Archives: Quiz

1) Floating lien agreements are the least secure form of inventory collateral. 2) Once the weighted average cost of capital (WACC) is determined then all projects of average risk will be compared to the original WACC regardless of the size […]

1) A direct quote of $1.9887 dollars to buy one U.K. pound corresponds to an indirect quote of .9887 pounds per one dollar. 2) Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the […]

1) If the future value of annuity A is greater than the future value of annuity B, then the present value of annuity A must also be greater than the present value of annuity B. 2) Financial ratios cannot be […]

1) Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners. 2) Ratios are used to standardize financial information, thereby making it easier to interpret. Answer: TRUE 3) At an annual […]

1) Anticipatory buying occurs because of an anticipated decrease in interest rates. 2) When preparing pro forma financial statement, the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the […]

1) Three of the most common options that can add value to a capital budgeting project are the option to delay the project, the option to expand the project, and the option to abandon the project. 2) Operating return on […]

1) The profitability index is the ratio of the present value of the future free cash flows to the initial investment. 2) One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs. […]

1) The cost of debt used in the international investment decision is the lesser of the parent’s or the subsidiary’s cost of debt. 2) Saving surplus units include individuals and governments, but not corporations. Answer: FALSE 3) Bill saves $3,000 […]

1) In measuring cash flows we are interested only in the incremental or incremental after-tax cash flows that are attributed to the investment proposal being evaluated. 2) Cash flows associated with a project’s termination generally include the salvage value of […]

1) If the increase in net working capital is recovered entirely at the end of the project then it may be ignored. 2) The information effect suggests dividend policy matters because dividends act as a persuasive communications tool, signaling investors […]

1) Stock repurchases do not alter a company’s capital structure since all of the purchased shares are retired and no longer outstanding. 2) A method for estimating a project’s beta that attempts to identify publicly traded firms engage solely in […]

1) The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock. 2) A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors […]

1) Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds. 2) The internal rate of return is the discount rate that equates the present value […]

1) Advantages of the payback period include that it is easy to calculate, easy to understand, and that it is based on cash flows rather than on accounting profits. 2) An example of a Eurobond is a bond issued in […]

1) A project with a payback period of four years is acceptable as long as the company’s target payback period is greater than or equal to four years. 2) Interest payments on a loan obtained specifically to fund a new […]

1) Sales of consumer durable goods, such as appliances, are more sensitive to swings in the business cycle, and therefore companies in these industries face a higher level of operating risk. 2) Long-term bonds have greater interest rate risk than […]

1) The initial outlay includes the cost of purchasing the asset and getting it operational, including the purchase price, shipping and installation, and any training costs for employees who will be operating the equipment, and any increases in working capital […]

1) Exchange rate risk exists for a party to a contract if the contract is denominated in a foreign currency. 2) Because there are no fixed financing costs, a common stock plan line in an EBIT-EPS analysis chart will have […]

1) A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio’s total risk. 2) If a U.S. company enters into a purchase agreement with a European company and the contract is denominated in euros, then direct […]

1) A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity. 2) The best financial structure is determined by finding the debt and equity mix […]

1) A stock with a beta of 1 has systematic or market risk equal to the “typical” stock in the marketplace. 2) Available yields on financial securities depend on their financial risk, interest rate risk, liquidity, and taxability. Answer: TRUE […]

1) Investors will be indifferent between two investments if both investments have the same expected return. 2) Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs. Answer: TRUE 3) Dividends per […]

1) The residual dividend theory implies that internally generated funds (i.e., retained earnings) should be used to fund all new investment projects before the company uses any additional debt. 2) To ensure that a borrower is not using short-term bank […]

1) Fixed assets are assets whose balances will remain the same throughout the year. 2) Lower asset turnover ratios are generally indicative of more efficient asset management. Answer: FALSE 3) Other things equal, higher net profit margins mean higher discretionary […]

1) Cash markets are often referred to as spot markets. 2) While many factors contributed to the financial crisis of 2007 and beyond, it is safe to say that real estate loans were NOT much of a contributing factor. Answer: […]

1) The market price of a firm’s common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings) divided by the number of shares outstanding. 2) Business risk […]

1) Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price. 2) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of […]

