Archives: Quiz

1) What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A.10.00% B.10.47% C.10.52% D.11.05% 2) Which of the following cash outflows does not reduce a firm’s net income? A.Income taxes […]

1) What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if the firm’s tax rate is 35%? A.7.8% B.8.5% C.12.0% D.16.2% 2) Which of the following would not be included among the […]

1) The use of a profitability index will always provide results consistent with selecting the project with the: A.highest NPV B.highest IRR C.largest dollar invested per rate of return D.largest return per dollar invested 2) Which of the following terms […]

1) The primary distinction between securities sold in the primary and secondary markets is the: A.riskiness of the securities B.price of the securities C.previous issuance of the securities D.profitability of the issuing corporation 2) When the yield curve is upward-sloping, […]

1) The main purpose in contracting to purchase foreign currency in the forward market is to: A.earn a premium (interest) on the exchange B.lock into a price now C.take advantage of future price reductions D.avoid the more expensive spot rates […]

1) Which of the following is least likely to contribute to the positive-NPV investments found in product markets? A.Patented-production processes B.Positive-NPV financing strategies C.Brand-name product recognition D.Lack of competition 2) Financial plans draw out the connections between: A.the firm’s plans […]

1) A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends. By how much will shareholders’ equity increase on the balance sheet? A.$17 million B.$18 million C.$19 million D.$25 […]

1) An investor owns 300 shares of stock currently selling for $70 per share. What should the investor expect to have after the stock declares a three-for-two split? A.200 shares selling for $93.10 each B.200 shares selling for $105.00 each […]

1) Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity? A.The bond is selling at a discount to par value B.The bond has a high default […]

1) Stocks that have more volatile price changes have more valuable call options because call holders: A.capture upside potential without downside risk B.realize that volatility decreases the present value of the exercise price C.have too little variability in the exercise […]

1) A spinoff is an action in which: A.the management bids for and acquires the firm B.one firm issues stock to acquire another firm C.successful product lines are sold to competitors D.a portion of the firm’s assets is sold off […]

1) Planners have determined that sales will increase by 20% next year, and that the profit margin will remain at 10% of sales. Which of the following statements is correct? A.Profit will grow by 20% B.The profit margin will grow […]

1) A firm has sales of $5 million, average total assets of $1.6 million, average fixed assets of $1 million, and average current liabilities of $300,000. Given this information, answer the following about the firm’s efficiency: a. Calculate asset turnover, […]

1) A firm with a debt-equity ratio of 1/2, return on assets of 15%, and return on debt of 10% will have return on equity of: A.15.00% B.16.67% C.20.00% D.21.17% 2) The international Fisher effect is valid in the long […]

1) If the market is efficient, stock prices should be expected to react only to new information that is released. 2) A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position […]

1) Changing management is the only reason that firms make acquisitions. 2) Accrued interest declines with each payment on an amortizing loan. Answer: TRUE 3) MM’s proposition II states that the expected return on equity increases as the firm’s debt-equity […]

1) Risk-free strategies that take advantage of misalignments in two prices (e.g., the spot and forward exchange rates) are called arbitrage strategies. 2) Holders of callable bonds know that the company will wish to buy the issue back if interest […]

1) The seller of a put option is betting that the market value of the stock will decrease. 2) The security market line sets a standard for other investmentsinvestors will be willing to hold other investments only if they offer […]

1) Takeovers are often described as part of a broader market for corporate control. 2) A banker’s acceptance is usually used in overseas trade. Answer: TRUE 3) The security market line provides a standard for project rejection. Answer: TRUE 4) […]

1) All financial managers and economists believe that long-run historical returns are the best measure available. 2) When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their […]

1) A cash conversion cycle is the period between a firm’s payment for materials and collection on its sales. 2) Insider trading is the purchase or sale of shares based on information that is not available to public investors, and […]

1) Short-term securities have high interest-rate risk. 2) An increase in accounts receivable balance provides an increase in cash flow. Answer: FALSE 3) Capital budgeting analysis focuses on cash flow as opposed to profits. Answer: TRUE 4) An economic gain […]

1) The net working capital of a firm will decrease when accrued wages are paid with cash. 2) The balancing items in a financial planning model are variables that adjust to maintain the consistency of a financial model. They are […]

1) One reason for the difference between profits and cash is that the cost of capital equipment is spread over the forecast life. 2) If you are not better informed than the highly paid professionals in banks and other institutions, […]

1) The separation of ownership and management is one distinctive feature of both corporations and sole proprietors. 2) More often than not, the announcement of a stock split does result in a rise in the market price of the stock. […]

1) Making good investment and financing decisions is the chieftask of the financial manager. 2) The “trade-off theory” of capital structure suggests that firms have an optimal level of debt. Answer: TRUE 3) The total depreciation tax shield equals the […]

