Finance All Multiple Choice
Hon just bought 800 shares of TYUJ stock, which has been trading for some time on the NYSE. In which market did Hon's purchase occur? A. Dealer market B. Secondary market C. Derivative market D. Primary market
B. Secondary market
Managers should act in shareholders' interests because shareholders have ___________ priority in receiving their claims. A. Top B. Somewhere in the middle C. Bottom D. Equal (to those of all other stakeholders)
C. Bottom
Research conducted on firms' dividend policies over time support which one of the following conclusions? A. Aggregate dividends and stock repurchases have steadily declined in real terms. B. Dividends are currently paid by the vast majority of firms. C. Managers tend to smooth dividends. D. Stock prices tend to increase whenever anticipated changes in dividends occur.
C. Managers tend to smooth dividends.
Which of the following statements is FALSE? A. Liquidity measures the speed and ease with which assets can be converted to cash without significant loss of value, and 'fortress' balance sheets are especially liquid. B. Even though depreciation is not a cash expense, it affects taxes, and corporations prefer to depreciate assets using accelerated over straight line methods for tax purposes. C. The marginal tax rate is the tax rate payable on the next dollar earned and is always higher than the average tax rate. D. Operating Cash Flow is generated from utilizing existing assets after deducting interest expense
D. Operating Cash Flow is generated from utilizing existing assets after deducting interest expense
Which of the following statements is TRUE? A. Efficient markets will protect investors from wrong choices if they do not diversify. B. Consistent with efficient markets, stock prices reach equilibrium several times per week. C. Efficient markets react to new information by instantly adjusting the price of a stock to its new fair market value without any delay or overreaction. D. Weak form efficiency implies that all information is reflected in stock prices.
C. Efficient markets react to new information by instantly adjusting the price of a stock to its new fair market value without any delay or overreaction.
Which of the following statements is TRUE? A. Bankruptcy occurs whenever a firm is unable to meet obligations or reports negative book equity. B. A Chapter 7 bankruptcy allows a firm to reorganize and continue operations as "debtor-in-possession." C. Under bankruptcy, trade creditors have lower priority than secured bank loans. D. Financial distress and bankruptcy costs cause WACC to decrease as leverage increases.
C. Under bankruptcy, trade creditors have lower priority than secured bank loans.
Which of the following statements is FALSE? A. The APR should not be used to compare two investments with different compounding periods. B. Lenders prefer less frequent compounding. C. Treasury Bills are pure discount loans with no coupon payments. D. Typical bullet bonds are interest-only loans where the principal is not amortized.
B. Lenders prefer less frequent compounding.
Which of the following statements is FALSE? A. MM Proposition 1, if there are no taxes, states the value of the firm does not depend whatsoever on its capital structure. B. MM Proposition 2, if there are no taxes, explains how the cost of equity decreases as the firm increases its use of debt financing. C. Because interest expense is tax deductible, leverage increases the firm's value by the amount of the present value of the interest tax shield. D. Because interest expense is tax deductible, a firm's WACC decreases as firms rely more heavily on debt financing.
B. MM Proposition 2, if there are no taxes, explains how the cost of equity decreases as the firm increases its use of debt financing.
Fill in the blanks: Stock prices fall if investors either expect _________ growth rates or require _________ returns. A. higher, higher B. higher, lower C. lower, higher D. lower, lower
C. lower, higher
Other things equal, investors will require higher yields on, and be willing to pay lower prices for, bonds with the following characteristics, except those which: A. Are unsecured B. Have less protective covenants C. Have lower credit quality D. Are convertible into common shares
D. Are convertible into common shares
Which of the following statements about the corporate form of ownership is FALSE? A. The shareholders are the owners of the firm and hold the top priority claim among all stakeholders. B. The shareholders elect the directors of the corporation, usually in uncontested elections. C. The directors appoint the firm's management, and yet managers usually participate in nominating new candidates for directors. D. Separation of ownership from control can cause agency problems where managers act in their own interests, rather than shareholders' interests.