1) The information effect hypothesis implies that increasing dividends provides a more credible signal of higher future earnings than does management’s assertion that future earnings will be higher. 2) With international investing, unlike domestic investing, exchange rate risk could cause […]

1) As the volume of production increases the variable cost-per unit of the product decreases. 2) A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity. […]

1) Two key components of a prudent capital structure are the debt maturity composition and the debt to equity composition. 2) Shareholder selection committees select potential board of director nominees ensuring that board members will monitor management sufficiently to protect […]

1) Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief. 2) The current yield for a bond is constant over time because the coupon rate is […]

1) It is important to evaluate a corporate manager’s financial decision by measuring the effect the decision should have on the corporation’s stock price if everything else were held constant. 2) Giving the company’s CEO stock options as part of […]

1) Working capital management involves managing a firm’s liquidity. 2) From the shareholders’ perspective, a stock repurchase has a potential tax advantage over the payment of a cash dividend. Answer: TRUE 3) If the interest rate is positive, then the […]

1) Negative historical returns are not possible during periods of high volatility (high standard deviations of returns) due to the risk-return tradeoff. 2) Accounting rules specify that assets on the balance sheet must be reported at current market value, because […]

1) Under majority voting a majority (>50%) shareholder will be able to elect the entire board of directors. 2) In general, interest rates are short-term debt are higher than interest rates on long-term debt because the borrower has less time […]

1) The firm’s cost of capital may also be referred to as the firm’s opportunity cost of capital. 2) Shareholders, as owners of the corporation, face unlimited liability for the corporation’s debts, while bondholders, as creditors, may only lose the […]

1) Borrowing more money will always increase a company’s return on equity because the company is using financial leverage, but it also adds to the riskiness of the company. 2) Credit terms of 1/10 net 30 means that the buyer […]

1) The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding. 2) Under current accounting rules, the plant and equipment account shows the historical cost […]

1) Commercial paper is much more liquid than money-market mutual funds because commercial paper is available to only the most creditworthy corporations. 2) The yield to maturity is the discount rate that equates the present value of the interest and […]

1) Corporations have two costs of common equity, one for retained earnings and one if the company issues new common stock. 2) A stock dividend differs from a stock split because in a stock split, the par value of the […]

1) Under terms of a field warehouse financing agreement, the collateral inventories are physically separated from the borrower’s other inventories but remain under the borrower’s control. 2) If a company’s cash balance increases during the year, and the company also […]

1) For a given constant required rate of return, the greatest portion of a preferred stockholder’s return comes from increases in the price of preferred stock. 2) Three basic factors that determine which sources of short-term financing a firm uses […]

1) Additional Paid in Capital on the balance sheet equals the amount paid by investors for the company’s common stock that exceeds the market price of the stock at the time of purchase. 2) A typical decision rule used in […]

1) Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company’s sales. 2) Because only the largest and most creditworthy companies are able to use commercial paper, the interest […]

1) Notes payable and bonds payable are spontaneous liabilities. 2) A 100% stock dividend and a 2-for-1 stock split will result in the same number of shares of stock being held by investors after the transaction is completed. Answer: TRUE […]

1) Owners equity increases each period by the amount of the corporation’s positive net cash flow. 2) Only a firm’s financial decisions affect its stock prices. Answer: FALSE 3) The price of a computer today is $400 and inflation is […]

1) The use of risk-adjusted discount rates is based on the concept that investors require a higher rate of return for more risky projects. 2) A direct quote is always denominated in U.S. dollars, since the dollar is the medium […]

1) Investment banking firms are prohibited from selling securities due to conflicts of interest. 2) Inventories are considered fixed assets because inventory levels remain fairly constant throughout the year. Answer: FALSE 3) Profits-to-Sales relationships are defined as profit margins. Answer: […]

1) A timeline identifies the timing and amount of a stream of cash flows, along with the interest rate it earns. 2) The current ratio and the acid test ratio both measure financial leverage. Answer: FALSE 3) One of the […]

1) The percent of sales method provides a general estimate, but the more detailed cash budget will ultimately be used to estimate financing needs. 2) Covered interest arbitrage can be taken advantage of when premiums in forward rates are not […]