Questions:
1) Occurs when a "follower" receives the benefit of an expenditure made by a "leader" by imitating the leader's behavior.
A. free-rider problem
B. The Principle of Comparative Advantage
C. asymmetric information
D. put option
2) Occurs when inaccurate information can falsely exist.
A. moral hazard
B. The Principle of Valuable Ideas
C. free-rider problem
D. adverse selection
3) Refers to situations wherein the agent can take unseen actions for personal benefit even though such actions are costly to the principal.
A. adverse selection
B. moral hazard
C. zero-sum game
D. The Behavioral Principle
4) The annual report refers to
A. a report issued annually by managers to primarily convey information about select working capital ratios.
B. the length of time remaining until an asset's maturity.
C. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
D. the extent to which something can be sold for cash quickly and easily without loss of value.
5) Remaining maturity refers to:
A. the length of an asset's life when it is issued.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
C. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
D. the amount of time remaining until its maturity.
6) Generally accepted accounting principles (GAAP) refers to
A. the length of an asset's life when it is issued.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
C. a report issued annually by a firm that includes, at a minimum, an income statement, a balance sheet, a statement of cash flows, and accompanying notes.
D. the extent to which something can be sold for cash quickly and easily without loss of value.
7) Original maturity refers to:
A. the length of an asset's life when it is issued.
B. a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
C. the price for which something could be bought or sold in a reasonable length of time, where "reasonable length of time" is defined in terms of the item's liquidity.
D. the net amount (net book value) for something shown in quarterly accounting statements.
8) The firm's assets in the balance sheet refer to:
A. the extent to which something can be sold for cash quickly and easily without loss of value.
B. the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).
C. the productive resources in the firm's operations
9) Book value (or Net book value) refers to:
A. the length of an asset's life when it is issued.
B. the statement of a firm's financial position at one point in time, including its assets and the claims on those assets by creditors (liabilities) and owners (stockholders' equity).
C. the price for which something could be bought or sold in a reasonable length of time, where "reasonable length of time" is defined in terms of the item's liquidity.
D. the net amount shown in the accounting statements.
10) The return expected by equity investors is called the __________.
A. market capitalization rate.
B. dividend yield.
C. average cost of capital.
D. none of these
11) Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
A. The market value of the bond is more than $1,000
B. The current yield was a lot less than 9% when the bond was first issued
C. The current yield was a lot greater than 9% when the bond was first issued
D. The market value of the bond is less than $1,000
12) Preferred stock payment obligations are typically __________.
A. viewed like debt obligations.
B. issued with a maturity date.
C. valued as an annuity.
D. none of these
13) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
A. lower transaction costs.
B. less political risk.
C. costs of converting currencies.
D. all of these
14) Certain countries have restrictions. In practice, U.S. investors have NOT invested very much internationally. Possible factors include __________.
A. non-listing of foreign securities on U.S. stock exchanges.
B. foreign tax considerations.
C. efficiency in converting currencies.
D. all of these
15) For diversified investors, the proper measure of a stock's risk is __________.
A. its nonsystematic risk.
B. its nondiversifiable risk.
C. its specific risk.
D. its standard deviation.
16) One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as __________.
A. the lending rate of interest
B. the prime rate of interest
C. the current rate of interest
D. the nominal rate of interest
17) Which of these investments would you expect to have the highest rate of return for the next 20 years?
A. intermediate-term U.S. government bonds
B. U.S. Treasury bills
C. long-term corporate bonds
D. anybody's guess
18) According to the Principle of Risk-Return Trade-Off, investors require a higher return to compensate for __________.
A. less risk
B. lack of diversification
C. diversification
D. greater risk
19) Suppose the Ruskin Oil Corporation has $150,000 for both its book balance and its bank balance. It takes 4 days for a check to clear. If Ruskin writes a $3,000 check, which of the following statements is false?
A. Ruskin's available balance is $150,000, its book balance is $147,000, and its disbursement float is $3,000.
B. If Ruskin writes a $3,000 check that takes 4 days to clear, during this period, $3,000 of disbursement float has been created.
C. Ruskin's book balance declines by the amount of the check, from $150,000 to $147,000, but the bank balance is unchanged until the check clears.
D. After the check clears, the book and bank balances will both be $147,000 and there is no more disbursement float.
20) Stony Products has a payables turnover of six times. What is Stony's payables deferral period (PDP)?
A. about 30.42 days
B. about 56.50 days
C. about 60.83 days
D. none of these
21) Stony Products has a receivables turnover of ten times. What is Stony's receivables collection period (RCP)?
