• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/132

Click to flip

132 Cards in this Set

  • Front
  • Back
Which of the following correctly describe a dealer market?
I. Dealers match buyers with sellers
II. Dealers buy and sell for themselves at their own risk
III. Dealer trading occurs over-the-counter
IV. Dealer transactions occur on a trading floor

a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
e. I, II, and III only
c. II and III only
The primary market is:

a. the market where all new issues of debt and equity securities are sold to the public
b. the NYSE
c. a reference to any auction market
d. a reference to any dealer market
e. any large stock exchange accessible to the general public for trading either debt or equity securities
a. the market where all new issues of debt and equity securities are sold to the public
Which of the following are potential stakeholders of a public corporation?

I. company creditors
II. company employees
III. federal and state government
IV. company suppliers

a. II only
b. III only
c. I and IV only
d. I, II, and IV only
e. I, II, III, and IV
e. I, II, III, and IV
The intent of the Sarbanes-Oxley Act of 2002 is increased:

a. dividend payouts to shareholders
b. disclosure of accounting information on privately held firms
c. protection against corporate accounting fraud
d. disclosure of shareholder information
e. disclosure of trading information for each of the U.S. stock exchanges
c. protection against corporate accounting fraud
Which of the following are advantages of the corporate form of organization?
I. ability to raise large sums of capital
II. ease of ownership transfer
III. corporate taxation
IV. unlimited firm life

a. I and II only
b. III and IV only
c. II, III, and IV only
d. I, II, and IV only
e. I, II, III, and IV
d. I, II, and IV only
The financial statement that summarizes a firm's operations over a period of time is called a(n):

a. income statement
b. cash flow statement
c. production report
d. balance sheet
e. periodic operating statement
a. income statement
Over the past year, a firm increased its current assets and decreased its current liabilities. As a result, the firm's net working capital:

a. had to increase
b. had to decrease
c. could have remained constant
d. could have either increased, decreased, or remained constant
e. was unaffected as the changes occurred in the firm's current accounts
a. had to increase
Which one of the following statements concerning the balance sheet is correct?

a. Total assets equal total liabilities minus total equity
b. Net working capital is equal to total assets minus current liabilities
c. Net fixed assets are equal to the initial cost of all the firm's long-term assets
d. Current assets are equal to total assets minus net working capital
e. Shareholders' equity is equal to net working capital plus net fixed assets minus long-term debt
e. Shareholders' equity is equal to net working capital plus net fixed assets minus long-term debt
The average tax rate is defined as the:

a. amount of tax due on the next dollar of taxable income
b. total tax paid divided by total revenue
c. total tax paid divided by total assets
d. amount of tax due on the next dollar of revenue
e. total taxes divided by total taxable income
e. total taxes divided by total taxable income
Which one of the following will increase the cash flow from assets, all else constant?

a. an increase in net capital spending
b. a decrease in the cash flow to creditors
c. an increase in depreciation
d. an increase in the change in net working capital
e. a decrease in dividends paid
c. an increase in depreciation
The internal growth rate is best described as the ______ growth rate achievable _____.

a. minimum; if a firm retains all of its net income
b. minimum; if a firm maintains a constant debt-equity ratio
c. maximum; if a firm finances the growth through the issuance of new shares of common stock
d. maximum; if a firm finances the growth with retained earnings and no external financing
e. maximum; if external debt financing is utilized
d. maximum; if a firm finances the growth with retained earnings and no external financing
A common-size income statement:
I. expresses all values as a percent of total assets
II. will not include depreciation as it is a non-cash expense
III. expresses net income as 100 percent
IV. can be used to compare the performance of a firm both over time and against its industry

a. I and III only
b. IV only
c. III and IV only
d. I, II, and III only
e. II, III, and IV only
b. IV only
The market-to-book ratio of a leveraged firm compares the price per share of stock to the:

a. par value per share
b. common stock plus paid in surplus per share
c. total assets per share
d. total equity per share
e. earnings per share
d. total equity per share
Which one of the following indicates a firm is utilizing its assets less efficiently than it has in the past?

a. an increase in the cash ratio
b. an increase in the fixed asset turnover ratio
c. a decrease in days' sales in receivables
d. an increase in the profit margin
e. a decrease in the inventory turnover ratio
e. a decrease in the inventory turnover ratio
The Du Pont identity helps financial managers determine:
I. why a firm's return on equity is lower than anticipated
II. the operating efficiency of a firm
III. the utilization rate of a firm's assets
IV. the rate of return on a firm's assets

a. II and III only
b. I and III only
c. II, III, and IV only
d. I, II, and III only
e. I, II, III, and IV
e. I, II, III, and IV
Which one of the following is a capital structure decision?

