ADM474 - Applied Finance for Business

Reading quizzes: questions and answers

Wrong answers highlighted in red
ADM 474 Reading Quizzes
Workshop 1
Question 1
2 out of 2 points

Which of the following is not a primary source of capital to the firm?
Answer

Selected Answer:
assets

Question 2
2 out of 2 points

The statement of cash flows does not include which of the following sections?
Answer

Selected Answer:
cash flows from sales activities

Question 3
2 out of 2 points

A statement of cash flows allows a financial analyst to determine
Answer

Selected Answer:
all of the above

Question 4
2 out of 2 points

The partnership form of organization
Answer

Selected
Answer:

avoids the double taxation of earnings and dividends found in the corporate form of

organization.
Question 5
2 out of 2 points

Total asset turnover indicates the firm's
Answer

Selected Answer:
ability to use its assets to generate sales.

Question 6
2 out of 2 points

A short-term creditor would be most interested in
Answer

Selected Answer:
liquidity ratios.

Question 7
2 out of 2 points

Depreciation tends to
Answer

Selected Answer:
increase cash flow and decrease income.

Question 8
2 out of 2 points

Disinflation may cause
Answer

Selected Answer:
a reduced required return demanded by investors on financial assets.

Question 9
2 out of 2 points

The most rigorous test of a firm's ability to pay its short-term obligations is its
Answer

Selected Answer:
quick ratio.

Question 10
2 out of 2 points

Agency theory examines the relationship between the
Answer

Selected Answer:
owners of the firm and the managers of the firm.

Question 11
2 out of 2 points

If accounts receivable stays the same, and credit sales go up
Answer

Selected Answer:
the average collection period will go down.

Question 12
2 out of 2 points

Companies that have higher risk than a competitor in the same industry will generally have
Answer

Selected Answer:
all of the above.

Question 13
2 out of 2 points

Which of the following is not one of the three basic financial statements?
Answer

Selected Answer:
Statement of Retained Earnings

Question 14
2 out of 2 points
The best indication of the operational efficiency of management is

Answer
Selected Answer:
earnings before interest and taxes (EBIT).

Question 15
2 out of 2 points

In addition to comparison with industry ratios, it is also helpful to analyze ratios using
Answer

Selected Answer:
both a and b.

Question 16
2 out of 2 points

Disinflation as compared to inflation would normally be good for investments in
Answer

Selected Answer:
bonds.

Question 17
2 out of 2 points

The firm's price-earnings (P/E) ratio is influenced by its
Answer

Selected Answer:
all of the above

Question 18
2 out of 2 points

The financial markets allocate capital to corporations by
Answer

Selected Answer:
reflecting expectations of the market participants in the prices of the corporation's.

Question 19
2 out of 2 points

Increased productivity due to technology has
Answer

Selected Answer:
helped to keep corporate costs in check.

Question 20
2 out of 2 points

Increasing interest expense will have what effect on EBIT?
Answer

Selected Answer:
no effect

Question 21
2 out of 2 points

Insider trading occurs when
Answer

Selected
Answer:

someone has information not available to the public which they use to profit from trading
in stocks.

Question 22
2 out of 2 points

Which of the following is not considered to be a profitability ratio?
Answer

Selected Answer:
times interest earned

Question 23
2 out of 2 points

Replacement cost accounting (current cost method) will usually
Answer

Selected Answer:
increase assets, decrease net income before taxes, and lower the return on equity.

Question 24
2 out of 2 points

If a firm has both interest expense and lease payments,
Answer

Selected Answer:
times interest earned will be greater than fixed charge coverage.

Question 25
0 out of 2 points

A corporation is
Answer

Selected Answer:
a separate legal entity with perpetual life.

Question 26
2 out of 2 points

Which of the following is not a true statement about the goal of maximizing shareholder wealth?
Answer

Selected Answer:
It is a short-run point of view which takes risk into account.

Question 27
2 out of 2 points

Which of the following is an outflow of cash?
Answer

Selected Answer:
the payment of cash dividends

Question 28
2 out of 2 points

Proper risk-return management means that
Answer

Selected Answer:
the firm must determine an appropriate trade-off between risk and return.

Question 29
2 out of 2 points

For a given level of profitability as measured by profit margin, the firm's return on equity will
Answer

Selected Answer:
increase as its debt-to assets ratio increases.

Question 30
2 out of 2 points

Money markets would include which of the following securities?
Answer

Selected Answer:
treasury bills and commercial paper.


Workshop 2
Question 1
2 out of 2 points

A firm's break-even point will rise if
Answer

Selected Answer:
variable cost per unit rises

Question 2
2 out of 2 points

In a cash budget, the cumulative cash balance is equal to:
Answer

Selected Answer:
net cash flow plus the beginning cash balance.

Question 3
2 out of 2 points

Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of
the following comparative statements about firms A and B is true?
Answer

Selected Answer:

B has a lower break-even point than A, but A's profit grows faster after break-even.
Question 4
2 out of 2 points

Cash breakeven analysis
Answer

Selected
Answer:

is helpful in analyzing the short-term outlook of the firm, particularly when it is in
trouble financially.

Question 5
2 out of 2 points

A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that
Answer

Selected
Answer:

sales were from beginning inventory until it was depleted, and then use sales from
current production.

Question 6
2 out of 2 points

A firm's earnings per share is not impacted by its financing plan at the point when
Answer

Selected Answer:
the cost of borrowed funds equals the return on assets.

Question 7
2 out of 2 points

When a firm employs no debt
Answer

Selected Answer:
it has a financial leverage of one.

Question 8
2 out of 2 points

A weakness of breakeven analysis is that it assumes:
Answer

Selected Answer:
revenue and costs are a linear (constant) function of volume.

Question 9
2 out of 2 points

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
Answer

Selected Answer:
Cyclical demand for the firm's products.

Question 10
2 out of 2 points

In using a systems approach to financial planning, it is necessary develop a
Answer

Selected Answer:
all of the above.

Question 11
2 out of 2 points

Required production during a planning period will depend on the
Answer

Selected Answer:
all of the above

Question 12
2 out of 2 points

When the cost of raw materials is increasing, FIFO accounting
Answer

Selected Answer:
yields higher ending inventory values than LIFO.

Question 13
2 out of 2 points

A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that
Answer

Selected
Answer:

sales were from current production until current production was depleted, and then use
sales from beginning inventory.

Question 14
0 out of 2 points

In the percent-of-sales method, if (A/S) and (L/S) both increase:
Answer

Selected Answer:
RNF stays the same.

Question 15
2 out of 2 points

If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial
leverage, then
Answer

Selected Answer:
DOL equals 1, and DFL equals 1.

Question 16
2 out of 2 points

In forecasting a firm's cash needs for some future period
Answer

Selected Answer:
all of the above

Question 17
2 out of 2 points

In the percent-of-sales method, an increase in dividends
Answer

Selected Answer:
will increase required new funds.

Question 18
0 out of 2 points

When using the percent-of-sales method in forecasting funds needed, which of the following is not true?
Answer

Selected Answer:
As the dividend payout ratio decreases, the required new funds also increase.

Question 19
2 out of 2 points

The key initial element in developing pro forma statements is
Answer

Selected Answer:
a sales forecast.

Question 20
2 out of 2 points

Financial leverage deals with:
Answer

Selected Answer:
the relationship of debt and equity in the capital structure.


Workshop 2 SECOND ATTEMPT
Question 1
2 out of 2 points

Which of the following is not true about leverage?
Answer

Selected
Answer:

combined leverage utilizes the entire income statement, showing the impact of change in volume
on EBIT.


Question 2
2 out of 2 points

In general, the larger the portion of a firm's sales that are on credit, the
Answer

Selected Answer:
higher will be the firm's need to borrow.


Question 3
2 out of 2 points

The degree of financial leverage is concerned with the relation between
Answer

Selected Answer:
changes in EBIT and changes in EPS.


Question 4
2 out of 2 points

A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that
Answer

Selected
Answer:

sales were from beginning inventory until it was depleted, and then use sales from current
production.


Question 5
0 out of 2 points

In order to estimate production requirements, we
Answer

Selected Answer:
add beginning inventory to projected sales in units and subtract desired ending inventory.


