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WorksheetsFM 1
Total questions: 129
Worksheet time: 1hrs 5mins
The goal of the firm should be:
Maximization of profits.
Maximization of shareholder wealth.
Maximization of consumer satisfaction.
Maximization of sales.
"Shareholder wealth" in a firm is represented by:
The market price per share of the firm's common stock.
The number of people employed in the firm.
The book value of the firm's assets less the book value of its liabilities
The amount of salary paid to its employees.
The long-run objective of financial management is to:
maximize return on investment.
maximize the value of the firm's common stock.
maximize earnings per share.
maximize market share.
Financing decisions are answers to questions:
What specific assets should be acquired?
What is the optimal firm size?
What assets should be eliminated?
What is the best dividend policy?
Investment decisions are answers to questions:
What is the best dividend policy?
What is the best type of financing?
What is the best financing mix?
What is the optimal firm size?
A market where new securities are bought and sold for the first time is:
Primary Market
Money Market
Capital Market
Secondary Market
A market for existing (used) securities rather than new issues is:
Primary Market
Capital Market
Capital Market
Secondary Market
You are about to determine your corporation’s taxable income. Which of the below would not be included as a tax-deductible expense?
Depreciation expense
Cost of goods sold
Dividend expense
Marketing expenses
Which of the following is not the responsibility of financial management?
obtaining the best mix of financing alternatives
preparation of the firm's accounting statements
allocation of funds to current and capital assets
development of an appropriate dividend policy
Money markets are markets for
Consumer automobile loans
Short-term debt securities.
Foreign stocks.
U.S. stocks.
The focal point of financial management in a firm is:
the minimization of the amount of taxes paid by the firm.
the dollars in profits earned by the firm.
the creation of value for shareholders.
the number and types of products or services provided by the firm.
Which of the following items is NOT included in current assets?
Bonds
Accounts receivable
Inventory
Cash
The current price at which the stock is currently trading is:
Liquidating Value (per share)
Book Value (per share)
Market Value (per share)
Par Value – The face value
Cost of capital is:
the coupon rate of debt
the average cost of the firm’s assets
the after-tax cost of debt
a hurdle rate set by the board of directors
The market price of a share of common stock is determined by:
the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.
Money market instruments include:
Common stock
Bankers’ acceptances
Corporate bonds
Preferred stock
Capital market instruments include:
Common stock
Bankers’ acceptances
Negotiable certificates of deposit
Commercial note
Which of the following would NOT improve the current ratio?
Issue long-term debt to buy inventory.
Sell common stock to reduce current liabilities.
Borrow short-term to finance additional fixed assets.
Sell fixed assets to reduce accounts payable.
The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if
sales increased relative to expenses.
cost of goods sold increased relative to sales.
Govt. increased the tax rate.
dividends were decreased.
The principal advantage of the sole proprietorship form of business organization is:
Hard to raise additional capital
Unlimited liability
Single tax filing on individual form
Transfer of ownership difficulties
The principal advantage of the corporate form of business organization is that:
Limited liability
Unlimited liability
Low setup cost
Personal tax on profits
Which of the following are not among the daily activities of financial
management?
the receipt and disbursement of funds
credit management
inventory control
sale of shares and bonds
How are earnings per share calculated?
Use the income statement to determine earnings after taxes (net income) and divide by the number of common and preferred shares outstanding.
Use the income statement to determine earnings after taxes (net income) and divide by the forecasted period's earnings after taxes. Then subtract 1 from the previously calculated value
Use the income statement to determine earnings after taxes (net income) and divide by the previous period's earnings after taxes.
Then subtract 1 from the previously calculated value.
Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding.
__ enhance the market value of shares and therefore equity capital is not free of cost.
Dividends
Face value
Redemption value
Book value
__ and
__ are the two versions of goals of the
financial management of the firm.
Production maximisation, Sales maximisation
Profit maximisation, Wealth maximization
Sales maximisation, Profit maximization
Value maximisation, Wealth maximisation
__ is the price at which the bond is traded in the stock exchange.
Face value
Redemption value
Market value
Maturity value
A(n)__ _ would be an example of a principal, while a(n)
__ would be an example of anagent.
shareholder; manager
shareholder; bondholder
accountant; bondholder
manager; owner
__ refers to the amount invested in various components of
current assets.
