World of Business Chapter 9 practice

Which of the following statements is true of earnings per share (EPS)? a. It compares current assets to current liabilities. b. It measures the net income per share of common stock outstanding. c. It indicates earnings per dollar invested by the owners of a company. d. It is a way of measuring the degree of financial leverage.

b. It measures the net income per share of common stock outstanding.

_____ provide a framework for analyzing the impact of a firm's plans on the financing needs of the company. a. Cash flow financial statements b. Pro forma financial statements c. Income financial statements d. Equity financial statements

b. Pro forma financial statements

_____ is calculated by dividing net income (profit) by owners' equity. a. The profit margin ratio b. Return-on-equity c. Earnings per share d. The debt to equity ratio

b. Return-on-equity

_____ are short-term IOUs issued by the U.S. government that typically mature in 4, 13, or 26 weeks. a. Covenants b. Treasury bills c. Debentures d. Trade credits

b. Treasury bills

A commitment to meeting social responsibilities: a. results in higher employee turnover. b. can contribute to a more profitable company. c. hinders shareholder wealth maximization. d. contributes to a decrease in shareholder value.

b. can contribute to a more profitable company.

A(n) _____ is a restriction lenders impose on borrowers as a condition of providing long-term debt financing. a. equity b. covenant c. fixture d. consol

b. covenant

Firms that use factors: a. rely solely on long-term financing. b. do not receive the full amount their customers owe. c. cannot eliminate their own collection department. d. have to wait for customers to pay.

b. do not receive the full amount their customers owe.

A(n) _____ is a company that provides short-term financing to firms by purchasing their accounts receivables at a discount. a. oligopoly b. factor c. subsidiary d. cascade

b. factor

A _____ is a financial arrangement in which a bank agrees to provide a firm with funds up to some specified limit, as long as the borrower's financial situation does not deteriorate, and the bank has sufficient funds. a. corporate bond b. line of credit c. covenant d. term loan

b. line of credit

Return-on-equity (ROE) and earnings per share (EPS) are both classified as _____. a. activity ratios b. profitability ratios c. leverage ratios d. liquidity ratios

b. profitability ratios

When a firm negotiates a loan with a bank, it signs a(n) _____, which specifies the length of the loan, the rate of interest the firm must pay, and other terms and conditions of the loan. a. covenant b. promissory note c. treasury bill d. accrual bond

b. promissory note

In the context of the sources of funds for a business, a _____ calls for a regular schedule of fixed payments sufficient to ensure that the principal and interest are repaid by the end of the tenure for which the money has been borrowed. a. treasury bill b. term loan c. promissory note d. corporate bond

b. term loan

_____ represents what customers who buy on credit owe the firm. a. Apparent consumption b. Interbank spread c. Accounts receivable d. Abandonment value

c. Accounts receivable

_____ are stocks of finished goods, work-in-process, parts, and materials that firms hold as a part of doing business. a. Consols b. Covenants c. Inventories d. Liabilities

c. Inventories

Identify a true statement about equity financing. a. It does not allow firms to skip dividend payments to stockholders. b. It is less flexible than debt financing. c. It does not yield the same tax benefits as debt financing. d. It is more risky than debt financing.

c. It does not yield the same tax benefits as debt financing.

Which of the following statements is true of return on equity (ROE)? a. It compares current assets to current liabilities. b. It is a way of measuring the degree of financial leverage. c. It indicates earnings per dollar invested by the owners of a company. d. It measures the net income per share of common stock outstanding.

c. It indicates earnings per dollar invested by the owners of a company.

Which of the following statements is true of commercial paper? a. It is only applicable to startups and small firms. b. It can be issued for up to three years. c. It is normally unsecured. d. It exclusively consists of long-term promissory notes.

c. It is normally unsecured.

_____ are the part of a firm's net income it reinvests. a. Cash dividends b. Net liabilities c. Retained earnings d. Counter credits

c. Retained earnings

A _____ is a projection showing how a firm's budgeted sales and costs will affect expected net earnings. a. liability statement b. budgeted balance sheet c. budgeted income statement d. stretch budget

c. budgeted income statement

The purpose of _____ is to protect creditors by preventing the borrower from pursuing policies that might undermine its ability to repay the loan. a. letter stocks b. cross subsidies c. covenants d. easements

c. covenants

Which of the following statements is true of a revolving credit agreement? a. Under the terms of a revolving credit agreement, a firm will pay interest on any funds it does not borrow. b. A revolving credit agreement is a guaranteed line of credit. c. A revolving credit agreement is a type of long-term loan. d. Under the terms of a revolving credit agreement, a firm will pay a commitment fee on any funds it borrows.

b. A revolving credit agreement is a guaranteed line of credit.

_____ is the process a firm uses to evaluate long-term investment proposals. a. Inventory benchmarking b. Capital budgeting c. Black marketing d. Concessional financing

b. Capital budgeting

Which of the following statements is true in the context of cash budgets? a. Cash budgets normally cover a six-year period. b. Cash budgets show projected cash inflows and outflows for each month. c. Cash inflows and outflows remain constant in most firms. d. Cash flow problems are minimized when customers buy on credit.

b. Cash budgets show projected cash inflows and outflows for each month.

Identify a true statement about commercial paper. a. It can be issued for up to three years. b. It is only offered by firms with excellent credit ratings. c. It exclusively consists of long-term promissory notes. d. It is normally secured.

b. It is only offered by firms with excellent credit ratings.

