Archives: Quiz

1) Specialists are assigned dealers who have the responsibility of making a market in an assigned security. 2) Shareholder wealth may be defined as the price of a companys stock times the number of shares outstanding. Answer: T 3) Capital […]

1) There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace. 2) The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the […]

1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank. 2) The identification stage in capital budgeting involves finding […]

1) Fixed capital would be defined as the firms fixed assets, which include plant, equipment and property. 2) The minimum required rate of return is a weighted average of the firms cost of various sources of capital. Answer: T 3) […]

1) The marginal tax rate is the rate paid on the last dollar of income. 2) An annual report contains descriptive information on operating and financial performance during the past year, a discussion of current and future business opportunities, and […]

1) The disbursement float is the delay in transferring the means of payment from the payor (customer) to the payee (the provider of goods or services). 2) Over the counter markets are organized exchanges for trading securities such as the […]

1) The profitability index measures the present value of benefits received for each dollar invested. 2) A debt holder may force the firm to abide by the terms of the debt contract even if the result is reorganization or dissolution […]

1) Foreign exchange markets are electronic communication systems connecting the major financial centers of the world. 2) Leverage does not affect EPS for most firms. Answer: F 3) A trust receipt is an instrument through which a bank retains title […]

1) Service industries tend to have larger proportions of fixed assets to current assets. 2) a sunk cost is a project-related expense that is dependent upon whether or not the project is undertaken. Answer: F 3) The President of the […]

1) Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds. 2) Incremental cash flows represents a projects cash flows summed together with the firms other cash flows to get a total firm view of […]

1) The interest rate that is observed in the marketplace is called a real interest rate. 2) The Fed plays a significant role in tax policy. Answer: F 3) An order bill of lading is a document given by a […]

1) In general, short-term interest rates are more stable than long-term interest rates. 2) Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky. Answer: T 3) Transactions motives for […]

1) The interest received by individuals on bonds issued by corporations in the United States is not tax deductible to the investor. 2) ADRs, or American Depository Receipts, which are traded on U.S. exchanges, represent shares of common stock that […]

1) Capital budgeting is the process of identifying, evaluating, and implementing a firms investment opportunities. 2) Standard deviation is stated in the same units of measurement as those of the data from which they were generated. Answer: T 3) Internally […]

1) Subordinate debentures are bonds whose claims are subordinate or junior to the claims of those holding debenture bonds. 2) The current account balance shows the flow of income into and out of the United States during a specified time […]

1) If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation. 2) Savings surplus occurs when an economic unit has current income that […]

1) The two basic sources of loanable funds are current the expansion of deposits by depository institutions and the generation of reserves through net capital inflows. 2) Treasury bonds may be issued with any maturity but generally have an original […]

1) The net present value of an investment is the present value of a projects future cash inflows minus its initial cost. 2) The maturity risk premium is the added return expected by lenders because of the expectation of inflation. […]

1) The primary market is a market in which securities are traded among investors. 2) In actual practice, most corporate bonds pay interest four times a year. Answer: F 3) For any firms given growth strategy, its dividend decision directly […]

1) A travelers letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them […]

1) Cost-push inflation during economic expansions when demand for goods and services is greater than supply. 2) When accounts receivable are pledged: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the […]

1) The flotation costs of an initial public offering are comprised solely of direct costs and the spread. 2) Trade credit may be considered the least formal of all forms of financing. Answer: T 3) A shock may be defined […]

1) The aftermarket is the market where securities are subsequently bought and sold after they are initially issued. 2) An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn […]

1) As the number of periods increases, present value increases. 2) A firms business risk is measured by its variability in EBIT over time. Answer: T 3) The operating profit margin is calculated as the firms net income divided by […]

1) Discounting is an arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value. 2) Cross-sectional analysis is used to evaluate a firms performance over time. Answer: F 3) Both the […]

1) Tax receipts tend to increase during economic downturns. 2) Common stock possesses the lowest claim on the assets and cash flow of the firm. Answer: T 3) More efficient management of working capital assets will lessen the firms needs […]

1) Two basic tools that can be used to reduce the consequences of managers making self-serving decisions include offering managers stock options and offering managers restricted stock. 2) In general, a firms return on assets will be less than its […]

