Archives: Quiz

1) In general, interest on bonds, like dividends on preferred stock, may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers. 2) The benefits of diversification occur as long as […]

1) Available yields on financial securities depend on their financial risk, interest rate risk, liquidity, and taxability. 2) An investor’s required rate of return for a common stock can be estimated by summing the stock’s dividend yield and annual growth […]

1) Discretionary financing needed is equal to projected total assets minus projected total liabilities. 2) A firm’s dividend policy includes two basic components: the dividend payout ratio and the profit retention ratio. Answer: FALSE 3) Financial ratios are used by […]

1) 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. 2) To evaluate or compare investment proposals, we must adjust the […]

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 project’s net present value profile shows how sensitive the project is to the choice […]

1) Operating leverage is measured as the responsiveness of the firm’s earnings before interest and taxes relative to fluctuations in sales. 2) It is common practice among the largest corporations to sell their securities directly to investors. Answer: FALSE 3) […]

1) If the sales growth rate is greater than zero, then the discretionary financing needed will also be greater than zero. 2) The risk-return tradeoff leads to two objectives: (1) keep enough cash on hand to make necessary payments, and […]

1) Flotation costs are typically greater in the secondary market than in the primary market. 2) Because fixed costs do not vary with a firm’s revenues, firm’s with high levels of fixed cost enjoy lower levels of operating risk because […]

1) The hedging principle implies that permanent asset investments not financed by spontaneous sources should be financed with permanent sources, and temporary investments not financed by spontaneous sources should be financed with temporary sources. 2) Most major countries in the […]

1) The percent of sales method assumes that all assets and all liabilities increase proportionally with sales, but retained earnings does not. 2) The difference between the asked price and the bid price is known as the spread. Answer: TRUE […]

1) In a limited partnership at least one general partner must exist; that general partner has unlimited liability. 2) The minimum denomination of U.S. Treasury bills is $100,000. Answer: FALSE 3) If the demand for a new bond issue increases, […]

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) The chief […]

1) If a company offers a cash discount for early payment, this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers. 2) If a firm does not have enough […]

1) The independence hypothesis suggests that the cost of equity decreases as financial leverage increases. 2) Unlike market value, the intrinsic value of an asset is estimated independently of risk. Answer: FALSE 3) The cash conversion cycle is equal to […]

1) If you only earned interest on your initial investment, and not on previously earned interest, it would be called simple interest. 2) The firm’s cost of capital may also be referred to as the firm’s opportunity cost of capital. […]

1) Break-even analysis is a short-term concept because, in the long run, all costs are variable. 2) Accounts payable and accrued expenses are known as discretionary sources of financing. Answer: FALSE 3) Commercial paper is much more liquid than money-market […]

1) A direct quote of $1.6255 dollars to buy one U.K. pound corresponds to an indirect quote of .6152 pounds per one dollar. 2) The EOQ model assumes constant demand and constant unit price. Answer: TRUE 3) The process of […]

1) Beginning in 2007 the United States experienced its most severe financial crisis since the Great Depression of the 1930s. 2) Lockbox arrangements may reduce mail float, processing float, and transit float. Answer: TRUE 3) Expected dividends and share repurchases […]

1) Achieving a lower inventory balance through working capital management can result in savings from both carrying costs and losses associated with obsolete inventory. 2) Accounting profits, adjusted for taxes and differences in accounting methods, provide the best measure of […]

1) Due to strict stock market controls, the most a stock’s value can drop in one trading day is 5%. 2) The cost of debt capital is obtained by substituting the net proceeds per bond for the bond price in […]

1) In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred. 2) The balance sheet reflects the accounting equation: Assets = Liabilities + Owners’ Equity. Answer: TRUE 3) NPV is the most theoretically correct capital […]

1) The financial manager typically cannot control the level of credit sales, and hence the company’s investment in accounts receivable, as the level of credit sales is determined in large part by the nature of the business enterprise. 2) If […]

1) A stock repurchase plan can be viewed as both a financing decision and an investment decision. 2) As the volume of production increases the variable cost-per unit of the product decreases. Answer: FALSE 3) Advantages of the payback period […]

1) To be included in a capital budgeting analysis, all incremental free cash flows must be expensed on the company’s books, otherwise generally accepted accounting principles will be violated. 2) When the corporation sells securities directly to the investment public […]