Which of the following is a similarity between corporate stocks and corporate bonds? a. Both are marketable. b. Both are certificates of debt. c. Both are informal IOUs. d. Both represent ownership in a corporation.

a. Both are marketable.

_____ is the mix of equity and debt financing a firm uses to meet its permanent financing needs. a. Capital structure b. An offer curve c. An index swap d. Marketing structure

a. Capital structure

_____ refers to funds provided by the owners of a company. a. Equity financing b. Trade crediting c. Debt financing d. Peer-to-peer lending

a. Equity financing

_____ is the functional area of business that is responsible for finding the best sources of funds and the best ways to use them. a. Finance b. Production c. Marketing d. Operation

a. Finance

Which of the following statements is true of the debt-to-assets ratio? a. It is a way of measuring the degree of financial leverage. b. It measures the net income per share of common stock outstanding. c. It is an asset management ratio. d. It is the same as return on equity.

a. It is a way of measuring the degree of financial leverage.

Which of the following statements is true of equity financing? a. It is more flexible than debt financing. b. It is more risky than debt financing. c. It yields the same tax benefits as debt financing. d. It requires firms to agree to burdensome covenants.

a. It is more flexible than debt financing.

_____ is sometimes called spontaneous financing because it is granted when a company places its orders without requiring any additional paperwork or special arrangements. a. Trade credit b. A promissory note c. A corporate bond d. Commercial paper

a. Trade credit

The net present value (NPV) of an investment proposal is found by: a. adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum. b. subtracting the present values of all of its cash outflows and the present values of all its cash inflows. c. dividing all of its estimated future cash flows by the sum of the total present cash inflows and the total present cash outflows. d. multiplying its estimated future cash flows with its present cash flows.

a. adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum.

The _____ is computed by dividing accounts receivable by average daily credit sales. a. average collection period b. inventory turnover ratio c. debt-to-assets ratio d. tradable good quantity

a. average collection period

The _____ is computed by dividing a firm's total liabilities by its total assets. a. debt ratio b. inventory turnover ratio c. inventory turnover ratio d. current ratio

a. debt ratio

When a firm provides its employees with a good work environment, _____. a. employee turnover is likely to be lower b. productivity of the employees is likely to reduce c. the firm is likely to be rated low on social responsibility d. the employees are likely to have low morale

a. employee turnover is likely to be lower

The _____ is computed by dividing a firm's cost of goods sold by average inventory levels. a. inventory turnover ratio b. tradable good quantity c. debt-to-assets ratio d. average collection period

a. inventory turnover ratio

A positive net present value (NPV) means that the: a. present value of the expected cash flows from a project is greater than the cost of the project. b. cost of a project outweighs its cash flow benefits. c. cost of a project exceeds its benefits even after accounting for the time value of money. d. feasibility of a project is low, and it will be rejected by financial managers.

a. present value of the expected cash flows from a project is greater than the cost of the project.

Earnings per share (EPS) is calculated by: a. dividing the number of shares outstanding by the value of owner's equity. b. multiplying the net income of a firm by the preferred dividends and dividing it by the total capital invested by the owners. c. dividing net income of a firm minus preferred dividends by the average number of shares of common stock outstanding. d. dividing the number of shares outstanding by net income of a firm.

c. dividing net income of a firm minus preferred dividends by the average number of shares of common stock outstanding.

In the context of basic financial planning tools, the budgeted income statement and budgeted balance sheet are referred to as _____. a. cash flow financial statements b. equity financial statements c. pro forma financial statements d. expenditure financial statements

c. pro forma financial statements

The _____ suggests that sources and uses of funds that offer the potential for high rates of return tend to be riskier than sources and uses of funds that offer lower returns. a. average accounting return b. budgeted income statement c. risk-return tradeoff d. market risk premium

c. risk-return tradeoff

Which of the following is a major issue that confronts financial managers as they seek to maximize the market price of stock? a. Cash management b. Trade credit c. Debt financing d. Social responsibility

d. Social responsibility

_____ is one of the most important sources of short-term financing for many firms and arises when suppliers ship materials, parts, or goods to a firm without requiring payment at the time of delivery. a. A corporate bond b. A balanced scorecard c. Working capital d. Trade credit

d. Trade credit

Understanding of the timing of cash flows within the planning period is important because: a. most firms experience uneven inflows and outflows of cash over the course of a year. b. most companies have predictable expenditures and do not experience cash shortages or surpluses. c. firms with growing sales experience steady cash flows. d. companies with growing sales plan their budgets accurately and do not experience deviations.

d. companies with growing sales plan their budgets accurately and do not experience deviations.

The legal and ethical obligation of financial managers to make decisions consistent with the financial interests of their firm's owners is called their _____. a. statutory duty b. implied duty c. directed duty d. fiduciary duty

d. fiduciary duty

A(n) _____ is one that relies heavily on debt. a. no-liability company b. non-leveraged firm c. equity financing company d. highly leveraged firm

d. highly leveraged firm

Historically, the most widely accepted goal of financial management has been to: a. analyze the risk associated with investments. b. organize and manage a firm's resources. c. help a firm fulfill its social responsibility. d. maximize the value of a firm to its owners.

d. maximize the value of a firm to its owners.