1) Financial assets include ownership of land, buildings, machinery, inventory, commodities, and precious metals. 2) In an efficient market, expected and unexpected news should cause stock prices to move up or down. Answer: F 3) Local governments depend heavily on […]

1) The par value of a common stock is an accounting and legal concept that bears no relationship to a firms stock price or book value. 2) Interest rate parity (IRP) states that the currency of a country with relatively […]

1) Increases in the cash conversion cycle will lower the firms short-term financing needs. 2) The ratio of long-term debt to GDP for non-financial U.S. corporations declined drastically during the late 1990s. Answer: F 3) Years of budget surpluses during […]

1) Agency costs are the tangible and intangible revenues generated by shareholders because of the actual or potential selfless actions of managers; and agency costs include explicit, out-of-pocket expenses. 2) Up until the start of the Vietnam War, the international […]

1) In general, large company stocks are less risky than small company stocks. 2) The branch of government primarily responsible for the formulation of fiscal policy is the President and his Council of Economic Advisors. Answer: T 3) By multiplying […]

1) Slow economic growth in investments in another country would be an example of political risk. 2) The stand-alone principle focuses on the projects own cash flows, uncontaminated by cash flows from the firms other activities. Answer: T 3) Short-term […]

1) The EPS/EBIT indifference level represents the level of Assets at which the firm would be indifferent between two different capital structures because they both result in the same level of EPS. 2) A documentary draft is a draft that […]

1) The operating profit margin is calculated as the firms earnings before interest and taxes divided by net sales. 2) Working capital includes a firms marketable securities, accounts receivable, inventories, and mortgage debt. Answer: F 3) Permanent current assets reflect […]

1) A weakness for a proprietorship is that owners liability for debts of the firm is unlimited. 2) EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another. Answer: T 3) The Fed […]

1) A firm with an inventory period of 100 days and an accounts receivable period of 50 days will have an operating cycle of 150 days. 2) The average collection period is calculated as the year-end accounts receivable divided by […]

1) A bond will sell at a discount if its required return or discount rate is greater than its coupon rate. 2) Because interest compounds, the annual percentage rate formula will overstate the true interest cost. Answer: F 3) Most […]

1) The independence hypothesis suggests that the total market value of the firm’s outstanding securities is unaffected by its capital structure. 2) Any increase in interest payments caused by a project should be counted in the incremental cash flows. Answer: […]

1) The profit and loss (income) statement is compiled on a cash basis. 2) A project’s contribution to firm risk is relevant for undiversified investors or when bankruptcy costs exist. Answer: TRUE 3) After a stock split of 2:1, each […]

1) A corporation that is short on cash will take a trade discount of 2/10 net 30 only if the corporation’s cost of funds is less than 2%. 2) Financing with new common stock is generally more costly than financing […]

1) The firm’s total investment in current assets should be financed with temporary sources of financing. 2) Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too […]

1) Capital budgeting decisions are based on free cash flow because free cash flow better reflects when money is received and available for reinvestment than account profits. 2) A direct quote of $1.9887 dollars to buy one U.K. pound corresponds […]

1) A firm’s cost of capital is the required rate of return on the firm’s average project. 2) Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in […]

1) If the before-tax cost of debt is 7% and the firm has a 40% marginal tax rate, the after-tax cost of debt is 2.8%. 2) Credit terms of 1/10 net 30 means that the buyer may take a 10% […]

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) A company that sells preferred stock and uses […]

1) Using the percent of sales method, projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009) times Projected Sales 2010. 2) The hedging principle is also called the principle of self-liquidating inventory. […]

1) In the case of insolvency, the claims of debt are honored prior to those of common stock and after those of preferred stock. 2) Once the weighted average cost of capital (WACC) is determined then all projects of average […]

1) A narrow spread indicates efficiency in the spot exchange market. 2) A return of 12% compounded annually is the same as a return of 1% per month. Answer: FALSE 3) Determination of safety stock involves a tradeoff between the […]

1) The main disadvantage of the NPV method is the need for detailed, long-term forecasts of free cash flows generated by prospective projects. 2) The ex-dividend date occurs prior to the declaration date. Answer: FALSE 3) Two approaches that allow […]