A. The shareholders are the owners of the firm and hold the top priority claim among all stakeholders.
Which of the following statements is FALSE? A. Over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large-company stocks, bonds, and T-Bills. B. The average return is always greater than the geometric return. C. Investors who hold bonds instead of stocks over long horizons can be rational and relatively averse to risk. D. Like the dividend yield, the capital gains yield can never be negative.
D. Like the dividend yield, the capital gains yield can never be negative.
Which of the following statements is FALSE? A. Sensitivity analysis helps determine the reasonable range of expectations for a project's outcome. B. The impacts of estimation errors and forecasting risks are small when NPVs are large and negative. C. Under intense competition, positive NPV projects are rare. D. The error of commission, or Type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative.
A. Sensitivity analysis helps determine the reasonable range of expectations for a project's outcome.
Which of the following statements is FALSE? A. While the book value of equity can be negative, the market value of equity cannot be negative. B. Market values are the prices at which assets, liabilities, and equities can be bought or sold for now. C. EBIT is the 'bottom line.' D. Average Tax Rates are less useful for making financial decisions than Marginal Tax Rates.
C. EBIT is the 'bottom line.'
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Average accounting return B. Payback C. Internal rate of return D. Profitability index
A. Average accounting return
Which of the following is an advantage of the corporate form of organization? A. Corporations can easily raise capital and its ownership can be transferred easily. B. Corporations can be started easily and face little regulation. C. Owners of corporations have unlimited liability and full control. D. Corporations pay taxes on income before dividends to their owners.
A. Corporations can easily raise capital and its ownership can be transferred easily.
Which of the following statements is TRUE? A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio. B. Labor strikes and part shortages are examples of market-wide systematic risks. C. Market-wide systematic risks can be significantly reduced by diversification. D. Asset-specific unsystematic risks can be substantially reduced with less numerous and less correlated assets in a portfolio.
A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio.
When is a firm insolvent from an accounting perspective? A. When the firm is unable to meet its financial obligations in a timely manner B. When the firm's debt exceeds the value of the firm's equity C. When the firm has a negative net worth D. When the firm's revenues cease
C. When the firm has a negative net worth
Portfolio diversification eliminates which of the following? A. Total investment risk B. Reward for bearing risk C. Market-wide risk D. Unsystematic risk
D. Unsystematic risk
Which one of the following statements is true concerning the price-earnings (PE) ratio? A. A high PE ratio typically indicates that a firm is expected to grow significantly. B. A PE ratio of 16 indicates that investors are willing to pay $1 for every $16 of current earnings. C. PE ratios are unaffected by the accounting methods employed by a firm. D. The PE ratio is classified as a profitability ratio.
A. A high PE ratio typically indicates that a firm is expected to grow significantly.
Which of the following will increase the value of a call option? A. An increase in the underlying stock price further above the strike price B. A decrease in the risk-free interest rate C. Less time to expiration as days pass D. A decrease in the volatility of the underlying stock's returns
A. An increase in the underlying stock price further above the strike price
Which of the following statements is FALSE? A. Asset-specific risks can be easily diversified with highly correlated assets in a portfolio B. Asset-specific risks can be easily diversified with numerous assets in a portfolio C. Bearing risk is rewarded with higher expected returns D. Only market-wide risks, not asset-specific risks, should earn rewards
A. Asset-specific risks can be easily diversified with highly correlated assets in a portfolio
Suppose Miller Inc. is able somehow to reduce its fixed assets without affecting the company's operations, sales, net income, or equity. This reduction will decrease which of the following ratios? A. Capital intensity ratio B. Return on assets C. Total asset turnover D. Return on equity
A. Capital intensity ratio
Lisa has $1,000 in cash today. Which one of the following investment options will come closest to doubling her money? A. 12 percent interest for 5 years B. 7 percent interest for 9 years C. 8 percent interest for 9 years D. 6 percent interest for 10 years
C. 8 percent interest for 9 years
Which one of the following has the highest effective annual rate? A. 6 percent compounded annually B. 6 percent compounded semi-annually C. 6 percent compounded quarterly D. 6 percent compounded monthly
D. 6 percent compounded monthly
Which of the following refers to a customer's willingness to meet his or her credit obligations? A. Character B. Capacity C. Capital D. Conditions
A. Character
All else constant, which one of the following will decrease the cash cycle? A. Decreasing the credit period granted to a customer B. Decreasing the inventory turnover rate C. Decreasing the accounts payable period D. Decreasing the accounts receivable turnover rate
A. Decreasing the credit period granted to a customer
Which of the following statements is FALSE? A. One reason why the Average Accounting Return is a flawed measure in making business decisions is that it is based on cash flows. B. IRR measures the dollar-weighted return on an investment. C. In order to use the Payback Rule as a tool to determine if an investment is acceptable, a manager needs to provide a pre-specified limit of time for recouping investment costs. D. The Profitability Index measures the value created per dollar invested, based on the time value of money.
