Finance Quiz

Front 1

1. In partnerships. Owners have unlimited liability and may have to cover debts of other less financially sound partners.

Back 1

True

Front 2

2. The president of chief executive officer is elevated by the firm’s stockholders and has ultimate authority to guide corporate affairs and make general policy.

Back 2

False

Front 3

3. The corporate controller typically handles the accounting activities, such as tax management, data processing, and cost and financial accounting.

Back 3

True

Front 4

4. The financial manager places primary emphasis on cash flows, the inflow and out flow of cash.

Back 4

True

Front 5

5. The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk.

Back 5

True

Front 6

6. Higher risk tends to result in a higher share price since the stockholder must be compensated for the greater risk.

Back 6

False

Front 7

7. A public offering is the sale of a new security issue directly to an investor or group of investors.

Back 7

False

Front 8

8. The money market is a financial relationship created by a number of institutions that allows suppliers and demanders of short-term funds to make transactions.

Back 8

True

Front 9

9. The price-to-earning (PE) ratio measures the amount common stock investors are willing to pay for each dollar of the firm’s earnings.

Back 9

True

Front 10

10. The marginal tax rate represents the rate at which additional income is taxed.

Back 10

True

Front 11

11. The income statement is a financial summary of the firm’s financial position at a given point in time.

Back 11

False

Front 12

12. Retained earnings represent the cumulative of all earnings retained and reinvested in the firm since its inception.

Back 12

True

Front 13

13. Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

Back 13

True

Front 14

15. The liquidity of a business firm is measured by its ability to satisfy its short-term obligations as they come due.

Back 14

True

Front 15

16. The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.

Back 15

False

Front 16

17. The average age of inventory can be calculated as 365 divided by inventory turnover.

Back 16

True

Front 17

18. The depreciable life of an asset can significantly affect the pattern of cash flows.

Back 17

True

Front 18

19. The MARCS depreciation method requires the use of the half-year convention. Assets are assumed to be acquired in the middle of the year and are fully depreciable in the first year.

Back 18

False

Front 19

20. Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

Back 19

True

Front 20

21. Cash budget is a statement of the firm’s planned inflows and outflows of cash that is used to estimate its short-term cash requirement.

Back 20

True

Front 21

23. It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes plus depreciation.

Back 21

True

Front 22

24. Net operating profit after taxes (NOPTA) represents the firm’s earnings after deducting both interest and taxes.

Back 22

False

Front 23

25. The pro forma statements provide the financial manager with the amount, if any, of external financing required to support a given level of sales.

Back 23

True

Front 24

1. For a given interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

Back 24

True

Front 25

2. Time-value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

Back 25

False

Front 26

3. The future value increases with increases in the interest rate or the period of time funds are left on deposit.

Back 26

True

Front 27

4. Everything else being equal, the higher the discount rate, the higher the present value.

Back 27

False

Front 28

5. The future value interest factor is the present value of $1 per period compounded at i percent for n periods.

Back 28

True

Front 29

6. The ordinary annuity is an annuity for which the cash flow occurs at the end of each period.

Back 29

True

Front 30

7. The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity

Back 30

True

Front 31

8. The effective rate of interest is the contractual rate of interest charged by a lender or promised by a borrower.

Back 31

False

Front 32

9. For any interest rate and for any period of time, the more frequently interest is compounded, the greater the amount if money that has to be invested today in order to accumulate a given future amount.

Back 32

False

Front 33

10. The nominal rate of interest is always lower than the effective rate of interest.

Back 33

True

Front 34

11. For the risk-averse manager, the required return decreases for an increase in risk.

Back 34

False

Front 35

12. The risk of an asset may be found by subtracting the worst outcome from the best outcome.

Back 35

True

Front 36

The more certain the return from an asset, the less variability and therefore the less risk.

Back 36

True

Front 37

15. Combining negatively correlated assets can reduce the overall variability of returns.

Back 37

True

Front 38

16. A portfolio of two negatively correlated assets has more risk than either of the individual assets.

Back 38

False

Front 39

17. Combining uncorrelated assets is more effective than combing positively correlated assets in reducing risk.

Back 39

True

Front 40

Foreign exchange risk is the risk that arises from the danger that a host government might take control of your business.

Back 40

False

Front 41

19. When the U.S. currency gains in value, the dollar value of a foreign-currency denominated portfolio of assets decline.

