Subject: Business / Finance
Q1. Which of the following has the most significant influence on return on equity?
a. Common dividends
b. Principal payments
d. Operating income
Q2. Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.
Q3. The goal of the firm should be:
a. maximization of profits (net income per share)
b. maximization of shareholder wealth
c. maximization of market share
d. maximization of sales
Q4. An example of a primary market transaction involving a money market security is:
a. A new issue of a security with a very short maturity
b. A new issue of a security with a very long maturity
c. The transfer of a previously-issued security with a very short maturity
d. The transfer of a previously-issued security with a very long maturity
Q5. Which of the following best reflects the mix of corporate securities issued in the U.S.?
a. 74% debt, 26% equity
b. 55% debt, 45% equity
c. 45% debt, 55% equity
d. 26% debt, 74% equity
Q6. If a firm has unused debt capacity and the general level of equity prices is depressed, financial executives will favor the issuance of debt securities over the issuance of new common stock.
Q7. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
a. current ratio
b. net profit margin
c. quick ratio
Q8. The market price of the firm's stock reflects the value of the firm as seen by its owners.
Q9. In the aggregate, households usually spend more on current consumption than they earn.
Q10. There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.
Q11. Patti Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Patti's acid test ratio?
Q12. PDQ Corp. has sales of $3,000,000; the firm's cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm's interest expense is $230,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $30,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is PDQ's "Addition to Retained Earnings?"
Q13. Capital market instruments include:
a. negotiable certificates of deposit
b. corporate equities
c. commercial paper
d. Treasury bills
Q14. According to the SEC the correct sequence of events for a security issue is:
a. red herring, final prospectus, registration statement
b. registration statement, red herring, final prospectus
c. final prospectus, registration statement, red herring
d. red herring, registration statement, final prospectus
Q15. An advantage of the OIROI ratio is that it:
a. ignores the firm's financing policies.
b. uses net income to measure efficiency.
c. combines total asset turnover and gross profit margin.
d. simply assumes that a firm is financed 50% by equity and 50% by debt.
Q16. The Securities and Exchange Commission is responsible for setting margin requirements.
Q17. Which of the below belongs in the liability section of a balance sheet?
a. Interest expense.
b. Accumulated depreciation.
c. Accounts payable.
d. Preferred stock.
Q18. Financial intermediaries:
a. offer indirect securities
b. include the national and regional stock exchange
c. usually are underwriting syndicates
d. constitute the various secondary markets
Q19. A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?
Q20. Advantages of private placements do not include which of the following:
a. more financing flexibility
b. lower flotation costs
c. investor protection through extensive regulation
d. funds which are available more quickly than through a public offering
Q21. The SEC requires registration of a public issue in which of the following circumstances?
a. a railroad bond issue
b. an issue of commercial paper
c. a public utility issue
d. an issue of $5,000,000
Q22. PDQ Corp. has sales of $3,000,000; the firm's cost of goods sold is $1,425,000; and its total operating expenses are $700,000. What is PDQ's EBIT?
a. $ 825,000
b. $ 875,000
Q23. Real assets are tangible, whereas financial assets merely reflect claims for future payment on other economic units.
Q24. In making financial decisions, the relevant tax rate is the:
a. marginal tax rate.
b. average (effective) tax rate.
c. previous year's tax rate.
d. maximum allowable tax rate.
Q25. One of the benefits of organized security exchanges is that they are said to provide a _____ market.
Q26. The permissible time period for issuance of securities under shelf registration is directly related to the life of the issuing company.
Q27. Which of the following relationships is true regarding the costs of issuing the following securities?
a. common stock > bonds > preferred stock
b. preferred stock > common stock > bonds
c. bonds > common stock > preferred stock
d. common stock > preferred stock > bonds
Q28. "The markets are quick and the prices are right" describes a market that is:
Q29. The investment banker does not underwrite the securities to be issued in which of the following?
a. initial public offering
b. primary market transaction
c. firm commitment
d. best efforts
Q30. If you were given current assets and current liabilities, what ratio could you compute?
a. accounts receivable turnover ratio
b. net profit margin
c. current ratio
d. current debt margin
Q31. Why is the quick ratio a more refined liquidity measure than the current ratio?
a. It measures how "quickly" cash and other liquid assets flow through the company.
b. Inventories are generally the least liquid of the firm's current assets.
c. Inventories are generally among the most liquid of the firm's current assets.
d. Cash is the most liquid current asset.