Net working capital
Temporary working capital
Gross working capital
Permanent working capital
__ is the length of time between the firm’s actual cash expenditure and its own cash receipt.
Working capital cycle
Gross operating cycle
Cash conversion cycle
Net operating cycle
The amount of current assets that varies with seasonal requirements is:
Temporary current assets
Permanent current assets
Temporary fixed assets
Permanent fixed assets
The amount of current assets required to meet a firm’s long-term minimum needs
Temporary current assets
Permanent current assets
Temporary fixed assets
Permanent fixed assets
Net Working Capital is:
Current Assets + Current Liabilities
Current Assets - Current Liabilities
Current Assets / Current Liabilities
Current Liabilities - Current Assets
Permanent working capital
includes fixed assets.
includes accounts payable.
varies with seasonal needs.
is the amount of current assets required to meet a firm's long-term minimum needs.
A firm's operating cycle is equal to its inventory turnover in days (ITD)
plus its RTD minus its payable turnover in days (PTD).
minus its RTD minus its PTD
plus its receivable turnover in days (RTD).
minus its RTD
Which of the following illustrates the use of a hedging (or matching) approach to financing?
Short-term assets financed with equity.
Permanent working capital financed with long-term liabilities.
Short-term assets financed with long-term liabilities.
All assets financed with 50 percent equity, 50 percent long-term debt mixture.
__ _ refers to the length of time allowed by a firm for its customers to make payment for their purchases.
Credit period
Holding period
Pay-back period
Average collection period
A (n) ___ _ current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.
wrong
aggressive
conservative
maturity matching
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short- term debt is considered to be a(an) ___ current operating asset financing strategy because of the inherent risks of using short-term financing.
wrong
aggressive
conservative
maturity matching
__ is a part of Current Liabilities
Accounts Payable
Accounts Receivable
Cash
Inventory
is NOT a part of Current Assets
Accounts Payable
Accounts Receivable
Cash
Inventory
In deciding the appropriate level of current assets for the firm, management is confronted with
a trade-off between short-term versus long- term borrowing.
a trade-off between liquidity and marketability.
a trade-off between equity and debt.
a trade-off between profitability and risk.
Which of the following would be consistent with a more aggressive approach to financing working capital?
Financing permanent inventory buildup with long-term debt.
Financing seasonal needs with short-term funds.
Financing short-term needs with short-term funds.
Financing some long-term needs with short-term funds.
If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a
horizontal merger
vertical merger
international mergers
leveraged buyouts
A __ _ is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope
Defensive tactics
Conglomerate merger
Joint venture
Leveraged buyouts (LBOs)
occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.
Defensive tactics
Conglomerate merger
Joint ventures
Leveraged buyouts (LBOs)
__ and
carry a fixed rate of interest and are to be paid off irrespective of
the firm’s revenues.
Debentures, Bonds
Debentures, Dividends
Dividends, Treasury notes
Dividends, Bonds
If a company issues bonus shares the debt equity ratio will
Will be affected
Will improve
Remain unaffected
Unable to determine without more information
The firm’s target capital structure should be
consistent with which of the following statements?
Minimize the cost of debt.
Maximize the earnings per share (EPS).
Minimize the cost of equity.
Obtain the highest possible bond rating.
In calculating the costs of the individual components of a firm's financing, the
corporate tax rate is important to which of the following component cost
formulas?
common stock
debt
preferred stock
retained earnings
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
Long-term debt
Accounts payable
Common stock
Preferred stock
Which of the following is NOT a cash outflow for the firm?
depreciation
dividends
interest payments
taxes
All of the following influence capital budgeting cash flows EXCEPT:
accelerated depreciation.
method of project financing used.
tax rate changes.
salvage value.
Spontaneous financing includes
a line of credit
accounts receivable
accounts payable
short-term loans
Amounts due from customers when goods are sold on credit are called
__ _.
Trade balance
Trade discount
Trade off
Trade debits
Which of the following is NOT commonly regarded as being a credit policy
variable?
Cash discounts
Collection policy
Credit standards
Payments deferral period
__ _ refers to a firm holding some cash to meet its routine expenses that are incurred in the ordinary course of business.
Speculative motive
Compensating motive
Precautionary motive
Transaction motive
Marketable securities are primarily
long-term debt instruments
short-term debt instruments
long-term equity securities
short-term equity securities
The first priority item in choosing marketable securities is:
Longer maturities and higher rate of return
Expected return and ability to sell quickly without significant price concession
Lowest risk and ability to sell quickly without significant price concession
Higher rate of return
Which of the following marketable securities is the obligation of a commercial
bank?