a. Should a new machine be purchased this year?
b. Should the credit terms offered to customers be revised?
c. Should debt or equity financing be used to purchase a building?
d. Should the level of inventory be increased?
c. Should debt or equity financing be used to purchase a building?
Which one of the following functions is generally under the control of the corporate treasurer?

a. cost accounting
b. tax management
c. financial planning
d. financial accounting
c. financial planning
Which one of the following best describes the liability a general partner has for the partnership debts?

a. no liability
b. liability limited to amount invested in the firm
c. liability limited based on percentage ownership
d. unlimited
d. unlimited
Which one of the following provides you with the greatest control over a firm's daily operations?

a. limited partner
b. major stockholder in a corporation
c. minor stockholder in a joint stock company
d. sole proprietor
d. sole proprietor
A limited partner:

a. has no personal responsibility for the debts incurred by the partnership.
b. is guaranteed a return of his or her entire investment in the partnership if the partnership terminates.
c. can only control the daily operations for an individual segment of the partnership.
d. has minimal control, if any, over the daily operations of the partnership.
d. has minimal control, if any, over the daily operations of the partnership.
The primary goal of corporate financial management is to maximize the:

a. total revenue of the firm.
b. number of shares of common stock outstanding.
c. current value per share of the existing stock.
d. current net income of the firm.
c. current value per share of the existing stock
The Sarbanes-Oxley Act in 2002 is designed to protect the public against:

a. a firm's net operating losses if those losses extend beyond a 2-year period.
b. declines in the market value of a firm's outstanding shares of stock.
c. financial malpractice and accounting fraud.
d. a firm's issuing additional shares of stock if the issue will reduce the market value of the currentoutstanding shares.
c. financial malpractice and accounting fraud.
Who has the ultimate control over a corporation?

a. shareholders
b. chief executive officer
c. chairman of the board
d. board of directors
a. shareholders
Which one of the following is a primary market transaction?

a. Theo, the president of ABC, sells some of his shares in ABC on the NYSE
b. ABC offers newly issued shares to the general public
c. Tom instructs his broker to sell all of his shares in ABC, Inc.
d. Mary gifts shares of ABC stock to her son
b. ABC offers newly issued shares to the general public
Public offerings of both debt and equity securities are regulated by the:

a. Securities and Exchange Commission.
b. U.S. Banking and Financial Services Agency.
c. U.S. Treasury Department.
d. Federal Reserve.
a. Securities and Exchange Commission
The chief financial officer of a corporation generally reports directly to the firm's:

a. chairman of the board.
b. chief executive officer.
c. president.
d. shareholders.
c. president
The decision concerning the types and amounts of items to be held in inventory is a _____ decision.

a. working capital management
b. capital budgeting
c. capital structure
d. portfolio management
a. working capital management
Which one of the following entities is considered a legal "person"?

a. corporation
b. general partnership
c. limited partnership
d. sole proprietorship
a. corporation
Which of the following have unlimited personal liability for the debts of the business entity?
a. general and limited partners
b. sole proprietors and limited partners
c. sole proprietors and general partners
d. limited partners and common stockholders
c. sole proprietors and general partners
The goal of financial management is to maximize the:

a. market value of the existing owners' equity.
b. current dividends.
c. total assets owned by the firm.
d. current net income.
a. market value of the existing owners' equity.
An agency problem is most apt to exist in which one of the following situations?

a. an employee asks for a raise and is denied
b. a management decision increases the market value of the firm's stock
c. a board member resigns for personal reasons
d. a firm's board decides to increase management bonuses and forego the normal stock dividend
d. a firm's board decides to increase management bonuses and forego the normal stock dividend
The Sarbanes-Oxley Act of 2002:

a. requires all corporations to comply with the terms of the act.
b. has significantly increased the number of firms opting to go public in the U.S.
c. imposed some significant costs on U.S. corporations.
d. makes the chief financial officer solely responsible for the accuracy of the firm's financial statements
c. imposed some significant costs on U.S. corporations.
Which one of the following forms of management compensation best addresses the agency problem?