Question 6
2 out of 2 points

The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.
Answer

Selected Answer:
fixed costs


Question 7
2 out of 2 points

In break-even analysis the contribution margin is defined as
Answer

Selected Answer:
sales minus variable costs.


Question 8
2 out of 2 points

The degree of operating leverage is computed as
Answer

Selected Answer:
percent change in operating income divided by percent change in volume.


Question 9
2 out of 2 points

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
Answer

Selected Answer:
Cyclical demand for the firm's products.


Question 10
2 out of 2 points

Firms with a high degree of operating leverage are
Answer

Selected Answer:
trading off higher fixed costs for lower per-unit variable costs.


Question 11
2 out of 2 points

A firm's earnings per share is not impacted by its financing plan at the point when
Answer

Selected Answer:
the cost of borrowed funds equals the return on assets.


Question 12
2 out of 2 points

In the percent-of-sales method
Answer

Selected Answer:
as the dividend payout ratio goes up, the required new funds also rise.


Question 13
0 out of 2 points

Which of the following questions does break-even analysis attempt to address?
Answer

Selected Answer:
At what point does the firm break even?


Question 14
2 out of 2 points

Pro forma financial statements are
Answer

Selected Answer:
all of the above


Question 15
2 out of 2 points

A rapid rate of growth in sales and profits may require
Answer

Selected Answer:
increased borrowing by the firm to support the sales increase.


Question 16
2 out of 2 points

In using a systems approach to financial planning, it is necessary develop a
Answer

Selected Answer:
all of the above.


Question 17
2 out of 2 points

Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest
and taxes where the return on assets is greater than the cost of debt.
Answer

Selected Answer:
Firm H will have a higher return on equity than C.


Question 18
2 out of 2 points

If the price per unit decreases because of competition but the cost structure remains the same
Answer

Selected Answer:
the breakeven point rises.


Question 19
2 out of 2 points

When a firm employs no debt
Answer

Selected Answer:
it has a financial leverage of one.


Question 20
2 out of 2 points

Which of the following is concerned with the change in operating profit as a result of a change in volume?
Answer

Selected Answer:

Operating leverage

WS2 3
rd
try
Question 1
2 out of 2 points

In break-even analysis the contribution margin is defined as
Answer

Selected Answer:
sales minus variable costs.


Question 2
2 out of 2 points

In general, the larger the portion of a firm's sales that are on credit, the
Answer

Selected Answer:
higher will be the firm's need to borrow.


Question 3
0 out of 2 points

In the percent-of-sales method, if (A/S) and (L/S) both increase:
Answer

Selected Answer:
RNF goes up.


Question 4
2 out of 2 points

A high DOL means:
Answer

Selected Answer:
there are high fixed costs.


Question 5
2 out of 2 points

If the price per unit decreases because of competition but the cost structure remains the same
Answer

Selected Answer:
the breakeven point rises.


Question 6
2 out of 2 points

A highly automated plant would generally have
Answer

Selected Answer:
more fixed than variable costs.


Question 7
2 out of 2 points

The break-even point can be calculated as
Answer

Selected Answer:
fixed cost divided by contribution margin.


Question 8
2 out of 2 points

Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
Answer

Selected Answer:
Cyclical demand for the firm's products.


Question 9
2 out of 2 points

In a cash budget, the cumulative cash balance is equal to:
Answer

Selected Answer:
net cash flow plus the beginning cash balance.


Question 10
2 out of 2 points

Conservatively leveraged Firm C and highly leveraged Firm H operate at the same level of earnings before interest
and taxes where the return on assets is greater than the cost of debt.
Answer

Selected Answer:
Firm H will have a higher return on equity than C.


Question 11
2 out of 2 points

When using the percent-of-sales method in forecasting funds needed, which of the following is not true?
Answer

Selected Answer:

Required new funds decrease as the dividend payout decreases.

Question 12
2 out of 2 points

A conservative financing plan involves
Answer

Selected Answer:
heavy reliance on equity.


Question 13
2 out of 2 points

The pro forma income statement is important to the overall process of constructing pro forma statements because it
allows us to determine a value for:
Answer

Selected Answer:
change in retained earnings.


Question 14
2 out of 2 points

In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the:
Answer

Selected Answer:
cash budget.


Question 15
2 out of 2 points

If sales volume exceeds the break-even point, the firm will experience
Answer

Selected Answer:
an operating profit.


Question 16
2 out of 2 points

In financial statements, the number of units shown in cost of goods sold as compared to the number of the units
actually produced
Answer

Selected Answer:
can be either higher or lower.


Question 17
2 out of 2 points

Firms with a high degree of operating leverage are
Answer

Selected Answer:
trading off higher fixed costs for lower per-unit variable costs.


Question 18
2 out of 2 points

A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that
Answer

Selected
Answer:

sales were from beginning inventory until it was depleted, and then use sales from current
production.


Question 19
2 out of 2 points

A firm's break-even point will rise if
Answer

Selected Answer:
variable cost per unit rises


Question 20
2 out of 2 points

In the construction of the cash payments schedule, the major cash payment is generally
Answer

Selected Answer:
costs associated with inventory manufactured.



WS3
Question 1
2 out of 2 points

Companies that are mostly influenced by seasonal sales have to make a choice between
Answer

Selected Answer:
All of the above


Question 2
0 out of 2 points
The term structure of interest rates or the yield curve

Answer
Selected Answer:
all of the above are true.


Question 3
2 out of 2 points

Retail companies like Target and Limited Brands are more likely to have
Answer

Selected Answer:
cyclical sales and more volatile earnings per share.


Question 4
2 out of 2 points

Which of the following combinations of asset structures and financing patterns is likely to create the least volatile
earnings?
Answer

Selected Answer:
Liquid assets and no debt


Question 5
2 out of 2 points

The term "permanent current assets" implies
Answer

Selected Answer:
some minimum level of current assets that are not self-liquidating.


Question 6
2 out of 2 points

Permanent current assets are not a factor in a manager's decision making process when all current assets will be
Answer

Selected Answer:
self-liquidating.


Question 7
2 out of 2 points

Treasury Inflation Protected Securities (TIPS)
Answer

Selected Answer:
a and b are true


Question 8
2 out of 2 points

Ideally, which of the following types of assets should be financed with long-term financing?
Answer

Selected Answer:
Fixed assets and permanent current assets


Question 9
2 out of 2 points

Working capital management is primarily concerned with the management and financing of
Answer

Selected Answer:
current assets.


Question 10
0 out of 2 points

The economic order quantity
Answer

Selected Answer:
all of the above


Question 11
2 out of 2 points

In managing cash and marketable securities, what should the manager's primary concern?
Answer

Selected Answer:
Liquidity and safety


Question 12
2 out of 2 points

Which of the following is not a condition under which a prudent manager would accept some risk in financing?
Answer

Selected Answer:
Inventory is highly perishable


Question 13
2 out of 2 points

Which of the following is not a condition under which a prudent manager would accept some risk in financing?
Answer

Selected Answer:
Inventory is highly perishable


Question 14
2 out of 2 points

A multinational company may prefer to hold sizeable cash balances in one currency rather than another because
Answer

Selected Answer:
both a and b


Question 15
2 out of 2 points

One of the most popular uses of automated clearing houses is the
Answer

Selected Answer:
direct deposit of checks such as social security payments, and government and private.


Question 16
2 out of 2 points

Well implemented web-based supply chainmanagement has all of the following benefits except
Answer

Selected Answer:
reduces the number of suppliers bidding for a company's business.


Question 17
2 out of 2 points

Inventory is usually divided into three basic categories except
Answer

Selected Answer:
projected sales.


Question 18
2 out of 2 points

The term structure of interest rates
Answer

Selected Answer:
all of the above.


Question 19
2 out of 2 points

When actual sales are greater than forecasted sales
Answer

Selected Answer:
all of the above


Question 20
2 out of 2 points

The corporate sweep account is an account
Answer

Selected Answer:
all of the above.


Question 21
2 out of 2 points

An inverted yield curve would suggest that
Answer

Selected Answer:
interest rates are expected to fall.


