A company’s balance sheet shows the value of assets, liabilities, and stockholders’ equity

atthe end of the fiscal year.

for any given period of time

at a specific point in time.

over an annual period.

-On a balance sheet, retained earnings are not “unspent cash” because

theyhave been paid out to common stockholders.

they have an arbitrarily assigned value.

they are always changing.

they have been used to finance the firm’s assets.

-For both managers and external financial analysts, blank______ is the single most important accounting number found on the income statement.

net income (net profit after tax)

earning before interest and taxes (EBIT)

earnings available for common stockholders

operating profit

-Earnings per share (EPS) is calculated by

dividingpretax income by the number of shares of common stock outstanding.

dividing the dividends paid by the number of shares of common stock outstanding.

dividing earnings available for common stockholders by the number of shares of common stock outstanding.

dividing net profits after tax by the total number of preferred and common stock shares outstanding.

-Net working capital

is a measure of a firm’s overall liquidity.

is defined as total assets minus current liabilities.

reflects decreasing firm solvency as it increases

all of the above

-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 “quickly” a firm can satisfy its short-term obligations.

It excludes inventory from the numerator of the ratio because it is difficult to convert inventory to cash and most sales are made on a credit basis.

It recognizes that parts can be quickly converted to cash.

It is not more appropriate. The current ratio would provide better information in this situation.

-The one fixed asset that is not depreciated is blank________.

cash.

inventories.

equipment.

land.

-Return on total assets (ROA) is equal to blank_________.

netprofit margin x total asset turnover.

the product of the components of the DuPont System.

earnings available for common stockholders / total assets.

all of the above.

-When a firm has no “other income,” its operating profit and blank_____ are equal.

netincome

net profit after taxes

EPS

EBIT

-The firm’s blank_______ are primarily interested in ratios that measure the short-term liquidity of the company and its ability to make principal and interest payments.

boardof directors

creditors

owners

financial managers

-When evaluating financial ratios, analysts typically examine a firm’s ratio values

comparedto firms in other industries

compared to the firm’s previous years’ ratios

compared to regional averages

compared to firms with similar net profit margins

-________ratios would provide the best information regarding total return to common stockholders.

Profitability

Activity

Liquidity

Debt

-The firm’s managers use ratios to blank_____________

generatean overall picture of the company’s financial health.

monitor the firm’s performance from period to period.

isolate developing problems.

all of the above

-The blank_________ flows result from debt and equity financing transactions.

financing

operating

investment

cash

-Which of the following is an inflow of corporate cash?

Dividends

Increasing treasury stock

Depreciation charges

Purchasing treasury bills

-The bottom-up method for forecasting sales

relieson the ability of complex statistical models to predict individual unit or regional sales figures, which are added together and reported to senior managers.

relies on the ability of senior managers to determine sales objectives for their company’s product and inform personnel about targets for each business unit.

relies on the ability of sales personnel to correctly apply statistical models in order to obtain firm-wide objectives for increased sales.

relies on the ability of sales personnel to assess future demand, usually without the aid of statistical models.

-Following blank_______ financing strategy takes advantage of short-term interest rates but also increases refinancing risk. Following ______ financing strategy minimizes the risk of a liquidity crisis, but generally increases borrowing costs. Following _______ financing strategy results in the use of long-term funding for permanent assets and short-term financing for temporary or seasonal requirements.

a conservative; a matching; an aggressive

a matching; an aggressive; a conservative

a conservative; an aggressive; a matching

none of the above

-The sustainable growth model gives managers a kind of shorthand projection that ties together blank_____ and _____.

growth objectives; financial needs

external funds required; strategic plan

growth objectives; cash receipts

the cash budget; strategic plan

-The key input required to build a cash budget is blank________

thecash disbursements.

the strategic plan.

the firm’s sales forecast.

the sustainable growth model.

-Which of the following are common cash disbursements?

rentand lease payments

interest payments and taxes

payments of accounts payable and wages

all of the above

-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

macroeconomic and industry forecasts.

customer input.

forecasts from the sales force.

Board of Directors input.

-A firm that employs an aggressive strategy to finance assets

willhave enough long-term financing to cover both its permanent investment in fixed and current assets and the additional seasonal investments in current assets.

will employ riskier borrowing techniques to finance its short-term assets.

will finance a portion of long-term (permanent) growth in assets with short-term financing.

will finance long-term assets with long-term financing and short-term assets with short-term financing.

-A strategic plan is a

forecast of the short-term inflows and outflows of a firm.

long-term guide driven by competitive forces.

projected financial statements typically based on the historical financial relationships within the firm.

short-term financial plan.