A. One reason why the Average Accounting Return is a flawed measure in making business decisions is that it is based on cash flows.
An agent who buys and sells securities from inventory is called a: A. Specialist B. Dealer C. Broker D. Floor Trader
B. Dealer
Which of the following statements is FALSE? A. A stock split is an increase in a firm's shares outstanding without any change in owners' equity. B. A reverse split is a stock split under which a firm's number of shares outstanding is reduced. C. A stock buyback refers to the purchase of the firm's shares of stock by the firm's debt holders. D. A stock dividend is a payment in the form of stock made by a firm to its owners, diluting the value of each share outstanding.
C. A stock buyback refers to the purchase of the firm's shares of stock by the firm's debt holders.
Which of the following statements is FALSE? A. With simple interest, the interest is not reinvested, so interest is earned each period only on the original principal. B. Both lenders and investors prefer more compounding. C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment. D. Treasury Bills are pure discount loans sold by the US government that repay a fixed amount as one lump sum at some time in the future.
C. Amortizing a loan allows for a portion of principal to be paid with the interest each period principal so that the actual payments to interest will increase with each payment.
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Taxability premium C. Default risk premium D. Liquidity premium
C. Default risk premium
A broker is an agent who: A. Trades on the floor of an exchange for himself or herself. B. Buys and sells from inventory. C. Offers new securities for sale to dealers only. D. Brings buyers and sellers together.
D. Brings buyers and sellers together.
Which of the following choices is NOT a CORRECT way to complete this sentence: Other things equal, a set of cash flows is more valuable ... A. The longer they last B. The more frequently they are paid C. The faster they grow D. The larger the time value that investors require compensation for trading a dollar today for dollars tomorrow
D. The larger the time value that investors require compensation for trading a dollar today for dollars tomorrow
Fill in the blanks: An annuity is worth _______ than a perpetuity, and a constant annuity is worth _______ than a growing annuity. (assuming the normal circumstance where the discount rate exceeds the growth rate and where the growth is positive) A. more, more B. more, less C. less, more D. less, less
D. less, less
Which of the following statements is TRUE? A. By investing in varied and numerous assets, an investor is able to virtually eliminate all asset-specific risks in her portfolio, both easily and cheaply. B. It is possible, but not very easy, for an investor to control market-wide risks in his portfolio, and increases in these market-wide risks are costly because they reduce expected returns. C. The most important characteristic in determining the expected return of a well-diversified portfolio is the total variance risks of the individual assets in the portfolio. D. When a portfolio has a positive investment in every one of its assets, its standard deviation cannot be less than that on every asset in the portfolio.
A. By investing in varied and numerous assets, an investor is able to virtually eliminate all asset-specific risks in her portfolio, both easily and cheaply.
Which of the following statements is FALSE? A. Like Johnson & Johnson (JNJ), nearly all of the 30 Dow Jones Industrial companies were forced to reduce their dividends per share in 2009 and again in 2010 due to the Great Recession. B. Apple paid its first dividend to common shareholders in 2012, and Berkshire Hathaway has not yet paid dividends to common shareholders. C. The dividend yield on the S&P500 has been approximately 2% in recent decades, and tends to be lower when prices rise. D. Share repurchases have become more common over the past half century, and over the same period, the dividend yield has trended downward.