Back 41

True

Front 42

20. The beta coefficient is an index of the degree of movement of an asset’s return in response to a change in the market return

Back 42

True

Front 43

21. On average, during the past 75 years, the return on long-term corporate bonds has exceeded the return on large-company stocks.

Back 43

False

Front 44

22. Business risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm’s revenue stability and the structure of its operating costs

Back 44

True

Front 45

23. Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase then the interest rates fall.

Back 45

True

Front 46

24. Market risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment

Back 46

True

Front 47

Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.

Back 47

True

Front 48

26. The shorter the maturity of a Treasury security, the smaller the interest rate risk.

Back 48

True

Front 49

27. An inverted yield curve indicates generally cheaper, short-term borrowing costs than long-term borrowing costs.

Back 49

False

Front 50

28. Although Treasury securities have no risk of default, they do suffer from “maturity risk” – the risk that interest rates will change in the future and thereby impact longer maturities more than shorter maturities.

Back 50

True

Front 51

29. Upward-sloping yield curves result from higher future inflation expectations, lender preferences for shorter maturity loans, and greater supply of short-term as opposed to long-term loans relative to their respective demand.

Back 51

True

Front 52

30. Debentures such as convertible bonds are unsecured bonds that only creditworthy firms can issue.

Back 52

True

Front 53

31. High-quality bonds provide higher interest rates than lower-quality bonds.

Back 53

False

Front 54

32. In the valuation process, the lower the risk, the greater the required return.

Back 54

False

Front 55

33. Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity

Back 55

True

Front 56

34. The longer the amount of time until a bond’s maturity, the more responsive it its market value to a given change in interest rates.

Back 56

True

Front 57

35. The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called default risk

Back 57

True

Front 58

36. The length of a maturity on a bond offering affects its cost. In general, the longer the maturity, the lower the cost.

Back 58

False

Front 59

37. As an outstanding bond approaches maturity, the price of the bond will always trend toward par value until, at maturity, the bond is worth its face value.

Back 59

True

Front 60

38. Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

Back 60

True

Front 61

39. Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid in additional shares of preferred stock prior to the payment of dividends to common stockholders.

Back 61

False

Front 62

40. The cost of preferred stock financing is generally higher than that of debt financing because the dividends are not tax-deductible for the firm.

Back 62

True

Front 63

41. American Depository Receipts (ADR) are claims issued by U.S. Banks representing ownership of shares of a foreign company’s stock help on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

Back 63

True

Front 64

42. In the valuation of common stock, the P/E ratio is considered superior to the use of book or liquidation values since it considers expected earnings.

Back 64

True

Front 65

43. Any action taken by the financial manager that decreases risk will also decrease the required return.

Back 65

True

Front 66

44. Unlike creditors (lenders), equity holders are owners of the firm.

Back 66

True

Front 67

45. In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders.

Back 67

False

Front 68

46. Common stock can be either privately or publicly owned.

Back 68

True

Front 69

47. Like bonds, common stock is usually sold with a par value

Back 69

True

Front 70

48. A prospectus is another term for a firm’s annual report

Back 70

False

Front 71

50. The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

Back 71

False

Front 72

1. Capital budgeting is the process of evaluating and selecting short-term investments consistent with the firm’s goal of owner wealth maximization.

Back 72

False

Front 73

2. A $30,000 outlay for anew machine with a usable life of 20 years is a capital expenditure

Back 73

True

Front 74

3. A firm with limited funds must ration its funds by allocating them to projects that will maximize share value.

Back 74

True

Front 75

4. Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

Back 75

False

Front 76

5. The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows

Back 76

True

Front 77

6. The depreciable value of an asset is equal to its purchase price minus installation costs, if any.

Back 77

False

Front 78

7. The book value of an asset is equal to its depreciable value minus the accumulated depreciation.

Back 78

True

Front 79

8. The change in net working capital – regardless of whether an increase or decrease – is taxable.

Back 79

False

Front 80

9. The capital budgeting process consists of four distinct but interrelated steps: proposal generation, review and analysis, decision making, and termination

Back 80

False

Front 81

10. A conventional cash flow of pattern is one in which an initial outflow is followed only to be a series of inflows

Back 81

True

Front 82

11. The three major cash flow components include the initial investment, non-operating cash inflows, and terminal cash flows.