A. about 35.42 days
B. about 36.50 days
C. about 40.83 days
D. none of these
22) __________ says to calculate the incremental after-tax cash flows connected with working capital decisions.
A. The Principle of Time Value of Money
B. The Signaling Principle
C. The Principle of Incremental Benefits
D. The Options Principle
23) __________ says to compare the benefits and costs of alternative uses and sources of money using after-tax APYs.
A. The Principle of Incremental Benefits
B. The Principle of Time Value of Money
C. The Signaling Principle
D. The Options Principle
24) Bank term loans represent __________.
A. long-term loans that looks like short-term debt
B. loans for specified amounts that require borrowers to repay them according to specified schedules
C. the pledge of receivables
D. all of these
25) Which (if any) of the below statements is false?
A. Higher collection costs reduce the NPV and but cannot cause it to be negative.
B. A customer who is likely to make late payments is also more likely to default and to require extra collection efforts.
C. Credit bureau reports give information about any legal judgments against the firm.
D. none of these
26) Credit-policy decisions involve all aspects of receivables management. The decision does NOT include which of the following?
A. monitoring receivables and avoiding actions for slow payment
B. setting evaluation methods and credit standards
C. the choice of credit terms
D. controlling and administering the firm's credit functions
27) Most credit sales are made on an open account basis, which means __________.
A. that customers cannot simply purchase what they want.
B. that customers simply purchase what they want.
C. that suppliers dictate the terms of the purchase.
D. that suppliers cannot dictate the terms of the purchase.
28) An all-equity-financed firm would __________.
A. not pay corporate income taxes because it would have no interest expense.
B. not pay any income taxes because interest would exactly offset its taxable income.
C. pay corporate income taxes because it would have interest expense.
D. pay corporate income taxes if its taxable income is positive.
29) A profitable firm would __________.
A. pay corporate income taxes because it would have interest expense.
B. pay corporate income taxes because it would not have interest expense.
C. pay corporate income taxes if it had a positive taxable income.
D. none of these
30) Whenever a firm splits itself into separate units, with each unit having limited liability with respect to its financing, the capital structure of each unit becomes __________.
A. an irrelevant consideration for a cost of capital.
B. the relevant consideration for a cost of capital.
C. important only if the firm faces financial distress.
D. none of these
31) There are two important tax considerations for a capital budgeting project. These include which (if any) of the following?
A. It is indeed cash flow that's irrelevant.
B. The standard cash flow estimation does not explicitly identify the financing costs.
C. The Principle of Incremental Benefits reminds us that it is the incremental cash flow that's relevant.
D. none of these
32) Projects can be classified into various categories. These include:
A. maintenance expenditures projects that involve replacing worn-out or damaged equipment.
B. cost savings and revenue enhancement projects that include improvements in production technology to realize cost savings and marketing campaigns to achieve revenue enhancement.
C. capacity expansion projects that involve expanding the current business by adding new equipment and facilities.
D. all of these
33) Ideas for capital budgeting projects come from all levels within an organization. The bottom up process results in ideas percolating through the organization.
A. sideways
B. downward
C. upward
D. any way
34) In practice, the __________ rule is preferred.
A. IRR
B. NPV
C. PI
D. Payback
35) Whenever projects are both independent and conventional, then the IRR and NPV methods agree. Which of the following statements is true?
A. A mutually exclusive project is one that can be chosen independently of other projects.
B. When undertaking one project prevents investing in another project, and vice versa, the projects are said to have a positive payback.
C. A conventional project is a project with an initial cash outflow that is followed by one or more expected future cash inflows.
D. all of these
36) The __________ method breaks down when evaluating projects in which the sign of the cash flow changes.
A. IRR
B. NPV
C. PI
D. Payback
37) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.
A. hiring and firing practices.
B. the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards.
C. what the arbitrage pricing theory tells us.
D. none of these
38) A firm cannot simply adopt the industry average debt ratio, because differences exist among firms in any particular industry with respect to __________.
A. tax position.
B. size.
C. competitive position.
D. all of these
39) Studies show systematic differences in capital structures across industries. These are due mostly to differences in __________.
A. the ability of assets to support borrowing.
B. the firm's inventory turnover ratio.
C. accounting practices.
D. management's attitude toward what other industries are doing.
40) Which of the following favors a high dividend payout policy?
A. no legal restrictions
B. policy restrictions affecting trust and endowment funds
C. higher taxes
D. all of these
41) There can be a variety of motives for stock repurchases including __________.