Q32. PDQ Corp. has sales of $3,000,000; the firm's cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm's interest expense is $230,000, and the corporate tax rate is 40%. What is PDQ's tax liability?
Q33. Most sole proprietorships convert to a corporation within a few years due to increasing state and federal regulations.
Q34. DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage (debt).
Q35. Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable.
Q36. Based on the information in the table, calculate the after tax cash flow from operations for 2002 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable):
December 2001 December 2002
Net income $1,500 $3,000
Accounts receivable 750 750
Accumulated depreciation 1,125 1,500
Common stock 4,500 5,250
Paid-in capital 7,500 8,250
Retained earnings 1,500 2,250
Accounts payable 750 750
Q37. General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.
Q38. The investment banker does not underwrite the securities to be issued in which of the following?
a. competitive bid purchase
b. negotiated purchase
c. commission or best efforts basis
d. direct sale
Q39. Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2000 (from highest to lowest standard deviation of returns)?
a. T-bills, long-term corporate bonds, common stocks, Small firm common stocks
b. small firm common stocks, common stocks, long-term corporate bonds, T-bills
c. T-bills, common stocks, long-term corporate bonds, small firm common stocks
d. long-term corporate bonds, T-bills, common stocks, small firm common stocks
Q40. Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period?
a. Balance Sheet
b. Statement of Cash Flows
c. Income Statement
d. Sources and Uses of Funds Statement
Q41. A "normal" yield curve is ________.
a. Downward sloping.
b. Downward sloping, then upward sloping.
c. Upward sloping.
d. Upward sloping, then downward sloping.
Q42. You are considering an investment in a U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. corporate bond pay?
Q43. The quick ratio of a firm would be increased by which of the following?
a. land held for investment is sold for cash
b. equipment is purchased, financed by a long-term debt issue
c. inventories are sold for cash
d. inventories are sold in exchange for a long-term note
e. both a and c above
Q44. The procedure by which significant changes may be made to a partnership, such as admission of a new partner or termination of the partnership, are governed by each state so no partnership agreement is needed.
Q45. A corporation may normally exclude what percentage of dividend income received from another corporation?
Q46. Common stock is the most relied on financing method used by corporations.
Q47. A corporation's capital losses can be carried back three years and, if any loss still remains, it may be carried forward:
a. 1 year
b. 3 years
c. 5 years
d. 7 years
Q48. The investment banker performs what three basic functions:
a. underwriting, distributing, and regulating
b. underwriting, advising, and price-pegging
c. underwriting, distributing, and negotiating
d. underwriting, distributing, and advising
Q49. The cash conversion cycle exceeds the sum of days of sales outstanding and days of sales in inventory.
Q50. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. Treasury bond pay?
Q1. The current yield is greater than the coupon rate for a discount bond.
Q2. As market rates of interest rise, investors move their funds into bonds, thus increasing their price and lowering their yield.
Q3. It is commonly accepted that a perpetuity must continue for at least 50 years.
Q4. Of the following, which differs in meaning from the other three?
a. Systematic Risk
b. Market Risk
c. Undiversifiable Risk
d. Asset-unique Risk
Q5. Many preferred stocks have a feature that requires a firm to periodically set aside an amount of money for the retirement of its preferred stock. What is the name of this feature?
d. Sinking fund
Q6. In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investor's attitude toward risk.
Q7. The yield to maturity on a bond:
a. is fixed in the indenture
b. is lower for higher risk bonds
c. is the expected rate of return on the bond
d. is generally below the coupon interest rate
Q8. When repaying an amortized loan, the interest payments increase over time due to the compounding process.
Q9. If the market price of a bond decreases, then:
a. the yield to maturity decreases
b. the coupon rate increases
c. the yield to maturity increases
d. the yield to maturity is not affected
Q10. If you put $1,000 in a savings account with a 5% nominal rate of interest compounded quarterly, what will the investment be worth in 6 years (round to the nearest dollar)?
Q11. If you invest $750 every six months at 8 percent compounded semi-annually, how much would you accumulate at the end of 10 years?
Q12. For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed to monthly compounding.
Q13. Yanti Corp. preferred stock has a 5% stated dividend percentage, and a $100 par value. What is the value of the stock if your required rate of return is 6% per year?
Q14. What is the value of a bond that has a par value of $1,000, a coupon of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10.
Q15. The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings) divided by the number of shares outstanding.