A. Like Johnson & Johnson (JNJ), nearly all of the 30 Dow Jones Industrial companies were forced to reduce their dividends per share in 2009 and again in 2010 due to the Great Recession.
New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation? A. Price-sales ratio B. Market-to-book ratio C. Profit margin D. ROE
A. Price-sales ratio
Which of the following statements is FALSE? A. Promissory notes are the most common credit instrument. B. The evidence of indebtedness in an open account is the invoice. C. For commercial drafts, the buyer accepts it and commits to payment before delivery. D. Banker's acceptances are commonly used in international trade.
A. Promissory notes are the most common credit instrument.
Which of the following statements is TRUE? A. The value of a call option can never be negative. B. The value of a call decreases as the price of the underlying stock increases. C. The value of a call increases when the volatility of the underlying asset's returns decreases. D. The intrinsic value of a call must be zero on the expiration date.
A. The value of a call option can never be negative.
You own 100 shares of JKL Inc. which has 20,000,000 shares outstanding that currently sell for $40 per share. JKL has previously announced a dividend of $0.80 per share with an ex-dividend date of May 31. Assume there are no taxes or other special advantages or disadvantages of dividends. If you take no action, which of the following statements is TRUE? A. You should expect the stock price to drop to $39.20 on May 31. B. You should expect the value of your brokerage account portfolio to increase by $80 on May 31. C. You should expect to receive 2 more shares of JKL in your account on May 31. D. You should expect to own a larger fraction of JKL's remaining outstanding shares on May 31.
A. You should expect the stock price to drop to $39.20 on May 31.
Which one of the following most likely represents the greatest political risk for a U.S.-based firm? A. A Boeing airplane assembly plant located in Canada B. A Koch Industries oil refinery in a port in Venezuela C. A Merck pharmaceutical sales office in Germany D. A Ford automotive parts plant in Korea that uses U.S. made components
B. A Koch Industries oil refinery in a port in Venezuela
Which was a source of cash, increasing a firm's cash balance, all else equal? A. $20 million shares repurchased in the open market. B. Accounts payable increased by $50 million. C. $15 million in sales from inventory on credit, simultaneously increasing accounts receivable by $15 million. D. $60 million of short-term debt was paid off and partially refinanced with $40 million in long-term debt.
B. Accounts payable increased by $50 million.
Which of the following is NOT an example of an option found in financial claims? A. Employee stock options that provide incentives to align managers' interests with shareholders B. Bank loans in which a firm is obligated to pay interest and principle over time C. Convertible preferred shares that can be exchanged for common shares at a pre-specified conversion ratio D. Equity owners' choice to repay risky debt to avoid bankruptcy
B. Bank loans in which a firm is obligated to pay interest and principle over time
Which one of the following activities is a source of cash? A. Decreasing long-term debt B. Decreasing accounts receivable C. Increasing fixed assets D. Repurchasing shares of stock
B. Decreasing accounts receivable
Which of the following statements is FALSE? A. Float equals the difference between the cash balance available at the bank and the cash balance recorded on the firm's books, and float also equals the sum of the disbursement float and the collection float (which is negative). B. Firms prefer to maintain a net collection float, rather than a net disbursement float, because they are receiving more money than they are spending. C. Firms often invest idle cash in money market securities which are short-term, safe, and easily marketable D. The income from investing excess cash in T-Bills is exempt from all state taxes, but the income from investing it in munis is exempt from all federal taxes.
B. Firms prefer to maintain a net collection float, rather than a net disbursement float, because they are receiving more money than they are spending.