Question 22
2 out of 2 points

Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by
Answer

Selected Answer:
seasonality.


Question 23
2 out of 2 points

Some analysts believe that the term structure of interest rates is determined by the behavior of various types of
financial institutions. This theory is called the
Answer

Selected Answer:
segmentation theory.


Question 24
0 out of 2 points

Which of the following are characteristics of money market investments?
Answer

Selected Answer:

Money market funds are offered by banks.

Question 25
2 out of 2 points

One of the major cost savings for consumers using automated clearing houses is
Answer

Selected Answer:
All of the above are true


Question 26
0 out of 2 points

Assuming level production throughout the year, and assuming receivables are collected in two equal installments
over the two months subsequent to the sales period, developing the cash budget requires the following steps:
Answer

Selected Answer:
estimate bank borrowing and repayments


Question 27
2 out of 2 points

Which of the following techniques allows explicit consideration of more than one possible outcome?
Answer

Selected Answer:
Expected value


Question 28
2 out of 2 points

When using the economic order quantity model
Answer

Selected Answer:
costs are minimized when total carrying costs and total ordering costs are equal.


Question 29
2 out of 2 points

The term "permanent current assets" implies
Answer

Selected Answer:
some minimum level of current assets that are not self-liquidating.


Question 30
2 out of 2 points

Cash flow does not rely on which of the following?
Answer

Selected Answer:
the monetary policy of the Federal Reserve


Question 1
2 out of 2 points

Working capital management is primarily concerned with the management and financing of
Answer

Selected Answer:
current assets.

Question 2
2 out of 2 points

The term structure of interest rates is influenced by
Answer

Selected Answer:
all of the above are true

Question 3
2 out of 2 points

A financial executive devotes the most time to
Answer

Selected Answer:
Working capital management.

Question 4
2 out of 2 points

The three primary policy variables to consider when extending credit include all of the following except
Answer

Selected Answer:
the level of interest rates.

Question 5
2 out of 2 points

The term "permanent current assets" implies
Answer

Selected Answer:
some minimum level of current assets that are not self-liquidating.

Question 6
0 out of 2 points

A firm that wishes to minimize risk when investing idle cash would be least likely to buy
Answer

Selected Answer:
commercial paper.

Question 7
2 out of 2 points

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the
Answer

Selected Answer:
financial manager generally borrows short-term.

Question 8
2 out of 2 points

In managing cash and marketable securities, what should the manager's primary concern?
Answer

Selected Answer:
Liquidity and safety

Question 9
2 out of 2 points

Characteristics of a money market deposit account include
Answer

Selected Answer:
all of the above

Question 10
0 out of 2 points

During tight money periods
Answer

Selected Answer:
the relationship between short and long-term rates remains unchanged.

Question 11
2 out of 2 points

International cash management systems are more complex than domestic cash management systems because
of
Answer

Selected Answer:
all of the above

Question 12
2 out of 2 points

Treasury Inflation Protected Securities (TIPS)
Answer

Selected Answer:
a and b are true

Question 13
2 out of 2 points

The term structure of interest rates
Answer

Selected Answer:
all of the above.

Question 14
2 out of 2 points

The most subjective and also significant segment of the 5 C's of credit for giving final approval is
Answer

Selected Answer:
character.

Question 15
2 out of 2 points

The corporate sweep account is an account
Answer

Selected Answer:
a and b are correct

Question 16
2 out of 2 points

As the economy moves through a business cycle, which of the following term structure of interest rates
theories dominate the shape of the yield curve.
Answer

Selected Answer:
None of the above dominate the shape of the yield curve

Question 17
2 out of 2 points

Which of the following combinations of asset structures and financing patterns is likely to create the least
volatile earnings?
Answer

Selected Answer:
Liquid assets and no debt

Question 18
2 out of 2 points

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the
Answer

Selected Answer:
financial manager generally borrows short-term.

Question 19
2 out of 2 points

The term structure of interest rates
Answer

Selected Answer:
all of the above.

Question 20
2 out of 2 points

When developing a credit scoring report, many variables would be considered. Which of the following best
represent the major factors Dun & Bradstreet would examine?
Answer

Selected
Answer:

The financial statements, satisfactory or slow payment experiences, negative public records
(suits, liens, judgments, bankruptcies).

Question 21
2 out of 2 points

A banker's acceptance
Answer

Selected Answer:
all of the above

Question 22
2 out of 2 points

Well implemented web-based supply chainmanagement has all of the following benefits except
Answer

Selected Answer:
reduces the number of suppliers bidding for a company's business.

Question 23
2 out of 2 points

Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have
to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How
much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
Answer

Selected Answer:
$100,000

Question 24
0 out of 2 points

Which of the following yield curves would be characteristic at peak periods of economic expansions?
Answer

Selected Answer:
upward sloping

Question 25
0 out of 2 points

Which of the following is not a true statement about automated clearinghouses (ACHs)?
Answer

Selected
Answer:

Automated clearinghouses are responsible for the check clearing process between
commercial banks and the Federal Reserve Banks.

Question 26
2 out of 2 points

Eurodollar certificates of deposits
Answer

Selected
Answer:

are U.S. dollars held on deposit by foreign banks and loaned out by those banks to

anyone seeking dollars.
Question 27
2 out of 2 points

A financial executive devotes the most time to
Answer

Selected Answer:
Working capital management.

Question 28
0 out of 2 points

The economic order quantity
Answer

Selected Answer:
determines the reorder point.

Question 29
2 out of 2 points

Generally, more use is made of short-term financing because
Answer

Selected Answer:
a and b above.

Question 30
2 out of 2 points

Which of the following is not a condition under which a prudent manager would accept some risk in
financing?
Answer

Selected Answer:
Inventory is highly perishable


Question 1
2 out of 2 points

A financial executive devotes the most time to
Answer

Selected Answer:
Working capital management.

Question 2
2 out of 2 points

Variables important to credit scoring models include
Answer

Selected Answer:
all of the above

Question 3
2 out of 2 points

Which of the following is a reason for diminishing liquidity in modern corporations?
Answer

Selected Answer:
All of the above are reasons for diminishing liquidity.

Question 4
2 out of 2 points

The theory of the term structure of interest rates which suggests that long-term rates are determined by the
average of short-term rates expected over the time that a long-term bond is outstanding is the
Answer

Selected Answer:
expectations hypothesis.

Question 5
2 out of 2 points

Which of the following is a reason for diminishing liquidity in modern corporations?
Answer

Selected Answer:
All of the above are reasons for diminishing liquidity.

Question 6
0 out of 2 points

A firm will usually increase the ratio of short-term debt to long-term debt when
Answer

Selected Answer:
short-term debt has a lower cost than long-term equity.

Question 7
0 out of 2 points

The term structure of interest rates or the yield curve
Answer

Selected Answer:
is normal when short-term rates are higher than long-term rates.

Question 8
2 out of 2 points

Normally, permanent current assets should be financed by
Answer

Selected Answer:
long-term funds.

Question 9
2 out of 2 points

Which of the following securities trades on a discount basis?
Answer

Selected Answer:
Treasury bills

Question 10
2 out of 2 points

The belief that investors require a higher return to entice them into holding long-term securities is the
viewpoint of the
Answer

Selected Answer:
the liquidity premium theory.

Question 11
2 out of 2 points

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the
Answer

Selected Answer:
financial manager generally borrows short-term.

Question 12
2 out of 2 points

Some analysts believe that the term structure of interest rates is determined by the behavior of various types
of financial institutions. This theory is called the
Answer

Selected Answer:
segmentation theory.

Question 13
2 out of 2 points

"Float" takes place because
Answer

Selected Answer:
a lag exists between writing a check and clearing it through the banking system.

Question 14
2 out of 2 points

Which of the following is not a condition under which a prudent manager would accept some risk in
financing?
Answer

Selected Answer:
Inventory is highly perishable

Question 15
2 out of 2 points

If a firm uses level production with seasonal sales
Answer

Selected Answer:
as sales decline inventory will increase.

Question 16
2 out of 2 points

Inventory is usually divided into three basic categories except
Answer

Selected Answer:
projected sales.

Question 17
2 out of 2 points

An aggressive, risk-oriented firm will likely
Answer

Selected Answer:
borrow short-term and carry low levels of liquidity.

