Professional Documents
Culture Documents
stockholders' equity
For both managers and external financial analysts, ______ is the single most
important accounting number found on the income statement.
D operating profit
dividing net profits after tax by the total number of preferred and common
D
stock shares outstanding.
Why is the quick ratio a more appropriate measure of liquidity than the
current ratio for a large-airplane manufacturer?
It recognizes the contribution of all assets so that analysts can see how
A
"quickly" a firm can satisfy its short-term obligations.
It is not more appropriate. The current ratio would provide better information
D
in this situation.
A cash.
B inventories.
C equipment.
D land.
When a firm has no "other income," its operating profit and _____ are equal.
A net income
C EPS
D EBIT
The firm's _______ are primarily interested in ratios that measure the short-
term liquidity of the company and its ability to make principal and interest
payments.
A board of directors
B creditors
C owners
D financial managers
________ ratios would provide the best information regarding total return to
common stockholders.
A Profitability
B Activity
C Liquidity
D Debt
The firm's managers use ratios to ______________.
The _________ flows result from debt and equity financing transactions.
A financing
B operating
C investment
D cash
A Dividends
relies on the ability of senior managers to determine sales objectives for their
B
company's product and inform personnel about targets for each business unit.
relies on the ability of sales personnel to assess future demand, usually without
D
the aid of statistical models.
Most pro forma statements begin with a sales forecast. One approach to
deriving a sales forecast is the top-down approach. Top-down sales forecasts
rely heavily on
B customer input.
will finance long-term assets with long-term financing and short-term assets
D
with short-term financing.
A strategic plan is a
A cash budget is
a sales forecast that includes the volume of business and various asset and
A
liability accounts.
a pro forma financial statement built upon logic of proportion and risk
B
management.
_________ are often used as the plug figure in pro forma projections.
B Cash balances
C Retained earnings
D a and b
C show the additional amount a firm must borrow at the end of each month.
D show the amount of excess a firm has to invest at the end of each month.
A strategy.
C matching principals.
B bottom-up
C regression
D blended
The terms and conditions to which a bond is subject are set forth in its
A Debenture.
B Underwriting agreement.
C Indenture.
D Restrictive covenants.
A Allows management to sell additional shares below the current market price.
Your Aunt Agatha purchased a call option a few months ago. Today is the
expiration date, so she must decide whether to exercise the option. Which of
the following statements is correct? Do not consider brokers' commissions in
your answer.
Aunt Agatha doesn't need to make a decision about exercising the option
A
today; in fact, it would be better if she waited until after the option expires.
Aunt Agatha should exercise the option if the price of the stock is less than the
B
exercise, or strike, price.
Aunt Agatha should exercise the option if the price of the stock is greater than
C
the exercise, or strike, price.
D Aunt Agatha should exercise the option, regardless of the current stock price.
C Flexibility, or the ability to adjust the bond's terms after it has been issued.
B European bank loans that are denominated in the new Euro currency.
The certificates that represent ownership in foreign companies that are sold in
D
the United States.
Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the
A
proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
A firm with a sinking fund payment coming due would generally choose to buy
B back bonds in the open market, if the price of the bond exceeds the sinking
fund call price.
Income bonds pay interest only when the amount of the interest is actually
C earned by the company. Thus, these securities cannot bankrupt a company
and this makes them riskier to investors than regular bonds.
One disadvantage of zero-coupon bonds is that issuing firms cannot realize the
D
tax savings from issuing debt until the bonds mature.
The preemptive right gives each existing common stockholder the right to
A
purchase his or her proportionate share of a new stock issue.
If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in
B
the primary market.
Listing a large firm's stock is often considered to be beneficial to stockholders
C because the increases in liquidity and status probably outweigh the additional
costs to the firm.
Stockholders have the right to elect the firm's directors, who in turn select the
officers who manage the business. If stockholders are dissatisfied with
D management's performance, an outside group may ask the stockholders to
vote for it in an effort to take control of the business. This action is called a
margin call.
Any bond sold outside the country of the borrower is called an international
A
bond.
B Foreign bonds and Eurobonds are two important types of international bonds.
Foreign bonds are bonds sold by a foreign borrower but denominated in the
C
currency of the country in which the issue is sold.
A(n) ____ is generally obtained from a bank or insurance company and the
borrower agrees to make a series of payments consisting of interest and
principal.
A putable bond
B bankers acceptance
C income bond
D term loan
A(n) ____ is a bond that pays no annual interest but is sold at a discount
below par, thus providing compensation to investors in the form of capital
appreciation.
A coupon bond
B income bond
C convertible bond
A cumulative dividends
B callable dividends
C putable dividends
D historical dividends
A ____ is a financial instrument which gives the owner the right but not the
obligation to sell shares of stock at a specified price during a particular time
period.
A convertible security
B call option
C warrant
D put option
A convertible bond
B certificate of deposit
C preferred stock
D inventory
Which of the following is NOT a source of equity on a firm’s balance sheet?
B retained earnings
C common stock
A ____ is an agreement between two firms where one firm agrees to sell
some of its financial assets to another and then buy the financial assets back
from that firm at a later time
A buy back
B call option
C repurchase agreement
D put option
A AAA
B AA
C A
D BBB
D the yield curve under "normal" conditions should be horizontal (i.e., flat.)