Which one of the following is most indicative of a flexible short-term financial policy? A. High ratio of short-term debt to long-term debt B. High ratio of current assets to sales C. Low level of net working capital D. Relatively low level of liquidity
B. High ratio of current assets to sales
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following? A. Short-run exposure to exchange rate risk B. Long-run exposure to exchange rate risk C. Translation exposure to exchange rate risk D. Political risk associated with the foreign operations
B. Long-run exposure to exchange rate risk
Which of the following statements is TRUE? A. Activities that increase cash are called uses of cash, and activities that decrease cash are called sources of cash. B. Sources of cash always involve increasing a liability or equity account, or decreasing an asset account (other than cash); for example, decreasing fixed assets by selling some property, plant, and equipment, is considered a source of cash. C. The accounts payable period is the time between the sale of inventory and the collection of the receivable. D. The operating cycle is the time period between cash disbursement and cash collection.
B. Sources of cash always involve increasing a liability or equity account, or decreasing an asset account (other than cash); for example, decreasing fixed assets by selling some property, plant, and equipment, is considered a source of cash.
Which of the following statements is FALSE? A. Credit management trades off the carrying the cost of extending credit to buyers against the goal of increasing sales. B. The credit period is typically longer for perishable goods and for buyers with higher credit risk. C. Terms of sale "2/10 net 45" indicates a 2% discount if paid within 10 days, with the total amount due in 45 days if the discount is not taken. D. Banker's acceptances are credit commitments made before delivery, are guaranteed by banks, and are common in international trade.
B. The credit period is typically longer for perishable goods and for buyers with higher credit risk.
Which of the following statements is FALSE about initial public offerings? A. IPOs are often underwritten by a syndicate of investment banks for a 7% spread on average B. IPOs must be registered with the SEC, which costs about 3% in accounting and legal fees C. An IPO's exact price is published in a red-herring two weeks before selling begins D. IPOs are underpriced on average by about 19%
C. An IPO's exact price is published in a red-herring two weeks before selling begins
Which of the following statements is FALSE? A. Firms seek to manage their cash by keeping no more than is needed on hand, because holding cash has an opportunity cost, namely, the returns that could be earned by investing the money. B. The optimal credit policy for a firm depends on many specific factors, but generally involves trading off the cost of granting credit, such as the carrying costs of receivables and the possibility of non-payment, against the benefits in terms of increased sales. C. In the five Cs of credit, capacity refers to the customer's willingness to meet credit obligations out of operating cash flows. D. In the five Cs of credit, collateral are the assets pledged by the customer for security in case of default.
C. In the five Cs of credit, capacity refers to the customer's willingness to meet credit obligations out of operating cash flows.
Which of the following statements is FALSE? A. Increasing long-term debt, or borrowing over the long term, increases cash. B. Decreasing current assets other than cash, such as collecting accounts receivable, is considered a source of cash. C. Increasing current liabilities, such as getting a 90-day loan, will decrease cash. D. Increasing current assets other than cash, such as extending more credit to customers, is considered a use of cash.
C. Increasing current liabilities, such as getting a 90-day loan, will decrease cash.
Which of the following will decrease the value of a call? A. An increase in the underlying stock price over the strike price B. An increase in the risk-free interest rate C. Less time to expiration as days pass D. An increase in the volatility of the underlying stock's returns
C. Less time to expiration as days pass
Which of the following statements is TRUE? A. European options are options that may be exercised at any time until its expiration date. American options, however, are options that may be exercised only on the expiration date. B. A call option is the right to sell an asset at a fixed price during a particular period of time, while a put option is the right to buy an asset at a fixed price during a particular period of time. C. Stock options traded on exchanges are a zero-sum game, meaning that whatever the buyer of a stock option makes, the writer or seller loses, and vice versa. D. Sometimes an option can be worth less than zero.
C. Stock options traded on exchanges are a zero-sum game, meaning that whatever the buyer of a stock option makes, the writer or seller loses, and vice versa.