1) An efficient market is one where the prices of the assets traded in that market fully reflect all available information at any instant in time. 2) A company with a AAA bond rating will command a higher interest rate […]

1) A bond’s yield to maturity varies from investor to investor because each investor has his or her own required return. 2) The risk-return tradeoff that investors face on a day-to-day basis is based on realized rates of return because […]

1) A corporation’s cost of common equity may be estimated using either a dividend valuation model or the capital asset pricing model. 2) The mixture of financing sources used by a firm will vary from year to year, so many […]

1) Exchange rate risk is the risk that exchange rates will be lower in the future than they are today. 2) Other things equal, management should retain profits only if the company’s investments within the firm are at least as […]

1) The more fixed-charge securities (such as bonds and preferred stock) the firm employs in its financial structure, the greater its financial leverage. 2) The presence of debt and/or preferred stock in a firm’s financial structure means the firm is […]

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) Another name for an asset’s expected rate of return is holding-period return. Answer: FALSE 3) […]

1) The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio. 2) Exchange-rate risk arises from the fact that the spot exchange rate on a future date is unknown today. Answer: TRUE 3) […]

1) Capital budgeting projects that expand sales are more likely to involve increases in working capital than are projects that involve the replacement of existing assets. 2) Capital structure is the mix of the long-term sources of funds used by […]

1) The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns. 2) The YLD% shown in Wall Street Journal stock quotes stands for the stock’s dividend yield and is calculated by dividing the […]

1) An investor who pays no tax would be more likely to accept the view that high dividends increase stock values rather than the view that low dividends increase stock values. 2) Managers should not be concerned with business ethics […]

1) Accounts receivable variables under control of the financial manager include the terms of credit sales and the quality of credit customers. 2) Discretionary sources of financing are those sources that vary automatically with a firm’s level of sales. Answer: […]

1) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm’s financial performance across time and with competitors. 2) The risk-adjusted discount rate method implicitly assumes that […]

1) Historically, price appreciation, or capital gains yield, has accounted for a greater portion of returns on common stocks than dividend payments. 2) The goal of profit maximization ignores the risk of financial decisions Answer: TRUE 3) Both the profitability […]

1) The investment banker prefers to avoid a negotiated purchase because it tends to be the least profitable arrangement for the investment banker. 2) A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 […]

1) A project’s annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending. 2) The primary source of spontaneous financing is accrued taxes. Answer: FALSE […]

1) The forward exchange rate quoted today should be equal to the spot rate in the future. 2) The procedure by which significant changes may be made to a partnership, such as admission of a new partner or termination of […]

1) A stock with a beta of 1.4 has 40% more variability in returns than the average stock. 2) Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its […]

1) The estimated value of reducing float by 1-day is one day’s interest on the freed up sales. 2) Net working capital is equal to gross working capital minus depreciation. Answer: FALSE 3) The less risky the bond (or the […]

1) Two advantages of financing with current liabilities are flexibility and lower interest cost. 2) The opportunity cost of any choice you make is the highest-valued alternative that you had to give up when you made the choice. Answer: FALSE[/cpmembership] […]

1) The statement of cash flow explains the changes that took place in the firm’s cash balance over the period of interest. 2) One method used to monitor the collections of accounts receivable is aging. Answer: TRUE 3) Although under […]

1) The primary sources of collateral for secured loans are accounts receivable and inventory. 2) Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns. Answer: TRUE 3) For companies in […]

1) In order to maximize shareholder value, a corporation must earn a higher rate of return on a dollar that is retained in the corporation than the shareholders can earn by investing the dollar elsewhere. 2) Preferred stock and common […]

1) According to the moderate view of capital structure theory, the cost of common equity is constant regardless of the debt financing level. 2) If a project’s IRR is equal to its required return, then the project’s NPV is equal […]

1) A stock repurchase plan that involves issuing long-term debt to fund the purchase of the company’s stock may be used as a way to alter a corporation’s capital structure. 2) The risk/return tradeoff implies that the return on a […]

1) A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes. 2) Discretionary financing needed is equal to the […]

1) One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs. 2) Preferred stock is traded in the money market, while common stock is traded in the capital market. Answer: FALSE 3) […]