Q16. Hughen Industries' common stock has an expected return of 12.4% and a beta of 1.2. If the expected risk free return is 4%, what is the expected return for the market?
Q17. The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.
Q18. You are considering an investment in First Allegiance Corp. The firm has a beta of 1.62. Currently, U.S. Treasury bills are yielding 6.75% and the expected return for the S & P 500 is 18.2%. What rate of return should you expect for your investment in First Allegiance?
Q19. The formula for calculating the present value (PV) of a perpetuity is PV = PP/(1 + i), where PP is the perpetuity payment and i is the discount rate.
Q20. Which of the following has a beta of one?
a. a risk free asset
b. the market
c. all assets have a beta greater than one
d. all assets have a beta less than one
Q21. Total risk equals systematic risk plus unsystematic risk.
Q22. In estimating a security's Beta, the market portfolio is commonly represented by the S&P 500 index.
Q23. The PDQ Company's common stock is expected to pay a $1.00 dividend in the coming year. If investors require a 15% return and the growth rate in dividends is expected to be 5%, what will the market price of the stock be?
Q24. The total amount of interest earned on a lump sum investment will exactly double if the amount of time is exactly doubled, everything else equal.
Q25. A bond is a long-term promissory note issued by the firm.
Q26. To compound $100 quarterly for 20 years at 8%, we must use:
a. 40 periods at 4%
b. 5 periods at 12%
c. 10 periods at 4%
d. 80 periods at 2%
Q27. Tri State Pickle Company preferred stock pays a perpetual annual dividend of 2 1/2% of its $100 par value. If investors' required rate of return on this stock is 15%, what is the value per share?
Q28. If the interest rate is zero:
a. PV = FVn
b. PV = FV x n
c. FV = PV
d. FV = PV/en
Q29. A security with a beta of one has a required rate of return equal to the overall market rate of return.
Q30. Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment?
Q31. Which type of value is shown on the firm's balance sheet?
a. book value
b. liquidation value
c. market value
d. intrinsic value
Q32. Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.
Q33. Consider the following four types of payments that could be made by a normal operating firm: interest, common dividends, income taxes, and preferred dividends. Compared to the other payments mentioned, where would you rank common dividend payments?
Q34. A bond rating of A is lower than a bond rating of AA.
Q35. A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.
Q36. The value of a bond investment, which provides fixed interest payments, will increase when discounted at a 12% rate rather than at a 7% rate.
Q37. The present value of an annuity due is less than the present value of an otherwise identical ordinary annuity.
Q38. The security market line reflects an individual investor's attitude toward risk.
Q39. Common stock does not mature.
Q40. Cary's Company bonds have a 12% coupon rate. Interest is paid semi-annually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of the bonds if investors' required rate of return is 8%.
Q41. If market interest rates rise:
a. Short-term bonds will decline in value more than long-term bonds.
b. Short-term bonds will rise in value more than long-term bonds.
c. Long-term bonds will decline in value more than short-term bonds.
d. Long-term bonds will rise in value more than short-term bonds.
Q42. The present value of a single future sum of money is inversely related to both the number of years until payment is received and the discount rate.
Q43. The present value of a perpetuity is finite, as opposed to infinite, because the amount of each payment declines as the time increases.
Q44. International Cruise Lines sold an issue of 15-year $1,000 par bonds to build new ships. The bonds pay 6.85% interest, semi-annually. Today's required rate of return is 8.35%. How much should these bonds sell for today? Round off to the nearest $1.
Q45. Thirty-five years ago you invested $1,000 in a retirement fund. Today the fund is worth $130,000. What has been your annually compounded rate of return on this investment?
Q46. Bonds generally have a maturity date while preferred stocks do not.
Q47. Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 8% on these bonds, they will be priced at:
a. Par value
b. A premium to par value
c. A discount to par value
d. Cannot be determined from information given
Q48. The stock valuation model D1/(Rc – g) requires the stock to grow at a rate greater than the required return; otherwise, the stock is worthless.
Q49. Which of the following best describes investment risk?
a. The probability of achieving an improbable event.
b. The possibility of making a profit.
c. The potential variability in future cash flows.
d. The chance that a security will materialize.
Q50. OatEaters Corporation bonds are currently priced at $953.77. They have a par value of $1,000 and 6 years to maturity. They pay an annual coupon rate of 7%. What is the yield to maturity on this bond?
b. 6 1/2%