a. flat annual salary
b. salary based on annual net income
c. stock options
d. annual bonus based on revenue growth
c. stock options
The NYSE:

a. has the most stringent listing requirements of any U.S. exchange.
b. is all electronic and has its base of operations in New York City.
c. is best described as a centralized dealer market.
d. exists solely a primary market.
a. has the most stringent listing requirements of any U.S. exchange.
Capital structure refers to the:

a. type of firm ownership selected.
b. mix of a firm's short-term assets.
c. mix of plant and equipment used for operational purposes.
d. mix of debt and equity used to finance a firm's operations.
d. mix of debt and equity used to finance a firm's operations.
An expense, such as depreciation, that lowers net income but does not affect a firm's cash flow is referred to as a(n):

a. indirect cost.
b. direct cost.
c. noncash item.
d. period cost.
e. variable cost.
c. non-cash item
The tax rate applicable to the next dollar of taxable income is called the _____ tax rate.

a. total
b. marginal
c. absolute
d. average
e. next
b. marginal
Free cash flow is equal to:

a. net income plus depreciation.
b. cash flow from assets.
c. earnings before interest and taxes plus depreciation minus taxes.
d. cash flow to shareholders.
e. the addition to retained earnings.
b. cash flow from assets
Trademarks are classified as:

a. short-term assets.
b. current liabilities.
c. long-term debt.
d. tangible fixed assets.
e. intangible fixed assets.
e. intangible fixed assets
Shareholders' equity is equal to:

a. total assets plus total liabilities.
b. net fixed assets minus total liabilities.
c. fixed assets minus long-term debt plus net working capital.
d. net working capital plus total assets.
e. total assets minus net working capital
c. fixed assets minus long-term debt plus net working capital
An income statement:

a. reveals the net cash flows of a firm over a stated period of time.
b. reflects the financial position of a firm as of a particular date.
c. shows the revenue and expenses based upon selected accounting methods.
d. records revenue only when cash is received for the product or service provided.
e. records expenses based on the recognition principle.
c. shows the revenue and expenses based upon selected accounting methods.
The cost of goods sold:

a. is equal to the variable cost per unit multiplied by the number of units sold.
b. is equal to the fixed costs of production for the time period.
c. includes all manufacturing costs incurred during the income statement period.
d. includes period costs only.
e. includes both the fixed and the variable costs of producing the items included in revenue.
e. includes both the fixed and the variable costs of producing the items included in revenue.
A positive cash flow to creditors indicates a firm:

a. borrowed more than it repaid for the period.
b. repaid more principal on its loans than it borrowed for the period.
c. has less debt at the end of the period than it had at the beginning of the period.
d. has more debt at the end of the period than it had at the beginning of the period.
e. paid more cash to its creditors than it received from them for the period.
e. paid more cash to its creditors than it received from them for the period.
All else equal, which of the following will decrease net working capital?
I. decrease in accounts receivable
II. increase in inventory
III. decrease in cash
IV. increase in accounts payable

a. I and III only
b. II and IV only
c. I and II only
d. III and IV only
e. I, III, and IV only
e. I, III, and IV only
Cash flow to stockholders:

a. is equal to the cash flow from assets plus the cash flow to creditors.
b. measures the cash flow between a firm and its debtors.
c. should be negative when the number of shares of stock issued remains constant for the period.
d. is positive when the amount of the dividends paid exceeds the amount of net new equity raised.
e. is negative when a firm increases its borrowing to finance a new business venture.
d. is positive when the amount of the dividends paid exceeds the amount of net new equity raised
Which one of the following is a breakdown of the ROE into its three component parts?

a. equity analysis
b. efficiency breakout
c. Du Pont identity
d. sustainable growth
e. profitability ratios
c. Du Pont identity
Eli and Sons wants to evaluate its assets to determine if its mix of assets has changed over time. To do this, the firm should compile which one of the following financial statements for each of the past few years?

a. income statement
b. balance sheet
c. common-size income statement
d. common-size balance sheet
e. statement of cash flows
d. common-size balance sheet
Which one of the following actions will decrease the current ratio, all else constant? Assume the current ratio is greater than 1.0.

a. purchasing inventory on credit
b. paying an account payable
c. collecting payment from a customer
d. selling inventory at a profit in a charge sale
e. selling inventory at cost in a cash sale
a. purchasing inventory on credit
Which one of the following ratios indicates how long a firm can pay its bills given its current cash balance?