Cash dividends send which of the following signals to the market? A. Agency costs will be raised since the firm will have less flexibility B. The firm is planning on downsizing C. The firm is currently, and expects to continue to be, profitable D. The firm will no longer conduct stock repurchases
C. The firm is currently, and expects to continue to be, profitable
Suppose you could buy 1,320 South Korea won or 78 Pakistan rupees last year for $1. Today, $1 will buy you 1,318 won or 80 rupees. Which one of the following occurred over the past year? A. The won depreciated against the dollar. B. The dollar depreciated against the rupee. C. The rupee depreciated against the dollar. D. The dollar appreciated against both the won and the rupee.
C. The rupee depreciated against the dollar.
Fill in the blanks: Standard deviation measures ______ risk, while beta measures ______ risk. A. Asset-specific; market-wide B. Market-wide; total C. Total; market-wide D. Total; asset-specific
C. Total; market-wide
Which of the following statements is TRUE? A. The venture capital market is the primary source of financing for established firms with proven profitability. B. Firm commitment underwriting is far less prevalent for large issues than best efforts underwriting, which is likely due to the lower uncertainty of smaller issues. C. The direct and indirect costs of going public can be substantial, and once a firm goes public, it will not be able to easily raise additional capital. D. A Green Shoe provision gives the underwriters the right to purchase additional shares at the offer price to cover overallotments.
D. A Green Shoe provision gives the underwriters the right to purchase additional shares at the offer price to cover overallotments.
Which of the following statements is FALSE? A. The direct fees paid by the issuer to the underwriter syndicate is called the spread, which is the difference between the price the issuer receives and the offer price paid by new shareholders. B. Direct expenses include filing fees, legal fees, and taxes and are costs incurred by the issuer that are not part of the compensation to underwriters. C. For initial public offerings, losses arise when shares are sold below their true value; hence, the underpricing of IPOs is an additional implicit cost to the issuer. D. A delayed registration permits a firm to register an offering under SEC 415 and then issue the securities over a two-year period.
D. A delayed registration permits a firm to register an offering under SEC 415 and then issue the securities over a two-year period.
Which one of the following statements is correct? A. Firms that follow restrictive financial policies can generally avoid short-term debt financing. B. Short-term borrowing is generally more expensive than long-term borrowing. C. Long-term interest rates tend to be more volatile than short-term rates. D. A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
D. A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
Which of the following statements is TRUE? A. The key risk for a flexible short-term financing policy is losing credit access. B. A 'fortress' balance sheet generally includes restrictive short-term financial policies. C. A restrictive short-term financing policy has high carrying costs and low shortage costs. D. Borrowing short-term to meet peak needs and maintaining a cash reserve for emergencies is described as a compromise policy for short-term financing.
D. Borrowing short-term to meet peak needs and maintaining a cash reserve for emergencies is described as a compromise policy for short-term financing.
Which of the following statements is FALSE? A. The preliminary document provided to potential investors for their review of new shares to be issued as they wait for the shares to be cleared for sale is called a red herring. B. The legal document that is provided to potential investors and describes a new security offering is called a prospectus. C. The advertisement, commonly found in financial newspapers, that announces a public offering of securities and provides the name of the underwriters is called a tombstone. D. Firms that assists issuers by pricing and selling new securities to the general public are called venture capitalists.
D. Firms that assists issuers by pricing and selling new securities to the general public are called venture capitalists.
Which of the following statements is FALSE? A. Shortage costs typically decrease with the level of investment in current assets. B. Increasing long-term debt increases cash. C. A 'fortress' balance sheet is typified by flexible policies with higher carrying costs, extra cash, and generous receivables, but creates the risk of a mismatch between short-term assets financed with long-term financial claims like bonds. D. Instability in financial markets has led corporations to choose restrictive short-term financial policies.
D. Instability in financial markets has led corporations to choose restrictive short-term financial policies.
Which of the following is NOT a justification for IPO underpricing? A. Young firms tend to be very risky. B. The best IPOs are oversubscribed. C. Underwriters like to avoid lawsuits. D. It benefits the existing shareholders.
