Archives: Quiz

1) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced. 2) One of the major reasons for attaching a stock purchase warrant is that investors do not require the issuing firm to […]

1) The conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security. 2) Multinational companies are firms that have international assets but operations in domestic markets only and draw part of their total […]

1) The nominal and effective rates are equivalent for annual compounding. 2) Because of their access to the international bond and equity markets, MNCs may have lower long-term financing costs, thus resulting in differences between the capital structures of these […]

1) Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent. 2) The operating cycle is the length of time a firm’s cash is tied up between […]

1) The cost of preferred stock is the ratio of the preferred stock dividend to a firm’s net proceeds from the sale of the preferred stock. 2) A takeover target’s management will not support a proposed takeover due to a […]

1) Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment. 2) When a bond’s value differs from par, its yield to maturity will differ from its coupon interest rate. Answer: […]

1) Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders. 2) Standard deviation measures the dispersion […]

1) Because retained earnings are a form of internal financing, the dividend decision can significantly affect a firm’s external financing requirements. 2) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances (i.e., an […]

1) The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander. 2) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific […]

1) Average age of inventory is viewed as the average length of time inventory is held by a firm or as the average number of days’ sales in inventory. 2) Unsystematic risk can be eliminated through diversification. Answer: TRUE 3) […]

1) In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or […]

1) The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price. 2) For a risk-averse manager, required return would decrease for an increase in risk. Answer: FALSE 3) A bond issued by […]

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

1) Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all its operational creditors for a certain number of days during the year. […]

1) Profitability ratios capture both risk and return. 2) Mercosur is a major South American trading bloc that includes countries that account for more than half of the total of Latin America’s GDP. Answer: TRUE 3) Average age of inventory […]

1) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion of each payment grows over […]

1) Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased. 2) Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur […]

1) The two basic types of risk associated with international cash flows are inflation and foreign exchange risks and political risks. 2) A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms […]

1) Accounting figures and cash flows are not necessarily the same due to the presence of certain non-cash expenditures on a firm’s income statement. 2) If the ending cash is greater than the minimum cash balance, excess cash exists. Answer: […]

1) Financial breakeven point represents the level of earnings after interest and taxes necessary for a firm to cover its fixed operating and financial changesthat is, the point at which dividends per share is equal to zero. 2) In exchange […]

1) In the ABC system of inventory management, the two-bin method or system could be utilized to control C items. 2) For a Eurodollar bond, the interest rate will reflect several different rates, most notably the U.S. long-term rate, the […]

1) The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan. 2) Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and preferences of […]

1) An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; an action that reduces the level of expected cash flows without a corresponding […]

1) The liquidity preference theory suggests that for any given issuer, long-term interest rates tend to be higher than short-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer-term securities; this causes the […]

1) Regular dividend policy is a dividend policy based on the payment of a certain fixed percentage of earnings to owners in each dividend period. 2) Because dividends are taxed at the same rate as capital gains under the 2003 […]

1) A firm may face increase in the weighted average cost of capital either when retained earnings have been exhausted or due to increases in debt, preferred stock, and common equity costs as additional new funds are required. 2) In […]

1) Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation. 2) The cost of capital is the rate of return a firm must earn on investments in […]

1) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project’s inflows to the present value of its outflows is called internal rate of return. 2) A […]

1) A treasurer is responsible for the firm’s accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. 2) An increase in cost (fixed cost or variable cost) tends to increase the operating breakeven point, whereas an […]

1) The pecking order explanation of capital structure states that a hierarchy of financing exists for firms, in which new external debt financing is employed first, followed by retained earnings and finally by external equity financing. 2) Both theory and […]

1) Agents of corporate owners are themselves owners of the firm and have been elected by all the corporate owners to represent them in decision-making and management of the firm. 2) Capital markets are for investors who want a safe […]

1) Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall. 2) The total leverage […]

1) Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected. 2) Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they […]

1) The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock. 2) The reorder point is the point at which a firm receives orders. Answer: FALSE 3) […]

1) The cash conversion cycle of a firm is the length of time from the beginning of the production process to the collection of cash from the sale of finished products. 2) A bond will sell at a premium when […]

1) The net effect of changes in a cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting a firm’s investment in accounts receivable. 2) In ratio analysis, the financial statements being […]

1) Research and development is considered to be a motive for making capital expenditures. 2) Disbursement float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and […]

1) A corporate controller is an officer responsible for a firm’s financial activities such as financial planning and fund raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange. 2) Futures and options are opportunities […]

1) On a purely theoretical basis, IRR is the better approach to capital budgeting than NPV because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm’s cost of capital. 2) An aging […]

1) A primary market is a financial market in which pre-owned securities are traded. 2) GAAP is the accounting profession’s rule-setting body. Answer: FALSE 3) Consolidation involves the combination of two or more firms, and the resulting firm maintains the […]

1) In general, a firm’s theoretical optimal capital structure is that which balances the tax benefits of debt financing against the increase probability of bankruptcy that result from its use. 2) Primary motives for merging include growth or diversification, synergy, […]

1) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation. 2) While an earnings requirement limiting the amount of dividends paid is sometimes imposed, a firm is not prohibited from paying more […]

1) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of liquid assets. 2) A stock split is usually taxable […]

1) The book value per share of common stock is the amount per share of common stock that would be received if all of a firm’s assets were sold for their accounting value and the proceeds remaining were divided among […]

1) The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs. 2) National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct […]

1) The base level of sales must be held constant to compare the total leverage associated with different levels of fixed costs. 2) Foreign bond is an international bond that is sold primarily in countries other than the country of […]

1) Efficient-market hypothesis is the theory describing the behavior of an assumed “perfect” market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly […]

1) Self-liquidating loans are intended merely to carry a firm through seasonal peaks in financing needs that are due primarily to buildups of accounts receivable and inventory. 2) The representative theory of dividends, as espoused by Modigliani and Miller, suggests […]

1) Securitization made it harder for banks to lend money because they could not pass the risk on to other investors. 2) Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of mortgages. Answer: […]

1) The acceptance of a particular project usually has no impact on a firm’s overall risk. 2) A financial manager’s primary activities include making investment and financing decisions. Answer: TRUE 3) Factoring accounts receivable is relatively an inexpensive source of […]