-A cash budget is

a sales forecast that includes the volume of business and various asset and liability accounts.

a pro forma financial statement built upon logic of proportion and risk management.

a statement of a firm’s planned inflows and outflows of cash used to ensure that a firm has available cash to meet short-term financial obligations.

a measure of assets matched to liabilities and equity.

-A speedup in blank_____ should _____ a firm’s financing needs; whereas, a slowdown in ______ should ______ financing needs for a firm.

collections; decrease; payments; increase

payments, increase; collections; decrease

collections; increase; payments; increase

payments; increase; collections; increase

-_________are often used as the plug figure in pro forma projectio

Gross fixed assets

Cash balances

Retained earning

a and b

-“Required total financing” figures in a cash budget

showthe monthly financing activities for a firm.

show the monthly change in borrowing for a firm.

show the additional amount a firm must borrow at the end of each month.

show the amount of excess a firm has to invest at the end of each month.

-A long-term financial plan begins with blank___________.

strategy.

pro forma financial statements.

matching principals.

the sustainable growth model.

-When generating pro forma statements, most firms rely on a blank__________ approach to sales forecasts.

top-down

bottom-up

regression

blended

-Most firms when planning for growth focus on

maintainingROI over the firm’s cost of capital.

maximizing Economic Value Added.

meeting asset target growth rates.

meeting sales target growth rates.

-The terms and conditions to which a bond is subject are set forth in its

Debenture.

Underwriting agreement.

Indenture.

Restrictive covenants.

-The preemptive right is important to shareholders because it

Allows management to sell additional shares below the current market price.

Protects the current shareholders against dilution of ownership interests.

Is included in every corporate charter.

Will result in higher dividends per share.

-Companies can issue different classes of common stock. Which of the following statements concerning stock classes is correct?

All common stocks fall into one of three classes: A, B, and C.

Most firms have several classes of common stock outstanding.

All common stock, regardless of class, must have voting rights.

None of the above statements is necessarily true.

-Pure options are instruments that are

Created by investors outside the firm.

Bought and sold primarily by investors and speculators.

Of greater importance to investors than to financial managers.

All of the above.

-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 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 exercise, or strike, price.

Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price.

Aunt Agatha should exercise the option, regardless of the current stock price.

-Which of the following are generally considered advantages of term loans over publicly issued bonds?

Lower flotation costs.

Speed, or how long it takes to bring the issue to market.

Flexibility, or the ability to adjust the bond’s terms after it has been issued.

All of the above.

-Eurodebt is the term used to designate

Debt sold by a foreign borrower that is denominated in the currency of the country where it is sold.

European bank loans that are denominated in the new Euro currency.

Debt that is denominated in a currency that is different than the currency of the country in which it is sold.

Equity instruments of one country that are sold in another country.

-An American Depository Receipt (ADR) represents

Debt sold by a foreign borrower that is denominated in the currency of the country where it is sold.

Certificates representing ownership in stocks of foreign companies that are held in trust by a bank located in the country the stock is traded.

Equity instruments of one country that are sold in another country.

The certificates that represent ownership in foreign companies that are sold in the United States.

Which of the following statements is correct?

Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.

A firm with a sinking fund payment coming due would generally choose to buy 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 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 tax savings from issuing debt until the bonds mature.

-Which of the following statements concerning common stock and the investment banking process is false?

The preemptive right gives each existing common stockholder the right to 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 the primary market.

Listing a large firm’s stock is often considered to be beneficial to stockholders 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 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.

-Which of the following statements is false?

Any bond sold outside the country of the borrower is called an international bond.

Foreign bonds and Eurobonds are two important types of international bonds.

Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.

The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.

-A(n) blank____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.

putable bond

bankers acceptance

income bond

term loan

-A(n) blank____ 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.

coupon bond

income bond

convertible bond

zero coupon bond

-A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?

cumulative dividends

callable dividends

putable dividends

historical dividends

-A blank____ 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

convertible security

call option

warrant

put option

-Which of the following is NOT an example of a financial asset?

convertible bond

certificate of deposit

preferred stock

inventory

-Which of the following is NOT a source of equity on a firm’s balance sheet?

additional paid-in capital

retained earnings

common stock

property, plant, and equipment

-A blank____ 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

buyback

call option

repurchase agreement

put option

-Bond ratings of blank____ and higher are considered investment grade

AAA

AA

A

BBB

-Which of the following statements is most correct? Other things held constant,

the “liquidity preference theory” would generally lead to an upward sloping yield curve.

the “market segmentation theory” would generally lead to an upward sloping yield curve.

the “expectations theory” would generally lead to an upward sloping yield curve.

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?

AAA bond with 10 years to maturity.

BBB perpetual bond.

BBB bond with 10 years to maturity.

AAA bond with 5 years to maturity.

-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?

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 bond because of maturity premiums.

It is impossible to tell without knowing the coupon rates of the bonds.