D. It benefits the existing shareholders.
Which of the following statements is FALSE? A. Johnson and Johnson exemplifies a company that steadily increased its dividend amount in a stair step way roughly every year from 2001 to 2012. B. Alcoa discontinued its dividends in 2008 and 2009, which coincided with a sharp decrease in its stock price. C. Only about 40% of S&P 500 companies pay dividends. D. On average, when companies increase dividends, their stock prices climb by about the same amount in magnitude as their stock prices fall when they decrease dividends.
D. On average, when companies increase dividends, their stock prices climb by about the same amount in magnitude as their stock prices fall when they decrease dividends.
Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Inside C. Secondary D. Primary
D. Primary
Which of the following statements is FALSE? A. The market value of any asset is what an item is actually worth if sold and must always be a positive value. B. Even though depreciation is not a cash expense, it affects taxes, and corporations prefer to depreciate assets using accelerated over straight line methods for tax purposes. C. The marginal tax rate is the tax rate payable on the next dollar earned and, due to deductions and credits, the marginal tax rate is always higher than the average tax rate. D. Priority measures the speed and ease with which assets can be converted to cash without significant loss of value.
D. Priority measures the speed and ease with which assets can be converted to cash without significant loss of value.
A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm: A. Automatically gives preferential treatment in the allocation of funds to its riskiest division B. Encourages the division managers to only recommend their most conservative projects C. Maintains the current risk level and capital structure of the firm D. Automatically maximizes the total value created for its shareholders
A. Automatically gives preferential treatment in the allocation of funds to its riskiest division
Which one of the following is most apt to align management's priorities with shareholders' interests? A. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold B. Allowing a manager to decorate his or her own office once he or she has been in that office for a period of 3 years or more C. Increasing the number of paid holidays that long-term employees are entitled to receive D. Allowing employees to retire early with full retirement benefits
A. Compensating managers with shares of stock that must be held for 3 years before the shares can be sold
Which of the following statements is TRUE? A. It is better to use Geometric Return than Average Return to forecast what the stock market over the next 50 years B. The return earned in an average year over a multiyear period is known as the geometric return C. The compound return earned per year over a multiyear period is known as the arithmetic average return D. The average return is always smaller than the geometric return
A. It is better to use Geometric Return than Average Return to forecast what the stock market over the next 50 years
Which of the following statements is FALSE? A. Like typical large US companies, Apple uses about 60% debt in its capital structure. B. In a Chapter 7 bankruptcy liquidation, employees and trade creditors have lower priority among claimants than senior and secured lenders. C. In a bankruptcy reorganization, middle managers or 'white collar' employees lose their jobs more commonly than production workers or 'blue collar' employees. D. Following a Chapter 11 filing a few years earlier and failed attempts to negotiate concessions with its unions, Hostess again in 2012 filed for bankruptcy with the intent to liquidate its assets.
A. Like typical large US companies, Apple uses about 60% debt in its capital structure.
Given an interest rate of zero percent, the future value of a lump sum invested today will always: A. Remain constant, regardless of the investment time period. B. Decrease if the investment time period is shortened. C. Decrease if the investment time period is lengthened. D. Be infinite in value.
A. Remain constant, regardless of the investment time period.
Which of the following statements is CORRECT? A. Shareholder's equity is the residual value of a firm B. Net working capital must be a positive value C. An increase in cash reduces the liquidity of a firm D. Equipment is generally considered a highly liquid asset
A. Shareholder's equity is the residual value of a firm
Which of the following statements is FALSE? A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows. B. Moving cash flows to the left on a time line is called discounting, and values are additive at any one point in time. C. Future value refers to the amount of money an investment will grow to over some period of time at some given interest rate. D. To estimate the present value of future cash flows, the discount rate should be adjusted for both the timing or maturity of that cash flow and the inherent risk of that cash flow.