Question 18
2 out of 2 points

A financial executive devotes the most time to
Answer

Selected Answer:
Working capital management.

Question 19
2 out of 2 points

Which of the following combinations of asset structures and financing patterns is likely to create the least
volatile earnings?
Answer

Selected Answer:
Liquid assets and no debt

Question 20
0 out of 2 points

A firm will usually increase the ratio of short-term debt to long-term debt when
Answer

Selected Answer:
short-term debt has a lower cost than long-term equity.

Question 21
2 out of 2 points

One of the most popular uses of automated clearing houses is the
Answer

Selected Answer:
direct deposit of checks such as social security payments, and government and private.

Question 22
0 out of 2 points

Which of the following yield curves would be characteristic at peak periods of economic expansions?
Answer

Selected Answer:
humped

Question 23
2 out of 2 points

Cost savings from JIT inventory management include(s)
Answer

Selected Answer:
all of the above

Question 24
2 out of 2 points

An aggressive working capital policy would have which of following characteristics?
Answer

Selected Answer:
A high ratio of short-term debt to long-term sources of funds.

Question 25
2 out of 2 points

In managing cash and marketable securities, what should the manager's primary concern?
Answer

Selected Answer:
Liquidity and safety

Question 26
2 out of 2 points

The economic order quantity
Answer

Selected Answer:
assumes that delivery times of each order are consistent.

Question 27
2 out of 2 points

International cash management systems are more complex than domestic cash management systems because
of
Answer

Selected Answer:
all of the above

Question 28
2 out of 2 points

When developing a credit scoring report, many variables would be considered. Which of the following best
represent the major factors Dun & Bradstreet would examine?
Answer

Selected
Answer:

The financial statements, satisfactory or slow payment experiences, negative public records
(suits, liens, judgments, bankruptcies).

Question 29
2 out of 2 points

Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by
Answer

Selected Answer:
seasonality.

Question 30
2 out of 2 points

The problem in stretching out the maturity of marketable securities is that
Answer

Selected Answer:
there is greater possibility of loss.


Question 1
2 out of 2 points

For a given firm, holding other factors constant, ordering costs per unit generally
Answer

Selected Answer:
decline as average inventory increases.

Question 2
2 out of 2 points

An aggressive, risk-oriented firm will likely
Answer

Selected Answer:
borrow short-term and carry low levels of liquidity.

Question 3
2 out of 2 points

One of the first considerations in cash management is
Answer

Selected Answer:
synchronization of cash inflows and cash outflows.

Question 4
2 out of 2 points

Treasury Inflation Protected Securities (TIPS)
Answer

Selected Answer:
a and b are true

Question 5
0 out of 2 points

Which of the following yield curves would be characteristic at peak periods of economic expansions?
Answer

Selected Answer:
horizontal

Question 6
2 out of 2 points

Which of the following techniques allows explicit consideration of more than one possible outcome?
Answer

Selected Answer:
Expected value

Question 7
2 out of 2 points

The belief that investors require a higher return to entice them into holding long-term securities is the
viewpoint of the
Answer

Selected Answer:
the liquidity premium theory.

Question 8
2 out of 2 points

Well implemented web-based supply chainmanagement has all of the following benefits except
Answer

Selected Answer:
reduces the number of suppliers bidding for a company's business.

Question 9
2 out of 2 points

During tight money periods
Answer

Selected Answer:
short-term rates are higher than long-term rates.

Question 10
2 out of 2 points
The system whereby funds are moved between computer terminals without use of checks is

Answer
Selected Answer:
electronic funds transfer.

Question 11
2 out of 2 points

"Float" takes place because
Answer

Selected Answer:
a lag exists between writing a check and clearing it through the banking system.

Question 12
2 out of 2 points

Assuming level production throughout the year, and assuming receivables are collected in two equal
installments over the two months subsequent to the sales period, developing the cash budget requires the
following steps:
Answer

Selected Answer:
estimate monthly cash receipts

Question 13
2 out of 2 points

As the economy moves through a business cycle, which of the following term structure of interest rates
theories dominate the shape of the yield curve.
Answer

Selected Answer:
None of the above dominate the shape of the yield curve

Question 14
0 out of 2 points

Publishing companies are characterized by
Answer

Selected Answer:
a and b.

Question 15
2 out of 2 points

Pressure for current asset buildup often results from
Answer

Selected Answer:
rapidly expanding sales.

Question 16
2 out of 2 points

International cash management systems are more complex than domestic cash management systems because
of
Answer

Selected Answer:
all of the above

Question 17
2 out of 2 points

The amount of safety stock that a firm carries depends upon
Answer

Selected Answer:
a and b are correct

Question 18
2 out of 2 points

Which of the following are characteristics of money market investments?
Answer

Selected Answer:
None of the above

Question 19
2 out of 2 points

Retail companies like Target and Limited Brands are more likely to have
Answer

Selected Answer:
cyclical sales and more volatile earnings per share.

Question 20
2 out of 2 points

Eurodollars
Answer

Selected Answer:
may be borrowed by anyone who wishes to hold dollars.

Question 21
2 out of 2 points

The term "permanent current assets" implies
Answer

Selected Answer:
some minimum level of current assets that are not self-liquidating.

Question 22
2 out of 2 points

Eurodollar certificates of deposits
Answer

Selected
Answer:

are U.S. dollars held on deposit by foreign banks and loaned out by those banks to
anyone seeking dollars.

Question 23
2 out of 2 points

An inverted yield curve would suggest that
Answer

Selected Answer:
interest rates are expected to fall.

Question 24
2 out of 2 points

When actual sales are greater than forecasted sales
Answer

Selected Answer:
all of the above

Question 25
2 out of 2 points

A conservatively financed firm would
Answer

Selected
Answer:

use long-term financing for permanent assets and fixed assets and a portion of the short-term
fluctuating assets and use short-term financing for all other short-term assets.

Question 26
2 out of 2 points

Probably the safest and most marketable instrument for short-term investment is
Answer

Selected Answer:
Treasury bills.

Question 27
2 out of 2 points

Some of the services provided around the clock by SWIFT are
Answer

Selected Answer:
all of the above

Question 28
2 out of 2 points

The use of cash budgeting procedures
Answer

Selected Answer:
all of the above are correct.

Question 29
2 out of 2 points

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the
Answer

Selected Answer:
financial manager generally borrows short-term.

Question 30
2 out of 2 points

Pressure for current asset buildup often results from
Answer

Selected Answer:
rapidly expanding sales.

WS 4

Question 1
2 out of 2 points

The after-tax cost of preferred stock to the issuing corporation
Answer

Selected Answer:
is the same as the before-tax cost.


Question 2
2 out of 2 points

As the time period until receipt increases, the present value of an amount at a fixed interest rate
Answer

Selected Answer:
decreases.


Question 3
2 out of 2 points

Preferred stock has all but which of the following characteristics?
Answer

Selected Answer:
the same binding contractual obligation as debt


Question 4
2 out of 2 points

The higher the rate used in determining the future value of a $1 annuity,
Answer

Selected Answer:
the greater the future value at the end of a period.


Question 5
2 out of 2 points

In a general sense, the value of any asset is the
Answer

Selected Answer:
present value of the cash flows received from the asset.


Question 6
2 out of 2 points

For a firm paying 7% for new debt, the higher the firm's tax rate
Answer

Selected Answer:
the lower the after-tax cost of debt.


Question 7
2 out of 2 points

Which of the following does not influence the yield to maturity for a security?
Answer

Selected Answer:
yields of similar securities


Question 8
2 out of 2 points

As the interest rate increases, the present value of an amount to be received at the end of a fixed period
Answer

Selected Answer:
decreases.


Question 9
2 out of 2 points

In determining the cost of retained earnings
Answer

Selected Answer:
the capital asset pricing model can be used.


Question 10
2 out of 2 points

The risk premium is likely to be highest for
Answer

Selected Answer:
gold mining expedition.


Question 11
2 out of 2 points

If in determining the yield to maturity on a bond at a given interest rate, you get a value below the current market
price, in the next calculation you should use
Answer

Selected Answer:
a lower interest rate.