The yields on the two bonds are equal.

-An inverted yield curve

Exists when short-term rates exceed long-term rates.

Exists when long-term rates exceed short-term rates

Represents the “normal term structure.”

Signifies that investors can get higher returns by investing in bonds than by 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?

Investors expect short-term rates to be constant over time.

Investors expect short-term rates to increase in the future.

Investors expect short-term rates to decrease in the future.

It is impossible to say unless we know whether investors require a positive or negative maturity risk premium.

-Which of the following statements is most correct?

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to 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 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?

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slope downward.

The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers 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?

Production opportunities

Time preferences for consumption

Exchange rates

Risk

-Most experts think that in the United States the real risk-free rate fluctuates between

one to two percent.

two to four percent.

four to seven percent

eight to twelve percent

-Which of the following assets is the most liquid?

Stock

Treasury bills

Corporate bonds

Cash

-During recessions the demand for funds typically blank____.

increases

stays the same

decreases

doubles

-As the demand for funds increase, the demand curve will shift to the blank____ resulting in ____ market clearing interest rate.

right; higher

left; higher

right; lower

left; lower

-The blank____ premium is compensation for possibility that the borrower will not be able to pay the debt’s interest and principal on time.

inflation risk

maturity risk

liquidity risk

default risk

-When a project’s NPV exceeds zero,

The project will also be acceptable using payback criteria.

The IRR should be calculated to insure that the project’s projected rate of return exceeds the required rate of return.

The project should be accepted without any further consideration, assuming we are confident that the cash flows and the required rate of return have been properly estimated.

Only answers a and c are correct.

-The underlying cause of ranking conflicts between the NPV and IRR methods is differing

Initial cost.

Reinvestment rate assumption.

Cash flow timing.

Profitability indices

-Which of the following statements is correct?

The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.

The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the IRR.

The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate.

The NPV method does not consider the inflation premium.

-Which of the following statements is most correct?

Sunk costs should be ignored in capital budgeting.

Opportunity costs should be ignored in capital budgeting.

Externalities should be ignored in capital budgeting.

Answers a, b, and c are all correct.

-Which of the following statements is correct?

Capital budgeting analysis for expansion and replacement projects is essentially the same because the types of cash flows involved are the same.

The replacement decision involves an analysis of two independent projects where the relevant cash flows include the initial investment, additional depreciation, and the terminal value.

The change in working capital for a project is the difference between the 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 invested capital, which is net income, and return of part of invested capital, which is depreciation.

-Which of the following statements is correct?

Capital budgeting analysis for expansion and replacement projects is essentially the same because the types of cash flows involved are the same.

In estimating incremental operating cash flows for the purpose of capital budgeting, interest payments should not be included since the effects of these payments are already included in the rate of return the firm is required to earn from its investments.

When equipment is sold, companies receive a tax credit as long as the salvage value is less than the initial cost of the equipment.

All of the above answers are correct.

-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 higher risk of the project.

Increase the NPV of the asset to reflect the greater risk.

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 small fraction of the total assets of the firm.

-Which of the following statements is correct?

Because discounted payback takes account of the required rate of return, a project’s discounted payback is normally shorter than its regular payback.

The NPV and IRR methods use the same basic equation, but in the NPV method 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 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 NPV profiles cross, then the smaller project will probably be the one with the steeper NPV profile.

-Which of the following statements is correct?

Large costs occur at the end of nuclear power plants’ lives because these plants have to be closed down, and shutdown costs are high due to the difficulty of handling radioactive materials. For this reason, it is possible that a nuclear plant project could have two IRRs.

If the Federal Reserve Board lowered interest rates, this would, other things 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 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.

All of the above statements are false.

-Which of the following rules are essential to successful cash flow estimates, and ultimately, to successful capital budgeting?

The return on invested capital is the only relevant cash flow.

Only incremental cash flows are relevant to the accept/reject decision.

Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.

All of the above are correct.

-Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project?

Risk premium method.

Pure play method.

Accounting beta method.

CAPM method.

-Which of the following statements is correct?

Capital budgeting has long-term effects on a firm leading the firm to lose some decision-making flexibility.

Because asset expansion is fundamentally related to future sales, the decision to buy an asset involves an implicit sales forecast.

Timing is important in capital budgeting.

All of the above are correct.

-____are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations.

Replacement decisions

Expansion decisions

Independent decisions

Mutually exclusive decisions

-____projects are a set of projects where the acceptance of one project means that other projects cannot be accepted.

Mutually exclusive

Replacement

Expansion

-A(n) blank____ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.

sunk cost

opportunity cost

externality

incremental cash flow

-Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows?

IRR

NPV

MIRR

Payback

-Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk?

Repatriation

Expropriation

Exchange Rate

Political