a. current ratio
b. debt ratio
c. cash coverage ratio
d. quick ratio
e. cash ratio
e. cash ratio
The equity multiplier is equal to:

a. one plus the debt-equity ratio.
b. one plus the total asset turnover.
c. total debt divided by total equity.
d. total equity divided by total assets.
e. one divided by the total asset turnover.
a. one plus the debt-equity ratio
The profit margin is the amount of net profit earned for every $1 of:

a. total assets
b. equity
c. long-term debt
d. sales
e. external financing
d. sales
Which of the following would most likely have shareholder approval?
I. times interest earned ratio greater than 1.0
II. equity multiplier greater than 1.0
III. increase in ROE
IV. increase in total asset turnover

a. II and III only
b. I and IV only
c. I, II, and IV only
d. II, III, and IV only
e. I, II, III, and IV
e. I, II, III, and IV
Which one of the following statements is true concerning the price-earnings ratio?
a. A high price-earnings ratio is often taken to mean that a firm is expected to grow significantly.
b. A price-earnings ratio of 16 means investors are willing to pay $1 for every $16 of current earnings.
c. Price-earnings ratios are unaffected by the accounting methods employed by a firm.
d. A firm with high earnings per share will also have a high price-earnings ratio.
e. A firm with minimal earnings will have a very low price-earnings ratio.
a. A high price-earnings ratio is often taken to mean that a firm is expected to grow significantly
Which one of the following actions will increase the internal growth rate of a firm, all else held constant?

a. a decrease in the return on assets
b. a decrease in the net income
c. an increase in the retention ratio
d. an increase in the dividend payout ratio
e. a decrease in the return on equity
c. an increase in the retention ratio
Financial statement analysis is:
I. the process of looking for items that are exceptions to the norm.
II. applicable only for internal purposes.
III. useful to both creditors and shareholders.
IV. useful when forecasting future performance.

a. I and III only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only
e. I, II, III, and IV
c. I, III, and IV only
The coupon is the:

a. amount of discount received when a bond is purchased
b. amount paid to a bond dealer when a bond is purchased
c. difference between the bid and ask price
d. annual interest divided by the current bond price
e. stated interest payment on a bond
e. stated interest payment on a bond
Amy found a bond lying in a street.
She picked it up, detached the appropriate bond coupon, and collected the current interest payment. Which type of bond did Amy find?

a. bearer
b. coupon
c. street
d. registered
e. secure
a. bearer
A debenture is:

a. long-term debt secured by fixed assets of the borrower
b. long-term debt secured by real estate
c. unsecured debt that generally matures in ten years or more
d. unsecured debt that generally matures is less than ten years
e. any type of debt that is short-term in nature
c. unsecured debt that generally matures in ten years or more
A sinking fund is an account managed by a bond trustee for the sole purpose of:

a. paying interest payments on a semi-annual basis
b. redeeming bonds early
c. repaying the face value at maturity
d. paying the expenses required to reissue outstanding bonds
e. paying the "balloon payment" at maturity
b. redeeming bonds early
A bond that pays no interest payments and sells at a deep discount is called a(n) ____ bond.

a. callable
b. income
c. zero coupon
d. convertible
e. tax-free
c. zero coupon
The price at which a dealer will purchase a bond is called the ____ price.

a. asked
b. face
c. call
d. put
e. bid
e. bid
The Treasury yield curve plots the yields (rates of return) on Treasury notes and bonds relative to the ____ of those securities.

a. face value
b. par value
c. maturity
d. coupon rate
e. issue date
c. maturity
When a bond's yield to maturity is greater than the bond's coupon rate, the bond:

a. will be called
b. is selling at a premium
c. has reached its maturity date
d. is priced at par
e. is selling at a discount
e. is selling at a discount
A bond's sensitivity to changes in market interest rates decreases when the time to maturity ____ or the coupon rate is ____.

a. increases; lower
b. decreases; higher
c. increases; higher
d. decreases; lower
e. remains constant; stable
a. increases; lower
A bond for which no specific property has been pledged as security is classified as a:

a. blanket mortgage bond
b. trust deed bond
c. registered bond
d. debenture
e. sinking fund bond
d. debenture
The dividend yield is defined as:

a. the current dividend divided by the current market value per share
b. the current dividend divided by the current book value per share
c. next year's expected dividend divided by the current market value per share
d. next year's expected dividend divided by the current book value per share
e. next year's expected dividend divided by next year's expected market value per share
c. next year's expected dividend divided by the current market value per share
The security that represents the residual ownership of a firm and has no priority in bankruptcy is called:

a. a convertible bond
b. senior debt
c. common stock
d. preferred stock
e. retained earnings
c. common stock
If I grant another individual the right to vote on my behalf for the directors of a corporation, I am voting by:

a. the straight method
b. the cumulative method
c. consent
d. proxy
e. preference
d. proxy
Preferred stock generally has a ____ and receives preference in bankruptcy over ____.