Negotiable certificate of deposit
Commercial paper
Repurchase agreement
T-bills
Other things held constant, which of the following will cause an increase in net working capital?
Cash is used to buy marketable securities.
Merchandise is sold at a profit, but the sale is on credit.
A cash dividend is declared and paid.
Long-term bonds are retired with the proceeds of a preferred stock issue.
The estimated benefits from a project are expressed as cash flows instead of income flows because:
it is cash, not accounting income, that is central to the firm's capital budgeting decision.
it is simpler to calculate cash flows than income flows.
this is required by the Internal Revenue Service.
this is required by the Securities and Exchange Commission.
If the IRR is greater than the required rate of return, the:
payback will be less than the life of the investment.
present value of all the cash inflows will be greater than the initial outlay.
payback will be greater than the life of the investment.
project should be rejected.
A capital investment is one that
has the prospect of long-term benefits.
has the prospect of short-term benefits.
applies only to investment in fixed assets.
is only undertaken by large corporations.
In the _ , the future value of all cash inflow at the end of time horizon at a particular rate of interest is calculated.
Compounding technique
Risk Premium
Discounting technique
Risk-free rate
You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
A money market transaction
A futures market transaction.
A primary market transaction.
A secondary market transaction.
A company can improve (lower) its debt-to-total
assets ratio by doing which of the following?
Shift short-term to long-term debt.
Sell common stock.
Shift long-term to short-term debt.
Borrow more.
Which of the following is not considered a permanent source of financing?
Common stock
Commercial paper
Preferred stock
Corporate bonds
Which of the following statements is NOT CORRECT?
Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money
Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency
A joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope
The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share
Which of the following statements is NOT CORRECT?
Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money
Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency
A joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope
The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share
The common stock of a company must provide a higher expected return than the debt of the same company because
there is more systematic risk involved for the common stock.
there is less demand for stock than for bonds.
there is greater demand for stock than for bonds.
there is a market premium required for bonds.
Which of the following is not an example of variable costs?
Packaging
Direct labor
Depreciation
Freight costs
Firms generally choose to finance temporary current operating assets with short- term debt because
short-term interest rates have traditionally been more stable than long-term interest rates.
short-term debt has a higher cost than equity capital.
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
The principal advantage of Conservative approach in financing strategy is that:
Borrowing at a higher overall cost
Uncertain regarding future interest costs
Less worry in refinancing short-term obligations
Borrowing more than what is necessary
Which of the following working capital strategies is the most aggressive?
Making greater use of long term finance and minimizing net short term asset.
Making greater use of short term finance and minimizing net short term asset.
Making greater use of long term finance and maximizing net short term asset.
Making greater use of short term finance and maximizing net short term asset.
The principal advantage of Maturity matching approach in financing strategy is that:
Reduces liquidity risk
Easy to implement in practice
High proportion of short term debt
Hard to implement in practice
The principal advantage of Aggressive approach in financing strategy is that:
Borrowing only what is necessary
Less uncertainty regarding future interest costs
Uncertain future interest costs
Refinancing short-term obligations in the future
Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
Increasing current assets while lowering current liabilities.
Replacing short-term debt with equity.
Increasing current assets while incurring more current liabilities.
Reducing current assets, increasing current liabilities, and reducing long-term debt.
Which of the following would NOT be financed from working capital?
Cash float.
Credit sales.
Accounts receivable.
A new personal computer for the office.
__ varies inversely with profitability.
Risk.
Financing.
Liquidity.
Liabilities.
Which of the following statements is CORRECT?
Net working capital is defined as current assets minus the sum of payables and accruals, and any
decrease in the currentratio automatically indicates that net working capital hasdecreased
Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased
If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
The mix between short-term and long-term debt must consider:
Customer satisfaction
Industry norms
Hobby of CFO
Cost of equity
When total current assets exceeds total current liabilities it refers to
Gross Working Capital
Temporary Working Capital
Net Working Capital
Temporary Current Assets
The mix between short-term and long-term debt must consider:
Customer satisfaction
Variability of cash flows
Cost of equity
Hobby of CFO
The mix between short-term and long-term debt must consider:
Customer satisfaction
Variability of sales
Hobby of CFO
Cost of equity
Cash management decisions must consider the risk versus expected return trade-offs from alternative policies because:
Too little cash increases risk; too much cash increases return
Too little cash reduce risk; too much cash reduces return
Too little cash reduces risk; too much cash increases return
Too little cash increases risk; too much cash reduces return
Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
Take steps to reduce the Days sales outstanding – DSO
Sell common stock to retire long-term bonds
Increase average inventory without increasing
sales
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales
Other things held constant, which of the following would tend to reduce the cash conversion cycle?