Question 12
2 out of 2 points

Use of the marginal cost of capital
Answer

Selected Answer:
both a and b are correct.


Question 13
2 out of 2 points

As the compounding rate becomes lower and lower, the future value of inflows approaches
Answer

Selected Answer:
the present value of the inflows


Question 14
2 out of 2 points

The optimal capital structure for firms in cyclical industries should contain ________________ than firms in stable
industries.
Answer

Selected Answer:
less debt


Question 15
2 out of 2 points

Valuation of financial assets requires knowledge of
Answer

Selected Answer:
a and b


Question 16
2 out of 2 points

The price of preferred stock may react strongly to a change in kpbecause
Answer

Selected Answer:
there is no maturity date.


Question 17
2 out of 2 points

Most firms are able to use _____ percent debt in their capital structure without exceeding norms acceptable to
creditors and investors.
Answer

Selected Answer:
30-50


Question 18
2 out of 2 points

If a company's stock price (Po) goes up, and nothing else changes, Ke(the required rate of return) should
Answer

Selected Answer:
go down.


Question 19
0 out of 2 points

There may be a change in the marginal cost of capital curve because
Answer

Selected Answer:
the firm is limited in the amount of depreciation it can take.


Question 20
2 out of 2 points

The shorter the length of time between a present value and its corresponding future value,
Answer

Selected Answer:
the higher the present value, relative to the future value.


Question 21
2 out of 2 points

An increase in the riskiness of a particular security would NOT affect
Answer

Selected Answer:
the premium for expected inflation.


Question 22
2 out of 2 points

In determining the future value of a single amount, one measures
Answer

Selected Answer:
the future value of an amount allowed to grow at a given interest rate.


Question 23
2 out of 2 points

The after-tax cost of debt will almost always be below
Answer

Selected Answer:
all of the above.


Question 24
2 out of 2 points

If the inflation premium for a bond goes up, the price of the bond
Answer

Selected Answer:
goes down.


Question 25
2 out of 2 points

A firm's debt to equity ratio varies at times because
Answer

Selected Answer:
all of the above are accurate statements.


Question 26
0 out of 2 points

If the flotation cost goes up, the cost of retained earnings will
Answer

Selected Answer:
go up.


Question 27
2 out of 2 points

The dividend valuation model stresses the
Answer

Selected Answer:
relationship of dividends to market prices.


Question 28
2 out of 2 points

Each project should be judged against
Answer

Selected Answer:
none of the above.


Question 29
2 out of 2 points

Why is the cost of debt normally lower than the cost of preferred stock?
Answer

Selected Answer:
interest is tax deductible.


Question 30
2 out of 2 points

The cost of capital for common stock is ke=(D1/Po)+g. What are the assumptions of the model?
Answer

Selected Answer:
All of the above are assumptions of the model.



Question 1
2 out of 2 points

Projects that are totally uncorrelated provide:
Answer

Selected Answer:
some risk reduction.


Question 2
2 out of 2 points

Which of the following is a false statement?
Answer

Selected Answer:
Risk-averse investors cannot be induced to invest in risky assets.


Question 3
2 out of 2 points

If three investment alternatives all have some degree of risk and different expected returns, which of the following
measures could best be used to rank the risk levels of the projects?
Answer

Selected Answer:
Coefficient of variation


Question 4
2 out of 2 points

The payback method has several disadvantages, among them:
Answer

Selected Answer:
a and b.


Question 5
2 out of 2 points

The coefficient of variation (V) can be defined as the
Answer

Selected Answer:
standard deviation divided by the mean (expected value).


Question 6
2 out of 2 points

Capital rationing
Answer

Selected Answer:
is a less than optimal way to arrive at capital budgeting decisions.


Question 7
2 out of 2 points

Capital budgeting is primarily concerned with
Answer

Selected Answer:
evaluating investment alternatives.


Question 8
0 out of 2 points

As the cost of capital increases
Answer

Selected Answer:
project selection remains unchanged.


Question 9
2 out of 2 points

An example of negative correlation may exist between the
Answer

Selected Answer:
jewelry and discount furniture industries.


Question 10
2 out of 2 points

With the exception of real estate investments, MACRS depreciation is beneficial to corporations because it
Answer

Selected Answer:
shortens the lives of assets for depreciation purposes.


Question 11
0 out of 2 points

Using the risk-adjusted discount rate approach, the firm's weighted average cost of capital is applied to projects with:
Answer

Selected Answer:
high risk.


Question 12
2 out of 2 points

If an investment project has a positive net present value, then the internal rate of return is
Answer

Selected Answer:
greater than the cost of capital.


Question 13
2 out of 2 points

The modified internal rate of return assumes:
Answer

Selected Answer:
inflows are reinvested at the cost of capital.


Question 14
2 out of 2 points

In order to evaluate risk, management may also set qualitative risk classes. Rank these four projects from the least to
the most risky.
(1.) Completely new market in United States.
(2.) Completely new market in South America.
(3.) Addition to normal product line.
(4.) Repair to old machinery.

Answer
Selected Answer:
4, 3, 1, 2


Question 15
2 out of 2 points

The coefficient of correlation
Answer

Selected Answer:
takes on values anywhere from -1 to +1.


Question 16
2 out of 2 points

Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with:
Answer

Selected Answer:
normal risk.


Question 17
2 out of 2 points

The lower the coefficient of correlation the greater the
Answer

Selected Answer:
risk reduction when projects are combined.


Question 18
2 out of 2 points

The portfolio effect in capital budgeting refers to
Answer

Selected Answer:
the degree of correlation between various investments.


Question 19
2 out of 2 points

The net present value profile
Answer

Selected Answer:
graphically portrays the relationship between the discount rate and the net present value.


Question 20
2 out of 2 points

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually
exclusive, the firm should accept all investment proposals
Answer

Selected Answer:
that have a positive net present value.


Question 1
2 out of 2 points

In order to reduce risk in a firm, the firm would seek to enter a business that
Answer

Selected Answer:
has high negative correlation with its present business.


Question 2
2 out of 2 points

At higher tax rates, depreciation is
Answer

Selected Answer:
more beneficial.


Question 3
2 out of 2 points

The net present value profile
Answer

Selected Answer:
graphically portrays the relationship between the discount rate and the net present value.


Question 4
2 out of 2 points

If a firm is experiencing no capital rationing, it should accept all investment proposals
Answer

Selected Answer:
that return an amount equal to or greater than the cost of capital.


Question 5
2 out of 2 points

Which of the following is a false statement?
Answer

Selected Answer:
Risk-averse investors cannot be induced to invest in risky assets.


Question 6
2 out of 2 points

If three investment alternatives all have some degree of risk and different expected returns, which of the following
measures could best be used to rank the risk levels of the projects?
Answer

Selected Answer:
Coefficient of variation


Question 7
2 out of 2 points

A characteristic of capital budgeting is
Answer

Selected Answer:
the internal rate of return must be greater than the cost of capital.


Question 8
0 out of 2 points

Projects that are negatively correlated
Answer

Selected Answer:
none of the above


Question 9
2 out of 2 points

The net present value method is a better method of evaluation than the internal rate of return method because the
NPV method
Answer

Selected Answer:
assumes that cash flows can be reinvested at the firm's more conservative cost of capital.


Question 10
2 out of 2 points

Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This WOULD NOT
CHANGE the capital budgeting choices a firm would make if it
Answer

Selected Answer:
uses payback period analysis.


Question 11
2 out of 2 points

If the capital budgeting decision includes a replacement analysis, then
Answer

Selected Answer:
only incremental cash flows should be looked at.


Question 12
2 out of 2 points

Using higher discount rates,
Answer

Selected Answer:

accelerated cost recovery depreciation is more valuable than straight line.

Question 13
2 out of 2 points

The coefficient of correlation
Answer

Selected Answer:
takes on values anywhere from -1 to +1.


Question 14
2 out of 2 points

The reason cash flow is used in capital budgeting is because
Answer

Selected Answer:
all of the above.


Question 15
2 out of 2 points

A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash
outflow (purchase price less proceeds from the sale of the old asset) would:
Answer

Selected Answer:
go down.