a. fixed dividend; bonds
b. dividend that increases annually; bonds
c. fixed dividend; common stock
d. dividend that increases annually; common stock
e. dividend that decreases annually; common stock
c. fixed dividend; common stock
The price of a stock at year 5 can be expressed as:

a. Po x g^5
b. Do x (1+R)^5
c. P1 x (1+R)^5
d. D6 / (R-g)
e. D5 / (R-g)
d. D6 / (R-g)
Ted's Tools expects to commence paying an annual dividend two years from now. The first dividend is expected to be $.75 per share with all dividends thereafter increasing by 2 percent annually. What is the expected dividend in year 5?

a. $0.75 x (1.02)^3
b. $0.75 x (1.02)^4
c. $0.75 x (1.02)^5
d. $0.75 x (1.02)^6
e. $0.75 x (1.02)^7
a. $0.75 x (1.02)^3
Holiday Markets pays a constant dividend. At the end of trading on Wednesday, the price of its stock was $43.16. At the end of trading on Thursday, the stock price was $44.08. The dividend yield ____ from Wednesday to Thursday while the capital gains yield ____ over that period.

a. remained constant; remained constant
b. increased; remained constant
c. increased; increased
d. decreased; remained constant
e. decreased; decreased
d. decreased; remained constant
Sun Tans pays a constant annual dividend. Over the past year, the required return on this firm's stock increased. Given this information you know that over the past year:

a. the stock price had to decrease
b. the stock price had to increase
c. the capital gains rate had to increase
d. the capital gains rate had to decrease
e. the stock price decreased and the capital gains yield increased
a. the stock price had to decrease
The dividend growth model is based on the assumption that the:

a. dividend increases by a positive amount each year
b. dividend either remains constant or increases by a positive amount each year
c. capital gains yield is a positive value
d. growth rate exceeds the discount rate
e. discount rate is greater than the growth rate
e. discount rate is greater than the growth rate
All of the following are characteristics of common stock except the:

a. ability to vote for corporate directors
b. ability to vote on key issues such as a merger
c. priority over other equity in a bankruptcy proceeding
d. right to share proportionally in dividends paid to common stockholders
e. right to share proportionally in any residual value in a bankruptcy proceeding
c. priority over other equity in a bankruptcy proceeding
The dividend yield is defined as:

a. the current dividend divided by the current market value per share
b. the current dividend divided by the current book value per share
c. next year's expected dividend divided by the current market value per share
d. next year's expected dividend divided by the current book value per share
e. next year's expected dividend divided by next year's expected market value per share
c. next year's expected dividend divided by the current market value per share
The security that represents the residual ownership of a firm and has no priority in bankruptcy is called:

a. a convertible bond
b. senior debt
c. common stock
d. preferred stock
e. retained earnings
c. common stock
If I grant another individual the right to vote on my behalf for the directors of a corporation, I am voting by:

a. the straight method
b. the cumulative method
c. consent
d. proxy
e. preference
d. proxy
Preferred stock generally has a ____ and receives preference in bankruptcy over ____.

a. fixed dividend; bonds
b. dividend that increases annually; bonds
c. fixed dividend; common stock
d. dividend that increases annually; common stock
e. dividend that decreases annually; common stock
c. fixed dividend; common stock
The price of a stock at year 5 can be expressed as:

a. Po x g^5
b. Do x (1+R)^5
c. P1 x (1+R)^5
d. D6 / (R-g)
e. D5 / (R-g)
d. D6 / (R-g)
Ted's Tools expects to commence paying an annual dividend two years from now. The first dividend is expected to be $.75 per share with all dividends thereafter increasing by 2 percent annually. What is the expected dividend in year 5?

a. $0.75 x (1.02)^3
b. $0.75 x (1.02)^4
c. $0.75 x (1.02)^5
d. $0.75 x (1.02)^6
e. $0.75 x (1.02)^7
a. $0.75 x (1.02)^3
Holiday Markets pays a constant dividend. At the end of trading on Wednesday, the price of its stock was $43.16. At the end of trading on Thursday, the stock price was $44.08. The dividend yield ____ from Wednesday to Thursday while the capital gains yield ____ over that period.

a. remained constant; remained constant
b. increased; remained constant
c. increased; increased
d. decreased; remained constant
e. decreased; decreased
d. decreased; remained constant
Sun Tans pays a constant annual dividend. Over the past year, the required return on this firm's stock increased. Given this information you know that over the past year:

a. the stock price had to decrease
b. the stock price had to increase
c. the capital gains rate had to increase
d. the capital gains rate had to decrease
e. the stock price decreased and the capital gains yield increased
a. the stock price had to decrease
The dividend growth model is based on the assumption that the:

a. dividend increases by a positive amount each year
b. dividend either remains constant or increases by a positive amount each year
c. capital gains yield is a positive value
d. growth rate exceeds the discount rate
e. discount rate is greater than the growth rate
e. discount rate is greater than the growth rate
All of the following are characteristics of common stock except the:

