A cash discount may best be defined as:
1.a reduction in price if payment is made within the specified time period
2.a discount offered to critical suppliers
3.a discount applied to volume sales
4.a discount or the repayment of the firm's debt
A convertible security is:
1.convertible into cash at the option of the holder
2.a bond or share of preferred, convertible into common at the firm's option
3.a bond or share of preferred, convertible into common at the holders' option
4.a security convertible into a debenture at the holder's option
A corporation will typically pay moderate dividends in:
1.Development-Stage I
2.Growth-Stage II
3.Expansion-Stage III
4.Maturity-Stage IV
A stock dividend:
1.represents a distribution of additional shares to common shareholders
2.differs from a stock split largely in size
3.normally has no real value to the investor
4.all of the above are correct
Agency theory examines the:
1.relationship between the owners and managers of the firm
2.insurability of the firm's assets
3.relationship between dividend policy and firm value
4.value of the firm relative to other firms in the industry
All of the following are factors influencing the choice of marketable securities except:
1.yield
2.maturity
3.marketability
4.maximum investment allowed
All of the following are true of capital cost allowance except:
1.it is a non-cash expense
2.it is not tax-deductible
3.it provides tax shield benefits
4.it should not be disregarded in capital budgeting decisions
Amortization is considered a source of funds to the firm because:
1.it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
2.it represents a reduction in asset holdings
3.it represents an increase in an asset account
4.amortization is not a source of funds
Annuity payments are generally assumed to occur:
1.during the period
2.at the beginning of the period
3.at the end of the period
4.it doesn't matter when they occur
Commercial paper may best be defined as:
1.a short term obligation of the government issued to commercial investors
2.short term unsecured promissory notes issued by corporations
3.an insignificant source of funds to large corporations
4.the debt obligations of chartered banks
Debt that is not secured by specific assets is called:
1.an indenture
2.a debenture
3.a mortgage agreement
4.common stock
Financial leverage:
1.reflects the firm's commitment to fixed, financial assets
2.has no impact on the earning of the firm
3.reflects the amount of debt used in the capital structure of the firm
4.primarily affects the left side of the balance sheet
Financial ratios are used to:
1.weigh and evaluate the operating performance of the firm
2.provide an absolute benchmark of industry performance
3.determine which firm will provide the highest return to investors
4.None of the above are correct
If interest or compounding is done on other than an annual basis, adjust by:
1.dividing the number of years by the number of compounding periods
2.multiplying the number of years by the number of compounding periods
3.dividing the interest rate by the number of compounding period
4.multiplying the years and dividing the interest rate by the number of compounding periods
In a lease versus borrow to purchase decision the appropriate discount rate, except for the salvage value, is:
1.the cost of capital
2.the aftertax cost of debt
3.the cost of equity capital
4.the cost of the debt
In establishing credit standards, the firm must consider the nature of the credit risk based on all of the following, except:
1.prior record of payment
2.terms of credit
3.financial stability
4.current net worth
It would be fair to say that securities markets in the future:
1.will become more competitive as an international market system develops
2.will be less efficient
3.will be more highly segregated than they are today
4.will be less automated than today's markets
Most retail stores are mainly concerned with:
1.their buyers' forecasts for the coming season
2.matching sales and inventory levels
3.decreasing inventory turnover
4.their investment in capital assets
One assumption underlying the use of the cost of capital to analyze capital projects is that:
1.current costs will remain the same
2.capital structure will vary with the type of financing
3.different risk projects are required to diversify the firm
4.the analyzed projects are of comparable risk to existing projects
Operating leverage may be defined as:
1.the degree to which debt is used in financing the firm
2.the difference between price and variable costs
3.the extent to which capital assets and fixed costs are utilized
4.the difference between fixed costs and the contribution margin
Preferred equity has all of the following characteristics except:
1.fixed dividends
2.the cumulative right to annual dividends
3.precedence over common stock dividends
4.residual claim to income
Private placement involves selling securities directly to:
1.insurance companies
2.pension funds
3.wealthy individuals
4.all of the above are correct
Profitability ratios measure:
1.the speed at which the firm is turning over its assets
2.the ability of the firm to earn an adequate return on sales, total assets, and invested capital
3.the firm's ability to pay off short term obligations as they are due
4.the debt position of the firm in light of its assets and earning power
Receivables turnover is:
1.a profitability ratio
2.a debt utilization ratio
3.an asset utilization ratio
4.a liquidity ratio
The balance sheet of the firm shows:
1.the profitability of the firm over time
2.the holdings and obligations of the firm
3.the assets of the firm on a current cost basis
4.the receipt and disbursement of corporate funds
The capital budgeting decision involves the planning of expenditures for projects with a life of at least:
1.one year
2.five years
3.ten years
4.fifteen years
The construction of the pro forma income statement is based on:
1.the prior year's income statement
2.sales projections and the production plan
3.the cash budget
4.the cash budget and prior year's income statement
The cost of retained earnings is equal to:
1.the return on new common stock
2.the return on preferred stock
3.the return on existing common stock
4.It does not have a cost.
