1. A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
True
False
2. Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.
True
False
3. The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.
True
False
4. A publicly owned corporation is a company whose shares are held by the investing public, which may not include other corporations or institutions as shareholders.
True
False
5. If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the Nasdaq Index.
True
False
6. The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.
True
False
7. Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
True
False
8. Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
True
False
9. The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
True
False
10. EBITDA stands for earnings before interest, taxes, debt, and assets.
True
False
11. Consider the following balance sheet, for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
Cash $ 50,000 Accounts payable $ 100,000
Inventory 200,000 Accruals 100,000
Accounts receivable 250,000 Total CL $ 200,000
Total CA $ 500,000 Debt 200,000
Net fixed assets $ 900,000 Common stock 200,000
Retained earnings 800,000
Total assets $1,400,000 Total L & E $1,400,000
True
False
12. Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.
True
False
13. To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.
True
False
14. Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
True
False
15. Retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
True
False
16. Which of the following is an example of a capital market instrument?
Commercial paper.
Preferred stock.
U.S. Treasury bills.
Banker's acceptances.
Money market mutual funds.
17. Money markets are markets for
Foreign currencies.
Consumer automobile loans.
Common stocks.
Long-term bonds.
Short-term debt securities such as Treasury bills and commercial paper.
18. Which of the following statements is CORRECT?
If you purchase 100 shares of Disney stock from your brother-in-law, this is 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.
The NYSE is an example of an over-the-counter market.
Only institutions, and not individuals, can engage in derivative market transactions.
As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
19. Which of the following statements is CORRECT?
The New York Stock Exchange is an auction market, and it has a physical location.
Home mortgage loans are traded in the money market.
If an investor sells shares of stock through a broker, then it would be a primary market transaction.
Capital markets deal only with common stocks and other equity securities.
While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
20. Which of the following statements is NOT CORRECT?
When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held."
"Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.
When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market.
It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.
21. Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?
The company repurchases common stock.
The company pays a dividend.
The company issues new common stock.
The company gives customers more time to pay their bills.
The company purchases a new piece of equipment.
22. Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?
The company sold a new issue of bonds.
The company made a large investment in new plant and equipment.
The company paid a large dividend.
The company had high depreciation expenses.
The company repurchased 20% of its common stock.
23. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
The company cut its dividend.
The company made large investments in fixed assets.
The company sold a division and received cash in return.
The company issued new common stock.
The company issued new long-term debt.
24. Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?
$17.83
$18.72
$19.66
$20.64
$21.67
25. Rao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than depreciation, and $3.00 million of depreciation. It had $8.50 million of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. What was Rao's operating income, or EBIT, in millions?
$3.21
$3.57
$3.97
$4.41
$4.90