a. ability to vote for corporate directors
b. ability to vote on key issues such as a merger
c. priority over other equity in a bankruptcy proceeding
d. right to share proportionally in dividends paid to common stockholders
e. right to share proportionally in any residual value in a bankruptcy proceeding
c. priority over other equity in a bankruptcy proceeding
The payback period is the period of time it takes an investment to generate sufficient cash flows to:

a. earn the required rate of return
b. produce the required net income
c. produce a yield equal to or greater than the market rate on similar investments
d. have a cash inflow, rather than an outflow, for the year
e. recover the investment's initial cost
e. recover the investment's initial cost
The discount rate that causes the net present value of a project to equal zero is called the:

a. yield to maturity
b. required return
c. market rate
d. internal rate of return
e. average accounting return
d. internal rate of return
If by accepting one investment you eliminate the option of another investment, you are dealing with:

a. mutually exclusive investments
b. negative net present values
c. conventional cash flows
d. investments with multiple IRRs
e. independent investments
a. mutually exclusive investments
The net present value:

a. increases as the required rate of return increases
b. is equal to the initial investment when the internal rate of return is equal to the required return
c. method of analysis cannot be applied to mutually exclusive projects
d. is inversely related to the discount rate
e. is unaffected by the timing of the related cash flows
d. is inversely related to the discount rate
Which one of the following statements is correct?

a. The payback period is computed based on the present value of each of a project's cash flows
b. The payback rule states that you should accept a project if the payback period is less than one year
c. The payback rule works best when applied to mutually exclusive decisions
d. The payback rule is biased in favor of short-term investments
e. The payback period considers the timing and amount of all of a project's cash flows
d. The payback rule is biased in favor of short-term investments
Which one of the following ignores the time value of money?

a. net present value
b. internal rate of return
c. payback
d. discounted cash flow analysis
e. profitability index
c. payback
Which one of the following statements related to the internal rate of return (IRR) is correct?

a. If the IRR exceeds the required return, the profitability index will be less than 1.0
b. The IRR is a better evaluation tool than the profitability index when two projects are mutually exclusive
c. When the IRR is less than the required return, the NPV is positive
d. If two projects are mutually exclusive, you should select the project with the highest IRR
e. A project has multiple IRRs if the project's cash flows are unconventional
e. A project has multiple IRRs if the project's cash flows are unconventional
The IRR decision rule states that a project should be accepted if its IRR:

a. exceeds the required rate
b. is equal to zero
c. is greater than the AAR
d. exceeds the IRRs of all other potential projects
e. is equal to or greater than 1.0
a. exceeds the required rate
When evaluating two mutually exclusive investments, the best method to use is the:

a. internal rate of return
b. profitability index
c. net present value
d. payback
e. average accounting return
c. net present value
For a project with conventional cash flows, a profitability index less than 1.0 indicates the:

a. internal rate of return is equal to the firm's required rate of return
b. project never pays back
c. internal rate of return is less than the project's required discount rate
d. net present value is positive
e. accounting rate of return is positive
c. internal rate of return is less than the project's required discount rate
The cost of equity for ABC Industries is defined as the:

a. firm's weighted average cost of capital multiplied by the firm's beta
b. yield to maturity on the firm's debt multiplied by one minus the tax rate
c. market rate of return multiplied by the firm's beta
d. return that ABC's shareholders require on their investment in the firm
e. next year's dividend divided by the current stock price
d. return that ABC's shareholders require on their investment in the firm
The return that lenders require on a firm's borrowed funds is called the firm's:

a. beta
b. aftertax yield
c. cost of debt
d. yield to maturity
e. bond rating
c. cost of debt
A primary advantage of the dividend growth model is:

a. its applicability to all common stocks
b. its correlation with the market rate of return
c. its consideration of the risk level of the firm
d. the fact that its easy to understand
e. its sensitivity to changes in the market rate of return
d. the fact that its easy to understand
In an efficient market where securities are correctly priced, a security with a beta of 1.03 will have a rate of return that plots:

a. just below the security market line (SML) and to the left of the market return
b. just below the SML and to the right of the market return
c. on the SML just to the left of the market return
d. on the SML just to the right of the market return
e. above the SML just to the right of the market return
d. on the SML just to the right of the market return
Which one of the following represents the best estimate for a firm's pre-tax cost of debt?

a. average coupon rate on the firm's outstanding bonds
b. coupon rate on the firm's latest bond issue
c. weighted average yield-to-maturity on the firm's outstanding debt
d. current yield on the firm's outstanding debt
e. annual interest divided by the market price per bond for the latest bond issue
c. weighted average yield-to-maturity on the firm's outstanding debt
Which one of the following will decrease the after-tax cost of debt for a firm?