Back 82

False

Front 83

12. If an asset is sold for more than its initial purchase price, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation

Back 83

True

Front 84

13. In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.

Back 84

True

Front 85

14. A project must be rejected if its payback period is longer than the maximum acceptable payback period.

Back 85

True

Front 86

15. Since the payback period can be viewed as a measure of risk exposure, many firms use it as a decision criterion or as a supplement to sophisticated decision techniques

Back 86

True

Front 87

16. Net present value is considered a non-sophisticated capital budgeting technique since it gives explicit consideration to the time value of money

Back 87

False

Front 88

17. The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

Back 88

True

Front 89

18. For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision, but differences in their underlying assumptions can cause them to rank projects differently.

Back 89

True

Front 90

19. The internal rate of return assumes that intermediate cash inflows are reinvested at the projects internal rate of return.

Back 90

True

Front 91

20. If the NPV is greater than $0, a project should be accepted.

Back 91

True

Front 92

21. If the IRR is greater than the cost of capital, a project should be accepted

Back 92

True

Front 93

22. In spite of the theoretical superiority of IRR, financial managers prefer to use NPV.

Back 93

False

Front 94

23. The breakeven cash flow is the minimum level of cash inflow necessary for a project to be acceptable.

Back 94

True

Front 95

24. Sensitivity analysis is a behavioral approach that used a number of possible values for a given variable to assess its impact on a firm’s return.

Back 95

True

Front 96

In a capital budgeting context, risk is the chance that a project will prove unacceptable or, more formally, the degree of variability of cash flows.

Back 96

True

Front 97

26. Simulation is a statistics-based behavorial approach that applies predetermined probability distributions and random numbers to estimate risky outcomes.

Back 97

True

Front 98

Exchange rate risk is the danger that an unexpected change in exchange rates will reduce the market value of a project’s cash flow

Back 98

True

Front 99

28. The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Back 99

False

Front 100

29. The firm’s objective is to use its budget to generate the highest internal rate of return for its cash inflows.

Back 100

False

Front 101

1. The target capital structure is the desired optimal mix of debt and equity financing that most firms attempt to achieve and maintain.

Back 101

True

Front 102

2. The cost of capital is the rate of return a firm must earn on investments in order to at lest leave the share price unchanged.

Back 102

True

Front 103

3. Business risk is the risk to the firm of being unable to cover required financial obligations.

Back 103

False

Front 104

4. In general, flotation costs include two components, underwriting costs and administrative costs.

Back 104

True

Front 105

5. The cost of common stock equity may be measured using on the constant growth valuation model.

Back 105

False

Front 106

6. The cost of new common stock is normally greater than any other long-term financing cost.

Back 106

True

Front 107

7. As the volume of financing increases, the costs of the various types of financing will increase the firm’s weighted average cost of capital.

Back 107

True

Front 108

8. According to the firm’s owner wealth maximization goal, the firm should only accept projects up to the point where the marginal return on its investment is equal to its weighted marginal cost of capital

Back 108

True

Front 109

9. The cost of common stock equity can be though of a the “magic number” that is used to decide whether a proposed corporate investment will increase or decrease the firm’s stock price

Back 109

False

Front 110

10. Preferred stock represents a special type of ownership interest in the firm and, thus, the preferred stockholders must receive their stated dividends prior to the distribution of any earnings to common stockholders and bondholders.

Back 110

False

Front 111

11. Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm’s owners

Back 111

True

Front 112

12. At the operating breakeven point, the sales revenue is equal to the sum of the fixed and variable operating costs.

Back 112

True

Front 113

13. In general, the greater the firm’s operating leverage, the higher its business risk.

Back 113

True

Front 114

14. The firm’s capital structure is the mix of short-term and long-term debt and equity maintained by the firm.

Back 114

False

Front 115

15. All items on the right-hand side of the firm’s balance sheet are called capital.

Back 115

False

Front 116

16. A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales

Back 116

False

Front 117

17. Business risk is the risk to the firm of being unable to cover operating costs

Back 117

True

Front 118

18. The EBIT-EPS analysis tends to concentrate on maximization of earning rather than maximization of owners’ wealth.

Back 118

True

Front 119

19. While operating leverage results only in magnification of returns, financial leverage results only in magnification of risk.

