FINA 350
Which of the following is not a reason to illustrate the fact that net present value method is better than internal rate of return:
NPV is difficult to compute
The current ratio is
a liquidity ratio
Liquidity ratios measure the company's
ability to pay its short-term obligations
It is a given fact that the general level of stock prices and the prevailing interest on debt investments has:
an inverse relationship
The net cash flows from an investment project
are earnings after tax plus depreciation
The balance sheet budget summarizes the effect of the budgeting system on the firm's
assets, liabilities and net worth
Which of the following does not represent a category of float?
collection float
A bond's yield to maturity is the rate of return that equates the present value of principal and interest payments to the
current market price of the bond
The dollar value of a stockholder's wealth is obtained by multiplying the number of shares owned by the
current stock price per share
The discounted cash flow model of valuation is: Po = D1/(Ke - g). How would Po change with a corresponding increase in risk for the firm all other things constant?
decrease
The portfolio effect states that as more assets are added to a portfolio, the risk of the portfolio
decreases
Beta may be used to classify stocks into which of the two following categories?
defensive stocks and aggressive stocks
Which of the following is not a part of a balance sheet?
dividends
A project is acceptable when its internal rate of return is greater than
firm's cost of capital
Favorable financial leverage occurs when the firm's return on investment (ROI) is greater than the
fixed cost of borrowing
In order to calculate the acid test ratio, one needs to deduct _____ from the current assets before dividing it by current liabilities.
inventories
Which of the following current assets is generally considered least liquid?
inventories
The relationship between a bond's price and yield to maturity:
is inverse
Net working capital
is the excess of current assets over current liabilities
The average rate of return method is inferior to the net present value method because
it does not consider the time value of money
Which of the following is not an advantage of internal rate of return method:
it requires prior computation of the cost of capital
With respect to an accept-reject decision, the firm should reject the investment project if
its net present value is less than zero and its internal rate of return exceeds zero but less than its cost of capital
Defensive stocks have a beta value
less than one
Which of the following principles reflects the ability of fixed costs to magnify the rate of return?
leverage
Current assets are listed on the balance sheet in order of their
liquidity
Aggressive stocks have a beta value
more than one
The profit margin on sales is _________ divided by sales.
net income after taxes
Which of the following is not classified as a current asset?
notes payable
Two projects are mutually exclusive if
one is adopted, the other one cannot be adopted
Which one of the following capital budgeting methods does not take into account the time value of money?
payback
Which of the following capital budgeting methods are considered unsophisticated?
payback and average rate of return
Which one of the following statements regarding the payback method is incorrect?
payback method acknowledges explicitly the cash flows beyond the payback period
The most commonly used capital budgeting methods under certainty are
payback, average rate of return, net present value, internal rate of return
A bond with a market price of $1,050 is said to be selling at
premium
The valuation principle states that the value of an asset is equal to the
present value of its expected cash flows
The following diversification alternatives are available to a firm along with their correlation coefficients. Which one should the firm select if it chooses to reduce its overall riskiness?
road construction - .4
The primary goal of the firm is to maximize
stockholders wealth
Which of the following financial statements reflect the firm's financial position at a point in time?
the balance sheet
Ratio Analysis involves the use of
the balance sheet and the income statement
The after-tax cost of a bond is equal to
the before tax cost of the bond times (1 - tax rate)
In order to calculate the weighted average cost of capital, one must compute
the cost of individual components of the capital structure and the percentage composition of the capital structure
Generally speaking, the higher the risk of a project
the higher the expected return
The internal rate of return is the discount rate which will equate the present value of net cash inflows to
the initial cost of investment
The profitability index is obtained by dividing the present value of net cash inflows by
the net investment
When the net present value of a project is zero, the discount rate is
the project's internal rate of return
On the topic of cash management, the term "float" refers to
the status of funds in the process of collection
Return on investment is net income after taxes divided by
total assets
Which of the following is not used to speed up the cash collection into the firm?
use of float
The interest rate which equates the present value of the coupon interest payments and the principal repayment of a bond to its market price is called the
yield to maturity
If a firm has a current ratio of one, its net working capital is
zero
When a project's cash flows are discounted by its internal rate of return, it has a
zero net present value