a. an increase in the risk level of a firm
b. an increase in tax rates
c. an increase in the risk-free rate of return
d. changing the firm's bond rating from A to B
e. a decrease in the price of the firm's outstanding bonds
b. an increase in tax rates
All else constant, an increase in the firm's cost of debt:

a. could be caused by an increase in the firm's tax rate
b. will result in an increase in the firm's cost of capital
c. will lower the firm's weighted average cost of capital
d. will lower the firm's cost of equity
e. will increase the firm's capital structure weight of debt
b. will result in an increase in the firm's cost of capital
The cost of preferred stock:

a. decreases when a firm's tax rate increases
b. is constant over time
c. is unaffected by changes in the price of the stock
d. is equal to the stock's dividend yield
e. increases as the price of the stock increases
d. is equal to the stock's dividend yield
Which one of the following statements is correct concerning capital structure weights?

a. Capital structure weights are constant over time
b. A new bond issue will not affect the weight of the firm's preferred stock
c. An increase in the debt-equity ratio will increase the weight of the common stock
d. The repurchase of preferred stock will not affect the weight of the debt
e. The issuance of additional shares of common stock will decrease the weight of the preferred stock
e. The issuance of additional shares of common stock will decrease the weight of the preferred stock
Which one of the following is a correct statement?

a. Current tax laws favor debt financing
b. A decrease in the dividend growth rate increases the cost of equity
c. An increase in the systematic risk of a firm will decrease the firm's cost of capital
d. A decrease in the firm's debt-equity ratio will usually decrease the firm's cost of capital
e. The cost of preferred stock decreases when the tax rate increases
a. Current tax laws favor debt financing
A dollar return is:
I. dependent on the size of an investment while a percentage return is not
II. more accurate than a percentage return because it includes dividend income, which a percentage return ignores
III. based on a time value of money computation while a percentage return is not
IV. generally used less frequently than a percentage return

a. I and III only
b. II and IV only
c. I and IV only
d. I, III, and IV only
e. I, II, III, and IV only
c. I and IV only
Over the period of 1926-2006:

a. long-term government bonds underperformed long-term corporate bonds
b. small-company stocks underperformed large-company stocks
c. inflation exceeded the rate of return on U.S. Treasury bills
d. U.S. Treasury bills outperformed long-term government bonds
e. large-company stocks outperformed all other investment categories
a. long-term government bonds underperformed long-term corporate bonds
Over the period of 1926-2006, the standard deviation of the returns on small-company stocks was ___ percent.

a. 15.6
b. 20.1
c. 24.6
d. 32.7
e. 41.6
d. 32.7
The distribution of returns for which one of the following for the period of 1926-2006 produces the largest standard deviation?

a. small-company stocks
b. U.S. Treasury bills
c. long-term government bonds
d. inflation
e. large-company stocks
a. small-company stocks
The historical record for the period 1926-2006 shows that the rate of return on:

a. large-company stocks is more volatile than the return on small-company stocks
b. the Consumer Price Index has been positive every year for the past 80 years
c. Treasury bills have been positive every year for the past 80 years
d. on Treasury bills varies less than one percent from one year to the next year
e. on the Consumer Price Index varies less than 1 percent from one year to the next
c. Treasury bills have been positive every year for the past 80 years
The return on which one of the following is used as the risk-free rate of return?

a. long-term corporate bonds
b. long-term government bonds
c. short-term corporate bonds
d. U.S. Treasury bills
e. the Consumer Price Index
d. U.S. Treasury bills
The lower the standard deviation of a security, the ____ the expected rate of return and the ___ the risk.

a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
e. more constant; more constant
a. lower; lower
Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are:

a. weak form efficient
b. strong form efficient
c. semistrong form efficient
d. efficient at any level
e. aware that the trader is an insider
b. strong form efficient
Unsystematic risk:
I. is also called firm-specific risk
II. is also called diversifiable risk
III. affects a limited number of assets
IV. affects a large number of assets

a. I and III only
b. II and IV only
c. I and IV only
d. I, II, and III only
e. I, II, and IV only
d. I, II, and III only
The expected return on a security given multiple states of the economy:

a. is computed as the arithmetic average of the returns for each state
b. is computed as the geometric average of the returns for each state
c. will vary as the probabilities of occurrence for each state vary
d. is unaffected by the likelihood that each state will occur
e. is unaffected by the expected return for a particular economic state
c. will vary as the probabilities of occurrence for each state vary
Which of the following must total to 100 percent?
I. rates of return for the various economic states
II. portfolio weights
III. probabilities of occurrence for the various economic states
IV. betas of the individual securities held within a portfolio

a. I and III only
b. II and IV only
c. II and III only
d. II, III, and IV only
e. I, II, III, and IV
c. II and III only
Which one of the following is an example of systematic risk?