Carry a constant amount of receivables as sales decline
Offer longer payment terms to customers
Place larger orders for raw materials to take advantage of price breaks
Continue to take all discounts that are offered and pay on the net date
Which of the following is NOT directly reflected in the
cash budget of a firm that is in the zero tax bracket?
Repurchases of common stock
Depreciation
Payments lags
Payment for plant construction
Which of the following actions would be likely to shorten the cash conversion cycle?
a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to
20 days
In ABC inventory classification model, items class A is:
low dollar value items but comprise a relatively small percentage of the total number of items held in inventory
low dollar value items but comprise a large percentage of the total items held in inventory
large dollar value items but comprise a large percentage of the total items held in inventory
large dollar value items but comprise a relatively small percentage of the total number of items held in inventory
In calculating the proportional amount of equity financing employed by a firm, we should use:
the common stock equity account on the firm's balance sheet.
the sum of common stock and preferred stock on the balance sheet.
the current market price per share of common stock times the number of shares outstanding.
the book value of the firm.
Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
a decrease in bad debt losses.
an increase in the average collection period.
higher profits.
an increase in sales.
The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice.
What would receivables be if all customers took the cash discount?
No change from the present level.
Unable to determine without more information.
Higher than the present level.
Lower than the present level.
An increase in the firm's receivable turnover ratio means that:
it is collecting credit sales more quickly than
before.
it has initiated more liberal credit terms.
cash sales have decreased
inventories have increased.
Which of the following statements is most consistent with efficient inventory
management? The firm has a....
low incidence of production schedule disruptions.
relatively high current ratio.
below average inventory turnover ratio.
below average total assets turnover ratio.
Credit policy of every company is largely influenced by
__ _ and __ _.
Liability, liquidity
Liquidity, profitability
Liability, profitability
Liquidity, accountability
Costs of not carrying enough inventory include:
customer disappointment.
lost sales.
possible worker layoffs.
lost sales; customer disappointment; possible worker layoffs.
XYZ is an oil based business company, which does not have adequate working capital. It fails to meet its current obligation, which leads to bankruptcy. Identify the type of decision involved to prevent risk of bankruptcy.
Dividend decision.
Investment decision.
Liquidity decision.
Finance decision
Which of the following statements is CORRECT?
If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off,
then we would expect to see zero accounts payable on its balancesheet
Conservative firms generally use no short-term debt and thus have zero current liabilities
Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the
firm's risk
A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt
A single, overall cost of capital is often used to evaluate projects because
it is the only way to measure a firm's required return
it avoids the problem of computing the required rate of return for each investment proposal.
it acknowledges that most new investment projects have about the same degree of risk.
it acknowledges that most new investment projects have about the same degree of risk.
To increase a given present value, the discount rate should be adjusted
upward
constant
no change
downward.
In order to maximize firm value, management should invest in new assets when the internal rate of return is:
greater or equal to the firm’s marginal cost of
capital.
less than the firm’s marginal cost of capital.
greater than the cost of debt financing.
less than the accounting rate of return.
is defined as the length of time required to recover the initial cash out-lay.
Discounted payback-period
Payback-period
Inventory conversion period
Budget period
When is greater than zero the project should be accepted.
Internal rate of return
Modified internal rate of return
Profitability index
Net present value
Which of the following statements is NOT CORRECT?
Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms
An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower
Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term
loans they must make a more thorough evaluation of the borrower's financial health, and (2) long- term loan agreements are more complex
The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan
A project's profitability index is equal to the ratio of the of a project's future cash flows to the project's_ _
net present value; initial cash outlay
present value; depreciable basis
present value; initial cash outlay
net present value; depreciable basis
The firm should accept independent projects if:
the profitability index is greater than 1.0
the payback is less than the IRR
the NPV is greater than the IRR.
the IRR is positive
Which of the following statements is NOT CORRECT?
Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts
The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs
Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities
Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt. This is especially true if the funds are used to finance long-term assets rather than short-term
assets
Which of the following statements is NOT CORRECT?