The efficient frontier represents:
1.the difference between investment returns
2.optimal risk-return tradeoffs
3.the correct investment for all firms to make
4.the correlation between profits and the portfolio effect
The extent to which inventory financing may be employed is based on all of the following, except:
1.the marketability of the pledged goods
2.their associated price stability of the goods
3.the perishability of the goods
4.the control of the goods by the manufacturer
The field of finance is closely related to the fields of:
1.statistics and economics
2.statistics and risk analysis
3.economics and accounting
4.accounting and comparative return analysis
The first area of study to benefit from the focus in the 1950's to a more analytical, decision oriented approach was:
1.cash and inventory management
2.capital budgeting (allocating financial capital to the purchase of plant and equipment)
3.capital structure formulation (the balance between liabilities and equity)
4.dividend policy (the relationship between dividends and earnings)
The first step in preparing the pro forma balance sheet is to:
1.prepare the pro forma income statement
2.prepare the cash budget
3.prepare the statement of cash flows
4.examine the prior period's balance sheet and translate the items through time
The liquidity premium theory suggests that long-term interest rates are higher than short-term interest rates because:
1.investors generally prefer to invest short periods of time
2.government policy maintains this relationship
3.there is greater risk in long-term bonds
4.exchange rate fluctuations establish this relationship
The primary purpose of the cash budget is:
1.to break the income statement down into monthly periods
2.to determine monthly cash receipts
3.to determine the collection pattern
4.to allow the firm to anticipate the need for outside funding
The spread may best be defined as:
1.the compensation due the lead underwriter
2.the total compensation for those participating in the distribution process
3.the price finally paid by the public for the shares
4.the proceeds from the distribution received by the firm
The standard deviation:
1.is the square root of the variance
2.measures dispersion or variability around the expected value
3.may be used to compare investments with the same expected return
4.all of the above are correct
The statement of cash flows:
1.measures changes in net income over time
2.the receipt and disbursement of funds of the firm
3.the assets of the firm and the means by which they are financed
4.emphasizes the critical nature of the firm's cash flows
The valuation of a financial asset is based on determining:
1.the present value of future cash flows
2.the current yield to maturity on long term corporate bonds
3.the capital budgeting process
4.what the corporation is paying to attract preferred shareholders
To an economist, the term income means:
1.sales-cost of goods sold
2.change in real worth taking place between the beginning and each of a period
3.operating profit-interest expense
4.earnings aftertaxes
To determine the price of preferred stock:
1.divide the rate of return by the dividend amount
2.divide the dividend amount by the rate of return
3.divide the dividend amount by the rate of return minus the growth rate
4.divide the dividend amount by the growth rate
To the securities analyst, the most important ratio group is:
1.asset utilization
2.profitability
3.liquidity
4.debt utilization
Under the Du Pont method of analysis, return on total assets is:
1.profit margin times assets turnover
2.net income/total assets
3.income before interest and taxes (EBIT)/total assets
4.net income/sales
Under the marginal principle of retained earnings:
1.the firm must compare what it can earn with what shareholders could earn on funds if they were distributed
2.all funds above and beyond retained earnings are paid to shareholders
3.funds not paid to creditors and preferred shareholders belong to common shareholders
4.all projects are financed internally
Under the payback period:
1.we compute the time required to recoup the original investment
2.there is no consideration of inflows after the cutoff period
3.the time value of money is ignored
4.all of the above are correct
Using a lockbox system to improve collections:
1.is more expensive than the use of collection centers
2.utilizes local banks to clear local payments made to the collection center
3.provides more float than collection centers
4.results in checks being forward to a P.O. box and clearing through local banks
When the coupon rate on a bond is equal to the yield to maturity, the price of the bond will be:
1.par
2.above par
3.below par
4.more information is required
Which of the following constitutes an internal source of funds:
1.corporate bonds
2.common stock
3.commercial paper
4.retained earnings and amortization cash flow
Which of the following is not a step in the development of the pro forma income statement?
1.Establish a sales projection.
2.Determine a production schedule and associated expenses to determine gross profit.
3.Determine the cash receipts.
4.Determine profit by completing the actual pro forma statement.
Which of the following properly lists balance sheet items in order of liquidity, from most liquid to least liquid?
1.Accounts receivable, inventory, marketable securities, cash.
2.Cash, marketable securities, accounts receivable, inventory.
3.Inventory, marketable securities, cash, accounts receivable.
4.Cash, inventory, accounts receivable, marketable securities.