Q1. Circle the right statement:
a. in the statement of cash flows, a reduce in inventories is reported as a use of cash.
b. in the statement of cash flows, a diminish in accounts receivable is reported as a use of cash
c. in the statement of cash flows, depreciation charges are reported as a use of cash
d. dividends do not show up in a statement of cash flows because dividends are supposed to be a financing activity, not an operating activity
e. in the statement of cash flows, a decrease in accounts payable is reported as a use of cash
Q2. A company's operations given a negative net cash flow last year, but the cash flow shown on its balance sheet increased. Which of the subsequent statements explains how this could occur?
a. the company repurchased some of its frequent stock
b. the company had high depreciation expenses
c. the company dramatically increased its capital expenditures
d. the company sold some of its fixed assets
e. it is not possible to have a negative total cash flow and show the cash flow on the balance sheet increasing
Q3. Which of the subsequent statements is correct?
a. As the price of a stock rises, the time value portion of an option on a stock increases because the dissimilarity between the price of the stock and the fixed strike price increases
b. Issuing options gives companies with a low cost method of raising capital
c. The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price
d. The potential loss of an option decreases as the option sells at higher and higher prices because the profit margin gets bigger
e. An option's value is evaluated by its exercise value, which is the market price of the stock less its striking price. Thus, an option cannot sell for more than its exercise value
Q4. Circle the correct answer:
a. Call options usually sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be
b. Call options usually sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be
c. Call options usually sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be
d. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock
e. If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.
Q5. Other things held constant, which of the subsequent actions would increase the amount of cash on a company's balance sheet?
a. The company buys a new piece of equipment
b. The company buys common stock
c. the company pays a dividend
d. The company issues a new common stock
e. The company gives customers more time to pay their bills
Q6. Which one of the subsequent statements concerning market and book values is correct?
a. The market value of accounts receivable is usually higher than the book value of those receivables
b. The market value tends to provide a better guide to the actual worth of an asset than does the book value
c. The book value tends to provide a better guide to the actual worth of an asset than does the market value
d. The present book value of equipment purchased last year is equal to the initial cost of the equipment
Short Answer Questions
Q1. Comment on the subsequent statement: "Book value is the value of equity as perceived by investors."
Q2. Comment on the subsequent statement: "Market value generally does not give a true picture of the investment of shareholders in a firm."
Q3. How do book values and market values affect the goal of financial managers?
Q4. How will a firm determine if its level of liquidity is appropriate?