Question 16
2 out of 2 points

Risk is usually measured as the
Answer

Selected Answer:
variability of outcomes around some expected value.


Question 17
2 out of 2 points

A firm may adopt capital rationing because
Answer

Selected Answer:
a and c.


Question 18
2 out of 2 points

The first step in the capital budgeting process is
Answer

Selected Answer:
idea development.


Question 19
2 out of 2 points

The portfolio effect in capital budgeting refers to
Answer

Selected Answer:
the degree of correlation between various investments.


Question 20
2 out of 2 points

Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with:
Answer

Selected Answer:
normal risk.


Question 1
2 out of 2 points

Which of the following is the lowest in priority of claims against a bankrupt firm?
Answer

Selected Answer:
Common stock


Question 2
2 out of 2 points

All of the following are advantages of going public except
Answer

Selected Answer:
the firm disseminates more information to the public on corporate affairs.


Question 3
2 out of 2 points

Investors consider which of the following to be the most important measure of bond returns?
Answer

Selected Answer:
yield to maturity.


Question 4
2 out of 2 points

Which Stock Exchange is known as the most liquid?
Answer

Selected Answer:
NYSE


Question 5
2 out of 2 points

Private placement of corporate bonds
Answer

Selected Answer:
has increased in use as new bond issues increased.


Question 6
2 out of 2 points

A call feature allows:
Answer

Selected Answer:
the corporation to redeem the bond before the maturity date.


Question 7
2 out of 2 points

Which of the following is not a key role of an investment banker?
Answer

Selected Answer:
Acting as transfer agent


Question 8
2 out of 2 points

The "call" provision on some bonds allows
Answer

Selected
Answer:

the corporation to redeem the bonds earlier than maturity but usually for a premium over the
par value.


Question 9
2 out of 2 points

The higher the tax rate, the ______ the net underwriting cost on the new bond issue.
Answer

Selected Answer:
lower


Question 10
2 out of 2 points

Which of the following best represents the hierarchy of creditor and stockholder claims?
Answer

Selected Answer:
Senior secured debt, subordinated debentures, common stock


Question 11
2 out of 2 points

An indenture is
Answer

Selected Answer:
the contract between a corporation and a trustee acting for bondholders.


Question 12
2 out of 2 points

Which of the following represents an inflow in a bond refunding decision?
Answer

Selected Answer:
Two of the above


Question 13
2 out of 2 points

The Securities Exchange Act of 1934 is primarily concerned with
Answer

Selected Answer:
regulation of organized exchanges.


Question 14
0 out of 2 points

The strong form of the efficient market hypothesis states that
Answer

Selected Answer:
prices reflect all public information.


Question 15
2 out of 2 points

Market stabilization
Answer

Selected Answer:
all of the above.


Question 16
2 out of 2 points

Zero-coupon bonds
Answer

Selected Answer:
provide no annual interest payments.


Question 17
2 out of 2 points

Financial intermediaries serve which of the following purposes?
Answer

Selected Answer:
All of the above.


Question 18
2 out of 2 points

A debenture represents:
Answer

Selected Answer:
unsecured debt.


Question 19
2 out of 2 points

Which of the following is an advantage of floating rate bonds to investors?
Answer

Selected Answer:
Their prices tend to be highly stable regardless of interest rate changes.


Question 20
2 out of 2 points

Which company is a leader in rating bonds?
Answer

Selected Answer:
Moody's Investor Service


Question 21
2 out of 2 points

Which of the following is not a recent trend in investment banking?
Answer

Selected Answer:
The use of self registration by smaller investment bankers.


Question 22
2 out of 2 points

the emergence of trading via ECNs has
Answer

Selected Answer:
lowered the cost of trading.


Question 23
2 out of 2 points

With respect to the United States and its relationship with the rest of the world, it can be said that
Answer

Selected Answer:
foreign investors hold large positions in U.S. government securities.


Question 24
2 out of 2 points

The purpose of secondary trading is to
Answer

Selected Answer:
provide liquidity and competition between investments.


Question 25
2 out of 2 points

Floating rate bonds are most likely to be popular with investors when it is anticipated that
Answer

Selected Answer:
interest rates will go up.


Question 26
2 out of 2 points

Which of the following is an internal source of funds?
Answer

Selected Answer:
Cash flow from depreciation (tax shield)


Question 27
2 out of 2 points

From the corporate issuer viewpoint, a zero-coupon bond allows the firm to:
Answer

Selected Answer:
defer payment obligations


Question 28
2 out of 2 points

Many bonds have some orderly preplanned system of repayment. Which of the following apply?
Answer

Selected Answer:
a and b


Question 29
2 out of 2 points

The Glass Stegal Act prohibited
Answer

Selected Answer:
commercial banks from combining investment banking and commercial banking functions.


Question 30
2 out of 2 points

Which of the following are advantages to private bond placement over public offerings?
Answer

Selected Answer:
Greater flexibility in negotiating terms


Question 1
2 out of 2 points

A major desire of stockholders regarding dividend policy is
Answer

Selected Answer:
dividend stability.


Question 2
2 out of 2 points

A warrant which does not expire until several years in the future and which provides its owner the opportunity to
buy a stock which is rising in price will probably sell for
Answer

Selected Answer:
more than its intrinsic value.


Question 3
2 out of 2 points

A stock dividend will
Answer

Selected Answer:
decrease the retained earnings account.


Question 4
2 out of 2 points

Which would not be considered an ADR stock in the U.S.?
Answer

Selected Answer:
Intel


Question 5
2 out of 2 points

If the price of common stock associated with a convertible bond is less than the conversion price
Answer

Selected Answer:
there is not enough information to tell what the bond price will be.


Question 6
2 out of 2 points

Preferred stock is the least used of all long-term securities because
Answer

Selected Answer:
all of the above.


Question 7
2 out of 2 points

A convertible bond is often utilized
Answer

Selected Answer:
All of the above.


Question 8
2 out of 2 points

Management may repurchase shares of stock in the market
Answer

Selected Answer:
all of the above


Question 9
2 out of 2 points

Which of the following is not true about the life cycle growth and dividend policy?
Answer

Selected Answer:
In the development stage, a firm usually pays stock dividends and some low cash dividends.


Question 10
2 out of 2 points

Preferred stock is often sold by companies
Answer

Selected Answer:
both a and b.


Question 11
0 out of 2 points

In the initial stage (Stage I), the corporation
Answer

Selected Answer:
needs all its earnings for reinvestment in new assets.


Question 12
2 out of 2 points

The theoretical floor value for a convertible bond is its
Answer

Selected Answer:
pure bond value.


Question 13
2 out of 2 points

Conversion price is usually set_______ the prevailing market price of the common stock at the time the bond issue is
sold.
Answer

Selected Answer:
above


Question 14
0 out of 2 points

Which of the following actions will provide the shareholders with the most total wealth when a company conducts a
rights offering?
Answer

Selected Answer:
Exercise the rights and sell the shares.


Question 15
2 out of 2 points

Expectations of a significant increase in the price of a firm's common stock will result in
Answer

Selected Answer:
large conversion premiums for the firm's convertible bonds.


Question 16
2 out of 2 points

According to the "marginal principle of retained earnings," dividends are
Answer

Selected Answer:
the passive variable.


Question 17
2 out of 2 points

The major, overall argument against the "marginal principle of retained earnings" is
Answer

Selected Answer:
its failure to consider stockholder preferences.


Question 18
2 out of 2 points

The par value on a preferred stock entitles the holder:
Answer

Selected Answer:
an established amount of money if the company is liquidated.


Question 19
2 out of 2 points

A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently sell for
$56 per share. The conversion premium is
Answer

Selected Answer:
$215


Question 20
2 out of 2 points

A convertible security is almost always
Answer

Selected Answer:
a security that can be converted into common stock at the holder's option.


Question 21
2 out of 2 points

The owner of a call has
Answer

Selected Answer:
the right but not the obligation to buy an asset at a given price.


Question 22
2 out of 2 points

Which of the following is the correct order of corporate issues based on risk and return? (most risk-return to least
risk-return)
Answer

Selected Answer:
Common stock, subordinated debentures, secured debt, treasury bills.