a. employee walkout in protest of a firm's promotion policies
b. an increase in federal tax rates
c. surprise firing of a firm's chief financial officer
d. acquisition of a competitor by a retail firm
e. layoffs by a major retailer
b. an increase in federal tax rates
The amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with a security is equal to:

a. the beta of the firm multiplied by the market rate of return
b. the market risk premium
c. the beta of the firm multiplied by the market risk premium
d. the risk-free rate of return
e. zero
e. zero
Diversifying a portfolio across various sectors and industries will tend to:

a. increase the required risk premium
b. reduce the beta of the portfolio to zero
c. increase the security's risk premium
d. eliminate the market risk
e. reduce the firm-specific risk
e. reduce the firm-specific risk
The beta of a diversified portfolio is equal to the ____ of the betas of the individual securities that compromise the portfolio.

a. arithmetic average
b. geometric average
c. weighted average
d. summation
e. nth root of the summation
c. weighted average
If a group of securities are each correctly priced (at equilibrium), then the reward-to-risk ratio:

a. for the entire group must equal 1.0
b. for each security must equal 1.0
c. for each security must equal 0
d. of each security is equal to the risk-free rate
e. of each security is equal to the slope of the security market line
e. of each security is equal to the slope of the security market line
Which one of the following will increase the rate of return for a security assuming the security continues to plot on the security market line?

a. a decrease in the risk-free rate of return
b. a decrease in the security's beta
c. an increase in the security's unsystematic level of risk
d. an increase in the market risk-to-reward ratio
e. a decrease in the market rate of return
d. an increase in the market risk-to-reward ratio
The dividend growth rate for a constant growth dividend stock is referred to as the:

a. dividend yield
b. capital gains yield
c. discount rate
d. market rate
e. total return
b. capital gains yield
The written agreement between a corporation and its lender that spells out the full terms of a bond issue is called the:

a. indenture
b. registration statement
c. call provision
d. private placement agreement
e. debenture
a. indenture
Julie owns a stock with a market price of $43 per share. This stock pays a constant annual dividend of $1.34 a share. If the price of the stock suddenly falls to $31 a share, you would expect the:
I. dividend yield to increase
II. dividend yield to decrease
III. capital gains yield to increase
IV. capital gains yield to decrease

a. I and III only
b. I only
c. III only
d. II and IV only
e. II only
b. I only
Which one of the following is a form of bond issue wherein interest payments are made directly to the owners of record?

a. street name
b. bearer
c. secured
d. coupon
e. registered
e. registered
Straight voting is defined as the process where the directors of a corporation are elected:

a. by each shareholder casting a single vote
b. for a single year only
c. solely through the use of proxies
d. simultaneously
e. one at a time
e. one at a time
Which one of the following bonds is the most sensitive to interest rate movements?

a. 5 percent semi-annual coupon, 10 year
b. 5 percent annual coupon, 10 year
c. zero-coupon, 5 year
d. 7 percent annual coupon, 5 year
e. zero-coupon, 10 year
e. zero-coupon, 10 year
The inflation premium:

a. rewards investors for accepting interest rate risk
b. remains constant over time
c. increases the real risk-free rate of return
d. is equal to the term structure of interest rates for any given time to maturity
e. compensates investors for expected price increases
e. compensates investors for expected price increases
In general, the value of any financial asset, is determined by:

a. computing the future value of the current cash flows of the asset
b. computing the future value of all past cash flows of the asset
c. computing the present value of the most recent cash flow of the asset
d. computing the present value of all future cash flows of the asset
e. computing the present value of all past cash flows of the asset
d. computing the present value of all future cash flows of the asset
A premium bond has a:
I. market price that is less than the face value
II. market price that exceeds the face value
III. yield to maturity that exceeds the coupon rate
IV. yield to maturity that is less than the coupon rate

a. I only
b. II only
c. I and IV only
d. II and IV only
e. II and III only
d. II and IV only
Preferred stock:

a. is more valuable if it is noncumulative rather than cumulative
b. is like an equity bond, having characteristics of both bonds and common stock
c. is treated as debt for tax purposes
d. pays a guaranteed dividend
e. almost always carries voting privileges
b. is like an equity bond, having characteristics of both bonds and common stock