higher yields than U.S. Treasury issues having similar maturities. 2) Spontaneous unsecured financing has a specific interest cost associated with it that can be at a fixed or floating […]

1) Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing. 2) Real options are opportunities that are embedded in capital budgeting projects that enable managers to alter […]

1) In case of international capital budgeting, a U.S. company can minimize its political risk by creating a joint venture with a competent and well-connected local partner. 2) A call feature in a bond allows bondholders to change each bond […]

1) Cross-sectional analysis involves the comparison of different firms’ financial ratios at the same point in time. 2) A cash budget gives the financial manager a clear view of the timing of a firm’s expected profitability over a given period. […]

1) A market risk-return function is a graphical presentation of the discount rates associated with each level of project risk. 2) It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation. Answer: […]

1) Generally, the greater a firm’s times interest earned ratio, the less able it is to meet payments as they come due. 2) In computing the weighted average cost of capital, from a strictly theoretical point of view, the preferred […]

1) When computing an interest or growth rate, the rate will increase with an increase in future value, holding present value and the number of periods constant. 2) One aspect of risk associated with the aggressive strategy’s maximum use of […]

1) Weights that use accounting values to measure the proportion of each type of capital in a firm’s financial structure are called market value weights. 2) Capital budgeting is the process of evaluating and selecting short-term investments that are consistent […]

1) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance. 2) If a market is truly efficient, investors should not waste their time trying […]

1) Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the […]

1) Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm’s relatively high debt levels. 2) Under conservative funding strategy, short-term financing is used only […]

1) Operating-change restrictions gives the bank a right to revoke the line of credit if any major changes occur in a firm’s financial condition or operations. 2) The various causes that increase the chances of business failures are current ratio […]

1) The real utility of the coefficient of variation is in comparing assets that have equal expected returns. 2) Treasury notes generate lower returns than U.S. Treasury bills. Answer: FALSE 3) Preferred stockholders are often referred to as residual claimants. […]

1) The U.S. approaches used in hostile takeovers is an effective method of changing corporate control and used in many areas of the world including China and Japan. 2) Preferred stockholders must receive their stated dividends prior to the distribution […]

1) A project’s net present value profile is a graph that plots a project’s NPV for various discount rates. 2) A bond with short maturity has less “interest rate risk” than a bond with long maturity when all other featurescoupon […]

1) The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity. 2) A prospectus is a portion […]

1) Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration. 2) For calculating payback period for an annuity, all cash flows must be adjusted for […]

1) In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid-in capital in excess of […]

1) The Jobs and Growth Tax Relief Reconciliation Act of 2009 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of […]

1) Net fixed assets represent the difference between gross fixed assets and accumulated depreciation of fixed assets. 2) Given a financial manager’s preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one. Answer: […]

1) The operating breakeven point can be found by solving for the sales level that just covers total fixed and variable costs. 2) From a bond issuer’s perspective, the IRR on a bond’s cash flows is its cost to maturity; […]

1) The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm’s profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to […]

1) A stock split commonly increases the stock’s per share par value. 2) Business risk is the risk to a firm of being unable to cover operating costs. Answer: TRUE 3) The dominant organized options exchange in which options are […]

1) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders. 2) A firm can raise capital by issuing securities such as convertibles and warrants but a firm […]

1) Unlike convertible securities, warrants cannot be called, but their limited life stimulates holders to exercise them when the exercise price is below the market price of the firm’s stock. 2) In general, the greater a firm’s operating leverage, the […]

1) A capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed asset investments. 2) Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system uses no, or very little, safety stocks. Answer: TRUE 3) Nonmanufacturing […]

1) The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This results in a real rate of interest of 4% on the bond. 2) In case of unequal-lived, mutually exclusive projects, the use […]

1) The cost of capital is a static concept and it is not affected by economic and firm-specific factors such as business risk and financial risk. 2) The accountant of a firm evaluates financial statements, develops additional data, and makes […]

1) The presence of contingent securities such as warrants and stock options affects the reporting of a firm’s earnings per share. 2) The cost of marginal bad debts is found by multiplying a firm’s opportunity cost by the difference between […]

1) The greater the leverage, the smaller the risk involved. 2) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of […]

1) One basic weakness of the simplified pro forma approaches lies in the assumption that the firm’s past financial condition is an accurate indicator of its future. 2) When considering a firm’s financial decision alternative, financial managers should accept only […]

1) A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio’s overall risk below the risk of the least risky asset. 2) An inverted yield curve is a downward-sloping yield curve that indicates that short-term […]

1) Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation. 2) An investment’s total return is the sum of any cash distributions minus the change in the investment’s value, divided […]

1) The marginal tax rate paid on a firm’s ordinary income can be calculated by dividing its taxes by its net income. 2) The book value of an asset is equal to its installed cost of asset minus the accumulated […]

1) A major decision confronting a business firm when purchasing marketable securities involves a trade-off between the opportunity to earn a return on idle funds during the holding period and the brokerage costs associated with the purchase and sale of […]

1) Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended. 2) Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and […]

1) Higher the value of the times interest earned ratio, higher is the proportion of the firm’s interest income compared to its contractual interest payments. 2) A call option is an option to sell a specified number of shares of […]

1) The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio’s overall risk below the risk of the least risky asset. 2) Mutually exclusive projects are those whose cash flows compete with […]

1) A shareholder receiving a stock dividend typically receives nothing of value. 2) Pledges of accounts receivable are never made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit […]

1) Lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default. 2) RADRs are popular because they are consistent with the general disposition of financial […]

1) In CAPM, the total risk is defined as the sum of nondiversifiable and diversifiable risk. 2) Federal agency issues are low-risk securities issued by government agencies but not guaranteed by the U.S. Treasury. Answer: TRUE 3) Target weights are […]

1) The average investment of a firm in accounts receivable is equal to the firm’s total variable cost of annual sales divided by its average collection period. 2) The amount of preferred stock dividends that must be paid each year […]