Question 23
2 out of 2 points

The conversion ratio is the
Answer

Selected Answer:
number of shares of common stock into which the convertible may be converted.


Question 24
2 out of 2 points

A proxy is
Answer

Selected Answer:
an authorization of a registered stockholder to another person to act in his place at the meeting.


Question 25
2 out of 2 points

The following are primary purchasers of preferred stock except
Answer

Selected Answer:
individual investors.


Question 26
2 out of 2 points

Under normal operating conditions the board of directors is elected by
Answer

Selected Answer:
the common stockholders.


Question 27
2 out of 2 points

A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is
Answer

Selected Answer:
an option


Question 28
2 out of 2 points

In the maturity stage, a firm
Answer

Selected Answer:
is growing about the same rate as the economy as a whole.


Question 29
2 out of 2 points

The price of a convertible bond
Answer

Selected Answer:
has only downside limitations.


Question 30
0 out of 2 points

The conversion premium is the greatest and the downside risk the smallest when
Answer

Selected Answer:
the conversion value is greater than the pure bond value.


Question 1
2 out of 2 points

A stock split
Answer

Selected Answer:
does not change the amount in the common stock account.


Question 2
2 out of 2 points

Conversion price is usually set_______ the prevailing market price of the common stock at the time the bond issue is
sold.
Answer

Selected Answer:
above


Question 3
0 out of 2 points

Which of the following is not true about rights trading on organized exchanges.
Answer

Selected Answer:
All are true


Question 4
2 out of 2 points

Preferred stock may be good for a company because it
Answer

Selected Answer:
expands the capital base of the firm without diluting the common stock ownership.


Question 5
2 out of 2 points

All of the following statements are true except
Answer

Selected
Answer:

Stockholders have to approve the acceptance of poison pill strategies before a corporation can
use them.


Question 6
2 out of 2 points

According to the "marginal principle of retained earnings," dividends are
Answer

Selected Answer:
the passive variable.


Question 7
0 out of 2 points

Which of the following is true?
Answer

Selected Answer:
Two of the above are true.


Question 8
2 out of 2 points

Which of the following is not a very common feature of preferred stock?
Answer

Selected Answer:
Voting rights


Question 9
2 out of 2 points

The owner of a put has
Answer

Selected Answer:
the right but not the obligation to sell an asset at a given price.


Question 10
2 out of 2 points

The owner of a call has
Answer

Selected Answer:
the right but not the obligation to buy an asset at a given price.


Question 11
2 out of 2 points

The effect of a rights offering on a stockholder is
Answer

Selected Answer:
to decrease his/her wealth if nothing is done.


Question 12
2 out of 2 points

A proxy is
Answer

Selected Answer:
an authorization of a registered stockholder to another person to act in his place at the meeting.


Question 13
2 out of 2 points

A major desire of stockholders regarding dividend policy is
Answer

Selected Answer:
dividend stability.


Question 14
2 out of 2 points

When a firm enters Stage IV of its life cycle,
Answer

Selected Answer:
The firm has reached maturity.


Question 15
2 out of 2 points

Which of the following statements is true with respect to cumulative voting?
Answer

Selected Answer:
All of the above are true.


Question 16
2 out of 2 points

Which of the following generally does not influence the dividend policy of the firm?
Answer

Selected Answer:
Seasonal changes in the level of cash


Question 17
2 out of 2 points

Expectations of a significant increase in the price of a firm's common stock will result in
Answer

Selected Answer:
large conversion premiums for the firm's convertible bonds.


Question 18
2 out of 2 points

Preferred stock is often sold by companies
Answer

Selected Answer:
both a and b.


Question 19
2 out of 2 points

Warrants are
Answer

Selected Answer:
investments whose value is directly related to the price of the underlying stock.


Question 20
2 out of 2 points

A warrant which does not expire until several years in the future and which provides its owner the opportunity to
buy a stock which is rising in price will probably sell for
Answer

Selected Answer:
more than its intrinsic value.


Question 21
2 out of 2 points

A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently sell for
$56 per share. The conversion premium is
Answer

Selected Answer:
$215


Question 22
2 out of 2 points

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm acquire
the company is called
Answer

Selected Answer:
a poison pill.


Question 23
2 out of 2 points

When comparing common stock of the same company it is fair to say that
Answer

Selected
Answer:

companies sometimes have two different classes of shares with unequal rights to dividends and
votes.


Question 24
2 out of 2 points

Reverse stock splits take place in many cases
Answer

Selected Answer:
to avoid delisting by the stock exchanges and NASDAQ.


Question 25
2 out of 2 points

A stock dividend will
Answer

Selected Answer:
decrease the retained earnings account.


Question 26
0 out of 2 points

Dutch auction preferred stock
Answer

Selected Answer:
is issued first to the bidder willing to accept the lowest yield.


Question 27
2 out of 2 points

If a corporate charter includes a provision for preemptive rights, the stockholders
Answer

Selected Answer:
get first option to buy additional issues of common stock.


Question 28
2 out of 2 points

The computation of basic earnings per share will include consideration of
Answer

Selected Answer:
only shares outstanding.


Question 29
2 out of 2 points

When a company has a convertible bond in its capital structure,
Answer

Selected Answer:
it can reduce its debt-to-equity ratio by calling the bond.


Question 30
2 out of 2 points

Which of the following is not true about the life cycle growth and dividend policy?
Answer

Selected Answer:
In the development stage, a firm usually pays stock dividends and some low cash dividends.


Question 1
2 out of 2 points

Under normal operating conditions the board of directors is elected by
Answer

Selected Answer:
the common stockholders.

Question 2
2 out of 2 points

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?
Answer

Selected Answer:
Retained earnings

Question 3
2 out of 2 points

The subscription rate is generally _______ than the rights-on price and _______ than the ex-rights price.
Answer

Selected Answer:
lower, lower

Question 4
2 out of 2 points

A proxy is
Answer

Selected
Answer:

an authorization of a registered stockholder to another person to act in his place at the
meeting.

Question 5
2 out of 2 points

The computation of basic earnings per share will include consideration of
Answer

Selected Answer:
only shares outstanding.

Question 6
0 out of 2 points

An increasing proportion of shares in the U.S. are owned by:
Answer

Selected Answer:
individual investors.

Question 7
2 out of 2 points

The marginal principle of retained earnings means that each potential project to be financed by retained
earnings must
Answer

Selected
Answer:

provide a higher rate of return than the stockholders can achieve after paying taxes on the
distributed dividends.

Question 8
2 out of 2 points

Which of the following characteristics are drawbacks of convertible bonds?
Answer

Selected Answer:
all of the above are drawbacks of convertibles.

Question 9
0 out of 2 points

A firm with excess cash and few investment alternatives might logically
Answer

Selected Answer:
choose to issue preferred stock.

Question 10
2 out of 2 points

Preferred stock is the least used of all long-term securities because
Answer

Selected Answer:
all of the above.

Question 11
2 out of 2 points

Which of the following statements about floating rate preferred stock is true?
Answer

Selected Answer:
The dividend rate changes quarterly.

Question 12
2 out of 2 points

The owner of a call has
Answer

Selected Answer:
the right but not the obligation to buy an asset at a given price.

Question 13
2 out of 2 points

If the stock price rises substantially above the conversion price, an advantage to the corporation would be
Answer

Selected
Answer:

the bond would most likely be converted into common stock and the debt would not have
to be repaid.

Question 14
2 out of 2 points

The residual theory of dividend policy asserts that
Answer

Selected Answer:
dividends are paid out of the residual remaining after internal investments by the firm.

Question 15
0 out of 2 points

A derivative is a financial instrument whose value is determined by
Answer

Selected Answer:
None of the above.

Question 16
0 out of 2 points

A stock dividend will
Answer

Selected Answer:
decrease the total value of stockholders' equity.

Question 17
0 out of 2 points

Which of the following actions will provide the shareholders with the most total wealth when a company
conducts a rights offering?
Answer

Selected Answer:
Exercise the rights for new shares.

Question 18
2 out of 2 points

A firm may repurchase stock in the market because
Answer

Selected Answer:
all of the above

Question 19
2 out of 2 points

A stock dividend will
Answer

Selected Answer:
decrease the retained earnings account.