1) Historically, internally generated cash covers less than half of a firm’s capital requirements. 2) A common characteristic of money market instruments is their high degree of liquidity. Answer: TRUE 3) Market price is not the same as book value […]

1) Capital budgeting decisions are used to determine how to raise the cash necessary for investments. 2) A Treasury bond’s bid price will be lower than the ask price. Answer: TRUE 3) All large corporations have little debt; it is […]

1) Calculation of company costs of capital should be conducted with market values whenever possible. 2) The payback rule always makes shareholders better off. Answer: FALSE 3) It is easier for individual investors to diversify their risk by buying shares […]

1) Projects with an NPV of zero decrease shareholders’ wealth by the cost of the project. 2) Expenditure on new capital equipment is a cash payment. Answer: TRUE 3) The most common benchmarks of bank loans are the London Interbank […]

1) An increase in current liabilities is a source of cash for the firm. 2) You should never compare cash flows occurring at different times without first discounting them to a common date. Answer: TRUE 3) In general, shareholders of […]

1) Indexed bonds were completely unknown in the United States until 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS. 2) Real assets can be intangible assets. Answer: TRUE 3) The present […]

1) Debt financing affects neither the operating risk nor the business risk of the firm. 2) The price at which new shares are sold to investors almost always exceeds par value. The difference is entered into the company’s accounts as […]

1) If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows. 2) Market value added is the same as economic value added. Answer: FALSE 3) The decision to offer credit […]

1) Net working capital is determined from the difference between current assets and current liabilities. 2) The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates. Answer: FALSE 3) Return on assets […]

1) An oil producer would sell, rather than buy, crude oil futures for protection from falling prices. 2) The sum of the payout ratio and the plowback ratio will always equal 1.0 . Answer: TRUE 3) A long-term investor would […]

1) The reinvestment of cash back into the firm’s operations is an example of a flow of savings to investment. 2) When additional funds must be committed to working capital, those funds are assumed to be recovered at the end […]

1) In a merger the acquiring firm buys only the assets of the target firm. 2) If factories are operating below full capacity, sales can increase without investment in fixed assets. However, beyond some sales level, new capacity must be […]

1) If a project’s value is less than its required investment, then the project is attractive financially. 2) Target firms frequently deter potential bidders by devising poison pills, which make the company unappetizing. Answer: TRUE 3) Assuming a project has […]

1) Investors usually give some companies with good track records the benefit of the doubt when the companies’ performance fails to meet the market expectation. 2) The Sarbanes-Oxley Act sought to prevent a repeat of the corporate scandals that brought […]

1) Financial models ensure consistency between growth assumptions and financing plans, and they identify the best financing plan. 2) For most managers, discounted cash flow analysis is in fact the dominant tool for project evaluation. Answer: TRUE 3) A company […]

1) Financial slack means having ready access to cash or debt financing. 2) Compared to other countries, the U.S. bankruptcy system is debtor-friendly. Answer: TRUE 3) Managers that accept projects that only break even on an accounting basis are helping […]

1) Debt financing affects neither the business risk nor the financial risk of the firm. 2) Engaging itself in a swap contract, a firm might agree to make a series of regular payments in one currency in return for receiving […]

1) A farmer can avoid delivery on a futures contract by buying an offsetting futures contract. 2) When bonds are selling at par value, the bonds are known as fixed-rate bonds. Answer: FALSE 3) Only the IPOs for large corporations […]

1) Advocates of mark-to-market accounting believe that this method works best during periods of great market uncertainty. 2) The put-call parity holds only if an investor plans to hold the options to maturity. Answer: TRUE 3) If the stock prices […]

1) Leveraged buyouts are acquisitions where a large fraction of the purchase price is financed with debt. 2) A capital budget shows a proposed list of investments. Answer: TRUE 3) The probability that all six of an executive’s stock-option grants […]

1) A company that borrows $1 million long term and invests the proceeds in inventory will see its cash position unchanged. 2) General partners have limited personal liability for business debts in a limited partnership. Answer: FALSE 3) A prospectus […]

1) Bond ratings measure the bond’s credit risk. 2) Both the seller and the buyer in a futures contract are required to put up margins. Answer: TRUE 3) Percentage of sales models are planning models in which the sales forecasts […]

1) The risk that remains in a stock portfolio after efforts to diversify is known as unique risk. 2) The cost of holding inventory is the interest paid on the money used to buy the inventory. Answer: FALSE 3) Other […]

1) The strategic planning portion of the capital budgeting process is essentially a “bottom-up” process. 2) The value of the target firm’s bonds goes down when a leveraged buyout is announced. Answer: TRUE 3) While control of large public companies […]