Your uncle would like to restrict his interest rate risk and his default risk, but
he still would like to invest in corporate bonds. Which of the possible bonds
listed below best satisfies your uncle's criteria?
If the yield curve is downward sloping, what is the yield to maturity on a 10-
year Treasury coupon bond, relative to that on a 1-year T-bond?
A The yield on the 10-year bond is less than the yield on a 1-year bond.
The yield on a 10-year bond will always be higher than the yield on a 1-year
B
bond because of maturity premiums.
Signifies that investors can get higher returns by investing in bonds than by
D
investing in stocks.
If the expectations theory of the term structure of interest rates is correct,
and if the other term structure theories are invalid, and we observe a
downward sloping yield curve, which of the following is a true statement?
If the maturity risk premium were zero and the rate of inflation were expected
B to increase in the future, then the yield curve for U.S. Treasury securities
would, other things held constant, have an upward slope.
The expectations theory of the term structure of interest rates states that
borrowers generally prefer to borrow on a long-term basis while savers
D
generally prefer to lend on a short-term basis, and that as a result, the yield
curve is normally upward sloping.
Which of the following statements is correct?
Reinvestment rate risk is lower, other things held constant, on long-term than
B
on short-term bonds.
The expectations theory of the term structure of interest rates states that
borrowers generally prefer to borrow on a long-term basis while savers
D
generally prefer to lend on a short-term basis, and that as a result, the yield
curve normally is upward sloping.
Which of the following is not one of the fundamental factors that affect the
cost of money?
A Production opportunities
C Exchange rates
D Risk
Most experts think that in the United States the real risk-free rate fluctuates
between
A one to two percent.
A Stock
B Treasury bills
C Corporate bonds
D Cash
A increases
D doubles
As the demand for funds increase, the demand curve will shift to the ____
resulting in ____ market clearing interest rate.
A right; higher
B left; higher
C right; lower
D left; lower
The ____ premium is compensation for possibility that the borrower will not
be able to pay the debt’s interest and principal on time.
A inflation risk
B maturity risk
C liquidity risk
D default risk
D
The IRR should be calculated to insure that the project's projected rate of
B
return exceeds the required rate of return.
The underlying cause of ranking conflicts between the NPV and IRR methods
is differing
A Initial cost.
D Profitability indices.
The NPV method assumes that cash flows will be reinvested at the risk-free
B
rate while the IRR method assumes reinvestment at the IRR.
The NPV method assumes that cash flows will be reinvested at the required
C rate of return while the IRR method assumes reinvestment at the risk-free
rate.
The change in working capital for a project is the difference between the
C required increase in current assets and the spontaneous increase in current
liabilities and is always positive.
The incremental operating cash flow for capital budgeting includes return on
D invested capital, which is net income, and return of part of invested capital,
which is depreciation.
When equipment is sold, companies receive a tax credit as long as the salvage
C
value is less than the initial cost of the equipment.
A firm is considering the purchase of an asset whose risk is greater than the
current risk of the firm, based on any method for assessing risk. In
evaluating this asset, the decision maker should
Increase the required rate of return used to evaluate the project to reflect the
A
higher risk of the project.
C Reject the asset, since its acceptance would increase the risk of the firm.
Ignore the risk differential if the asset to be accepted would comprise only a
D
small fraction of the total assets of the firm.
The NPV and IRR methods use the same basic equation, but in the NPV method
B the discount rate is specified and the equation is solved for NPV, while in the
IRR method the NPV is set equal to zero and the discount rate is found.
If the required rate of return is less than the crossover rate for two mutually
C
exclusive projects' NPV profiles, a NPV/IRR conflict will not occur.
If you are choosing between two projects which have the same life, and if their
D NPV profiles cross, then the smaller project will probably be the one with the
steeper NPV profile.
If the Federal Reserve Board lowered interest rates, this would, other things
B
held constant, tend to favor short-term as opposed to long-term projects.
For NPV versus IRR ranking conflicts to occur, the projects under consideration
C must have NPV profiles which cross one another. Crossing profiles can occur
only if the two projects differ in the size of the required investment outlay.
Which of the following rules are essential to successful cash flow estimates,
and ultimately, to successful capital budgeting?
Total cash flows are relevant to capital budgeting analysis and the
C
accept/reject decision.
D CAPM method.
Capital budgeting has long-term effects on a firm leading the firm to lose some
A
decision-making flexibility.
____ are decisions about whether to purchase capital projects and add them
to existing assets so as to increase existing operations.
A Replacement decisions
B Expansion decisions
C Independent decisions
____ projects are a set of projects where the acceptance of one project
means that other projects cannot be accepted.
A Mutually exclusive
B Independent
C Replacement
D Expansion
A(n) ____ is a cash outlay that already has been incurred and that cannot
be recovered regardless of whether the project is accepted or rejected.
A sunk cost
B opportunity cost
C externality
A IRR
B NPV
C MIRR
D Payback
Uncertainty regarding the domestic flows that result from converting foreign
cash flows is what type of risk?
A Repatriation
B Expropriation
C Exchange Rate
D Political