A. a decrease in anticipated earnings.
B. a buyback of undervalued stock.
C. a decrease in leverage.
D. all of these
42) Some countries have __________ in which shareholders' returns are not fully taxed twice.
A. an imputation tax system
B. a split tax system
C. a two-tier tax system
D. none of these
43) Conditional sales contracts __________.
A. are seldom issued to finance the purchase of aircraft
B. are similar to equipment trust certificates
C. enable the borrower to obtain title to the assets only before it fully repays the debt
D. all of these
44) The Time Value of Money Principle says __________.
A. to set a price and other terms that investors will find acceptable when issuing securities
B. to use discounted cash flow analysis to compare the costs and benefits of financing decisions, such as alternative securities to sell, lease versus borrow and buy, and bond refunding
C. to look for the most advantageous ways to finance the firm, such as the lowest-cost debt alternative
D. that announcing the firm's decision to issue securities conveys information about the firm
45) Stated maturity is __________.
A. usually a fixed rate, but it can be a variable rate that's adjusted according to a specified formula
B. the amount the borrower must repay
C. the date the borrower must repay the money it borrowed
46) The Time Value of Money Principle says to __________.
A. recognize that the cancellation option in a lease is valuable to the lessee.
B. use discounted cash flow analysis to compare the costs and benefits of leasing, relative to the alternative of borrowing and buying.
C. look for profitable opportunities to lease (or rent) an asset, rather than borrow and buy it.
D. look for profitable opportunities to arrange project financing or limit partnership financing for an asset you wish to purchase.
47) __________ says to calculate the net advantage of leasing based on the incremental after-tax benefits that leasing will provide.
A. The Principle of Comparative Advantage
B. The Principle of Incremental Benefits
C. The Options Principle
D. The Capital Market Efficiency
48) __________ says to look for opportunities to develop asset-based financing arrangements that offer new positive-NPV financing mechanisms.
A. The Principle of Self-Interested Behavior
B. The Principle of Comparative Advantage
C. The Principle of Valuable Ideas
D. The Time Value of Money Principle
49) The wholesale price for Captain John's is $1.00 per loaf, and the variable cost of production is $0.50 per loaf. Captain John's is expecting that expansion will allow them to sell an additional 5.0 million loaves in the next year. What additional revenues minus expenses will be generated from expansion?
A. $25,000
B. $250,000
C. $550,000
D. none of these
[Contribution margin = wholesale price ? variable cost = $1.00 ? $0.50 = $0.50 per loaf. The additional 5 million loaves would therefore generate an increase of $0.50 per loaf times 5 million loaves = $2,500,000 in revenues minus expenses each year.]
50) The wholesale price for Captain John's is $3.00 per loaf. One million loaves will be sold in the next year. What is the contribution margin?
A. $3,000,000
B. cannot tell
C. $3,000,000 minus fixed costs
D. $3.00
51) The wholesale price for Captain John's is $0.612 per loaf, and the variable cost of production is $0.387 per loaf. Captain John's is expecting that expansion will allow them to sell an additional 4.5 million loaves in the next five years. What additional revenues minus expenses will be generated from expansion?
A. $1,012,500
B. $1,102,000
C. $1,000,500
D. $912,500
52) In efficient markets, as in the United States, you should think long and hard before you conclude that a market price is __________.
A. wrong.
B. fair.
C. followed by many analysts.
D. all of these
53) Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is ___________.
A. caught up in a bear market.
B. being sold by insiders.
C. overvalued.
D. undervalued.
54) Which of the following statements is true?
A. Soft capital rationing refers to the rationing imposed externally by limited funds for borrowing from outside sources.
B. Hard capital rationing refers to the rationing imposed internally by the firm.
C. A post audit is a set of procedures for evaluating a capital budgeting decision after the fact.
D. all of these
55) __________ says to forecast the firm's cash flows, and analyze the incremental cash flows of alternative decisions.
A. The Principle of Incremental Benefits
B. The Principle of Risk-Return Trade-Off
C. The Time Value of Money Principle
D. The Signaling Principle
56) __________ says to carefully evaluate and monitor the financial plan's impact on the firm and its stakeholders.
A. The Principle of Capital Market Efficiency
B. The Principle of Self-Interested Behavior
C. The Principle of Diversification
D. The Principle of Risk-Return Trade-Off
57) __________ says to use common industry practices as a good starting place for the planning process.
A. The Principle of Self-Interested Behavior
B. The Principle of Valuable Ideas
C. The Behavioral Principle
D. The Principle of Incremental Benefits