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60
Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year
The cash budget is useful to help estimate future financing needs, especially the need for
short-term working capital loans
Which of the following statements is CORRECT?
Most defensive mergers occur as a result of managers' actions to maximize shareholders’ wealth
Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price
In a merger with true synergies, the post- merger value exceeds the sum of the separate companies' pre-merger values
The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from
the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock
Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company
has greater than average financial risk when
compared to other firms in its industry
will not experience any difficulty with its creditors.
has less liquidity than other firms in the industry.
will be viewed as having high creditworthiness.
Which of the following statements is CORRECT?
The IPO market is a subset of the secondary market.
If you purchased 100 shares of Disney stock from your brother-in-law, this would be an example of a primary market transaction.
If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
As they are generally defined, money market transactions involve debt securities with maturities of less than one year
Which of the following statements (in general) is correct?
The higher the tax rate for a firm, the lower the interest coverage ratio.
An increase in net profit margin with no change in sales or assets means a poor ROI
A low receivables turnover is desirable
The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
The debt ratio is a measure of a firm’s:
leverage.
liquidity
profitability.
efficiency.
Which of the following statements is CORRECT?
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate
Commercial paper is a form of short-term
financing that is primarily used by large, strong, financially stable companies
Trade credit is provided only to relatively large, strong firms
Commercial paper is typically offered at a long-term maturity of at least five years
Which of the following statements is NOT CORRECT?
Accruals are "free" in the sense that no explicit interest is paid on these funds
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate
A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital
Bank loans generally carry a higher interest
rate than commercial paper
Which of the following statements is NOT CORRECT?
If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit
A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength
A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan
The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs
Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.
Investment a pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
Investment a pays $125 at the end of every 6- month period for the next 10 years (a total of 20 payments).
Investment a pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
Investment a pays $250 at the end of every year for the next 10 years (a total of 10
payments).
A profitability index of 0.85 for a project means that:
the project's NPV is greater than zero.
the present value of benefits is 85% greater than the project's costs.
the project returns 85 cents in present value for each current dollar invested.
the payback period is less than one year.
Which of the following investments would have the lowest present value?
Assume that the effective annual rate for all investments is the same and is greater than zero.
Investment a pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
Investment a pays $125 at the end of every 6- month period for the next 10 years (a total of 20 payments).
Investment a pays $250 at the end of every year for the next 10 years (a total of 10 payments).
Investment a pays $250 at the beginning of
every year for the next 10 years (a total of 10 payments).
Which of the following statements is correct?
If the NPV of a project is greater than 0, its PI will equal 0.
If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
If the PI of a project is less than 1, its NPV should be less than 0.
If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.
Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company's long-term financing.
1 = bonds; 2 = common stock; 3 = preferred stock.
1 = common stock; 2 = preferred stock; 3 = bonds.
1 = bonds; 2 = preferred stock; 3 = common stock.
1 = preferred stock; 2 = common stock; 3 = bonds
Market values are often used in computing the weighted average cost of capital because
this is the simplest way to do the calculation.
this is consistent with the goal of maximizing shareholder value.
this is a very common mistake.
this is required in the U.S. by the Securities and Exchange Commission.
The term "capital structure" refers to:
shareholders' equity.
total assets minus liabilities.
current assets and current liabilities.
long-term debt, preferred stock, and common stock equity.
The cost of equity capital is all of the following EXCEPT:
by far the most difficult component cost to
estimate.
a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
the minimum rate that a firm should earn on the equity-financed part of an investment
generally lower than the before-tax cost of debt.
Financing a long-lived asset with short-term financing would be
an example of "high risk -- high (potential) profitability" asset financing.
an example of "moderate risk -- moderate (potential) profitability" asset financing.
an example of "low risk -- low (potential) profitability" asset financing.
an example of the "hedging approach" to financing.
Which of the following statements is CORRECT?
The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
Capital market instruments include both long- term debt and common stocks.
An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market
transaction.
Which of the following is a primary market transaction?
One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.
You buy 200 shares of IBM stock from your brother. The trade is not made through a broker - you just give him cash and he gives you the stock.
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
You invest $10,000 in a mutual fund, which
then uses the money to buy $10,000 of IBM shares on the NYSE.
Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?
Common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5
percent annual yield.
A long-term AAA-rated corporate bond with a current annual yield of 9.4 percent.
Ninety-day commercial paper with a current annual yield of 6.2 percent.
A 30-year Treasury bond with a current annual yield of 8.7 percent.