Back 119

False

Front 120

20. Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less operating leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

Back 120

True`

Front 121

21. Purchasers of a stock selling ex-dividend do not receive the current dividend

Back 121

True

Front 122

22. The payment of cash dividends to corporate stockholders is decided by the firm’s chief financial officer.

Back 122

False

Front 123

23. Because retained earnings are a form of internal financing, the dividend decision can significantly affect the firm’s external financing requirements

Back 123

True

Front 124

24. A stock split commonly increases the number of shares outstanding and increase the stock’s per share par value

Back 124

False

Front 125

25. The repurchase of common stock results in a type of reverse dilution, since the earning per share and the market price of stock are increased by reducing the number of shares outstanding.

Back 125

True

Front 126

26. Dividends provide information about the firm’s current performance by little or no information about the firm’s future performance

Back 126

False

Front 127

27. The dividend payment date is set by the firm’s board of directors and represents the actual date on which the firm mails the dividend payment to the holders of record

Back 127

True

Front 128

28. In a firm has overdue liabilities or is legally insolvent or bankrupt, most states prohibit its payment of cash dividends

Back 128

True

Front 129

29. Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable

Back 129

True

Front 130

In a 2 for 1 stock split, the number of shares outstanding increases by fifty percent and the stock’s per-share par valued is reduced by fifty percent

Back 130

True

Front 131

1. The short-term financial management is concerned with management of the firm’s current assets and current liabilities.

Back 131

True

Front 132

2. Because firms are unable to match cash inflows to outflows with certainty, most of them need current liabilities that more than cover outflows for current assets

Back 132

False

Front 133

3. Net working capital can be defined as the portion of the firm’s current assets financed with long-term funds

Back 133

True

Front 134

4. An increase in current assets decreases net working capital, thereby reducing the risk of technical insolvency

Back 134

False

Front 135

5. The cash conversion cycle of a firm is the amount of time that elapses from the point when the firm makes an outlay to purchase raw material to the point when cash is collected from the sale of the finished good

Back 135

True

Front 136

6. The aggressive financing strategy is a strategy by which the firm finances its current assets with short-term funds and its fixed assets with long-term funds

Back 136

False

Front 137

7. The aggressive strategy operates with the minimum net working capital since only the permanent portion of the firm’s current assets is being financed with long-term funds

Back 137

False

Front 138

8. The operating cycle is the recurring transition of the firm’s working capital form cash to inventories and inventories to receivables and back to cash

Back 138

True

Front 139

9. The conservative financing strategy is a strategy by which the firm finances all projected funds requirements with long-term funds

Back 139

True

Front 140

10. As credit standards are relaxed, sales are expected to increase and the investment in accounts receivables is expected to decrease

Back 140

False

Front 141

11. 2/15 net 45 translates as 2 percent of the balance is due in 15 days, the remaining balance is due in 45 days

Back 141

False

Front 142

12. Marketable securities must be liquid and safe to be considered as investments for short-term assets

Back 142

True

Front 143

13. Commercial paper is a short-term fund on deposit at commercial banks having variable yields based on size, maturity, and prevailing money market conditions

Back 143

False

Front 144

14. Cash management techniques are aimed at minimizing the firm’s financing requirements by taking advantage of certain imperfections in the collection and payment system

Back 144

True

Front 145

15. The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days

Back 145

True

Front 146

Self-liquidating loans are intended merely to carry the firm through seasonal peaks in financing needs, mainly buildups of accounts receivable and inventory

Back 146

True

Front 147

The discount rate is the lowest rate of interest charged by the nation’s leading banks on business loans to their most important and reliable business borrowers

Back 147

False

Front 148

18. The effective interest rate for a loan is the same as the loan’s state interest rate

Back 148

False

Front 149

19. Secured short-term financing has specific assets pledged as collateral and appears on the balance sheet as current liabilities.

Back 149

True

Front 150

20. Fixed assets are the most desirable short-term loan collateral since they normally have a longer life, or duration, than the term of the loan

Back 150

False

Front 151

21. Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business

Back 151

True

Front 152

For forms that are in financial position to take a cash discount, it is generally a more financially sound decision to take the discount

Back 152

True

Front 153

23. Lines of credit are not guaranteed loans if the back does not have the funds available to lend

Back 153

True

Front 154

24. Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time

Back 154

True

Front 155

25. The two major sources of short-term financing are accounts payable and accruals.

Back 155

True