Question 20
2 out of 2 points

Warrants are
Answer

Selected Answer:
investments whose value is directly related to the price of the underlying stock.

Question 21
2 out of 2 points

The floor price of a convertible bond cannot fall below
Answer

Selected Answer:
the pure bond value.

Question 22
2 out of 2 points

Which of the following is true?
Answer

Selected
Answer:

As the price of common stock increases, the market price of a convertible bond and the
conversion value increase.

Question 23
2 out of 2 points

"Preemptive rights" means that
Answer

Selected
Answer:

existing shareholders are guaranteed an opportunity to retain their proportional share of
ownership of the firm.

Question 24
0 out of 2 points

Which of the following is not true about preferred stock?
Answer

Selected Answer:
Preferred stocks are often cumulative in respect to dividends.

Question 25
2 out of 2 points

Some dividend reinvestment plans allow the stockholder to acquire shares of stock
Answer

Selected Answer:
all of the above

Question 26
2 out of 2 points

The owner of a put has
Answer

Selected Answer:
the right but not the obligation to sell an asset at a given price.

Question 27
2 out of 2 points

If the price of common stock associated with a convertible bond is less than the conversion price
Answer

Selected Answer:
there is not enough information to tell what the bond price will be.

Question 28
2 out of 2 points

A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently
sell for $56 per share. The conversion premium is
Answer

Selected Answer:
$215

Question 29
2 out of 2 points

When a firm enters Stage III of its life cycle, all of the following are likely to be observed except which?
Answer

Selected Answer:
Sales begin to decrease.

Question 30
2 out of 2 points

When comparing common stock of the same company it is fair to say that
Answer

Selected
Answer:

companies sometimes have two different classes of shares with unequal rights to
dividends and votes.

Question 1
2 out of 2 points

The conversion premium will be large
Answer

Selected Answer:
if investors have great expectations for the price of the common stock.


Question 2
2 out of 2 points

A convertible bond is often utilized
Answer

Selected Answer:
All of the above.


Question 3
2 out of 2 points

Some dividend reinvestment plans allow the stockholder to acquire shares of stock
Answer

Selected Answer:
all of the above


Question 4
2 out of 2 points

Under normal operating conditions the board of directors is elected by
Answer

Selected Answer:
the common stockholders.


Question 5
2 out of 2 points

If the price of common stock associated with a convertible bond is less than the conversion price
Answer

Selected Answer:
there is not enough information to tell what the bond price will be.


Question 6
2 out of 2 points

In Stage II (growth stage), sales and returns on assets will be growing at increasing rates. Which of the following is
true?
Answer

Selected Answer:
Stock dividends (additional shares) are quite common.


Question 7
2 out of 2 points

The subscription rate is generally _______ than the rights-on price and _______ than the ex-rights price.
Answer

Selected Answer:
lower, lower


Question 8
2 out of 2 points

Which of the following is not true about the life cycle growth and dividend policy?
Answer

Selected Answer:
In the development stage, a firm usually pays stock dividends and some low cash dividends.


Question 9
2 out of 2 points

A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is
Answer

Selected Answer:

an option

Question 10
2 out of 2 points

The par value on a preferred stock entitles the holder:
Answer

Selected Answer:
an established amount of money if the company is liquidated.


Question 11
2 out of 2 points

A 2-for-1 stock split is declared. In this case which of following statements is true?
Answer

Selected Answer:
The par value of the common stock is reduced.


Question 12
2 out of 2 points

One advantage to the corporation in selling a convertible bond is:
Answer

Selected Answer:
the interest rate on a convertible is lower than a straight debt issue of equal risk.


Question 13
2 out of 2 points
Preferred stock is often sold by companies

Answer
Selected Answer:
both a and b.


Question 14
2 out of 2 points

If a preferred stock is of the cumulative type
Answer

Selected
Answer:

unpaid dividends of one period must be carried forward and paid in subsequent periods before
anything can be paid to common stockholders.


Question 15
2 out of 2 points

Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?
Answer

Selected Answer:
Retained earnings


Question 16
2 out of 2 points

A rights offering
Answer

Selected Answer:
gives a firm a built-in market for new securities.


Question 17
2 out of 2 points

In which phase of the life cycle would one most likely encounter stock dividends?
Answer

Selected Answer:
Phase II and Phase III.


Question 18
2 out of 2 points

Conversion price is usually set_______ the prevailing market price of the common stock at the time the bond issue is
sold.
Answer

Selected Answer:
above


Question 19
2 out of 2 points

All of the following statements are true except
Answer

Selected
Answer:

Stockholders have to approve the acceptance of poison pill strategies before a corporation can
use them.


Question 20
2 out of 2 points

Which of the following are benefits of a rights offering?
Answer

Selected Answer:
Rights offerings have lower margin requirements.


Question 21
2 out of 2 points

Which contract is an option?
Answer

Selected Answer:
both A and B are options.


Question 22
2 out of 2 points

Options contracts contrast with futures because
Answer

Selected Answer:
options do create an obligation for the owner of the instrument.


Question 23
2 out of 2 points

A proxy is
Answer

Selected Answer:
an authorization of a registered stockholder to another person to act in his place at the meeting.


Question 24
2 out of 2 points

The purpose of cumulative voting is
Answer

Selected Answer:
to allow minority stockholders the possibility of a voice on the board of directors.


Question 25
2 out of 2 points

A reverse stock split
Answer

Selected Answer:
exchanges fewer new shares of common for old shares of common stock.


Question 26
2 out of 2 points

Management may repurchase shares of stock in the market
Answer

Selected Answer:
all of the above


Question 27
2 out of 2 points

A convertible security is almost always
Answer

Selected Answer:
a security that can be converted into common stock at the holder's option.


Question 28
2 out of 2 points

Dutch auction preferred stock
Answer

Selected Answer:
all of the above.


Question 29
2 out of 2 points

Which of the following is not a true statement?
Answer

Selected Answer:
Common stockholders are legally entitled to some dividend.


Question 30
2 out of 2 points

A convertible bond is currently selling for $1335. It is convertible into 20 shares of common which presently sell for
$56 per share. The conversion premium is
Answer

Selected Answer:
$215


Final Exam
Question 1
10 out of 10 points

Ms. Smith borrowed $1,250 at a 11% stated rate of interest and was to pay back the loan in 24 monthly
payments. What is her effective rate of interest?
Answer

Selected Answer:

21.12%
Question 2
10 out of 10 points

Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a
return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio
of 5 to 1 between sales and accounts receivable. What is the return on investment?
Answer

Selected Answer:
25%

Question 3
10 out of 10 points

If government bonds pay 8.5% interest and insured savings accounts pay 5.5% interest, stockholders in a
moderately risky firm would expect return-on-equity values of
Answer

Selected Answer:
above 8.5%, but the exact amount is uncertain.

Question 4
10 out of 10 points

Sharpe Products has 1 million outstanding shares and 9 directors. Cumulonimbus Holdings owns 175,000
shares of Sharpe. How many directors can Cumulonimbus elect with cumulative voting?
Answer

Selected Answer:
1

Question 5
10 out of 10 points

A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the
market value of the bond? Use annual analysis.
Answer

Selected Answer:
over $1,200

Question 6
10 out of 10 points

Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5%
will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and
selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales?
Answer

Selected Answer:
$5,554.50

Question 7
10 out of 10 points

A $1,000 par value bond with a conversion price of $40 has a conversion ratio of
Answer

Selected Answer:
25 shares

Question 8
10 out of 10 points

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of
retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given
the following information, how much will your annual benefits be?

Present value of $1 PVIF= .18
Future value of $1 FVIF = 5.6
Present value of annuity PVIFA= 9.129
Future value of annuity FVIFA = 51.16
Answer

Selected Answer:
$8,043

Question 9
10 out of 10 points

XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. The average collection
period is 90 days (3 months). What was the sales figure for the year?
Answer

Selected Answer:
$6,000,000

Question 10
10 out of 10 points

A firm has profits of $10,000 on unit sales of 5,000 units. Fixed costs are $30,000. What is the firm's break-
even sales level?
Answer

Selected Answer:
less than 4000 units.