A. The effect of compounding is great over short time periods, but then it begins to decline as the horizon grows.
Which of the following statements is TRUE? A. The marginal tax rate for most U.S. corporations is 35% while the average tax rate actually paid across U.S. corporations has actually been closer to 25% B. A Limited Liability Company (LLC) is legally defined as a person, while a corporation with limited liability is considered a partnership of several persons C. The ability of a corporation to grow can be seriously limited by an inability to raise cash via the primary capital markets for investment. D. According to the theory of the firm, among all stakeholders, the stockholders take the least risk.
A. The marginal tax rate for most U.S. corporations is 35% while the average tax rate actually paid across U.S. corporations has actually been closer to 25%
Which of the following statements is FALSE? A. Market capitalization is the number of shares outstanding times the market price. B. A company with a .05x interest coverage ratio would be at less risk of missing payments on interest than a company with a 4.9x interest coverage ratio. C. The DuPont Identity is an expression that breaks the return on equity into three parts that measure operating efficiency, asset use efficiency, and financial leverage. D. Sometimes book equity can become negative, and when that happens, positive ROE is not a good sign.
B. A company with a .05x interest coverage ratio would be at less risk of missing payments on interest than a company with a 4.9x interest coverage ratio.
Which of the following statements is FALSE? A. The cost to a firm for capital funding equals the expected return to the providers of those funds B. A firm's cost of capital depends primarily on the source of the funds, not the use C. WACC is affected by market conditions including interest rates, tax rates, and the market risk premium D. A firm's WACC reflects the average risk of the existing projects undertaken by the firm
B. A firm's cost of capital depends primarily on the source of the funds, not the use
Which of the following statements is TRUE? A. The Gordon Growth Model assumes constant dividend growth but implies that stock prices grow at a different rate. B. A stock's price is the present value of its future cash flows, namely, its expected capital gains and dividends. C. Brokers buy and sell securities from their own inventory, while dealers bring buyers and sellers together to complete transactions. D. Holders of common stock have greater voting rights in corporate decisions than holders of preferred stock, but they have less voting rights than creditors of the corporation.
B. A stock's price is the present value of its future cash flows, namely, its expected capital gains and dividends.
Which of the following statements is FALSE? A. Financial Managers make three basic types of decisions: Capital Budgeting, Capital Structure, and Working Capital Management. B. Capital budgeting is the process of planning and managing a firm's short-term investments. C. The primary goal for corporate managers should be to make good decisions to maximize the market value of the owner's equity. D. Agency conflicts, which sometimes arise when CEOs are overly motivated to seek job security, can be reduced by adjusting managerial compensation.
B. Capital budgeting is the process of planning and managing a firm's short-term investments.
The average accounting return method of analyzing projects: A. Incorporates cash flows. B. Is similar to calculating the Return on Assets. C. Is difficult to estimate using information from accounting statements. D. Should accept all projects with positive AAR.
B. Is similar to calculating the Return on Assets.
Which of the following statements is FALSE? A. Unlike equity holders, debt holders are not owners B. Lenders can exert control over a company's managers by voting for its board of directors. C. A corporation cannot deduct its payments to preferred shareholders before it pays taxes D. Holders of convertible bonds can force bankruptcy if their coupons are not paid
B. Lenders can exert control over a company's managers by voting for its board of directors.
Which of the following statements is FALSE? A. While the book value of equity can be negative, the market value of equity cannot be negative. B. On the income statement, financial analysts often focus on a company's EBIT, and items above this line depend on the company's long-term financing choices among debt and equity. C. The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate. D. Managers should use the marginal tax rate when making decisions regarding new investments and financing choices.
B. On the income statement, financial analysts often focus on a company's EBIT, and items above this line depend on the company's long-term financing choices among debt and equity.
Which of the following statements is FALSE? A. A bond's yield represents the annualized return that an investor would earn by holding it to maturity, if it does not default. B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease. C. When interest rates increase, then bond prices fall, and moreso the longer their maturity and the smaller their coupons. D. If a bond is held to maturity and it does not default, then the reinvestment rate risk will offset the price risk.
B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease.
Which of the following statements is TRUE? A. When yields increase, bonds with shorter maturities tend to decrease in value more than bonds with longer maturities. B. Over time, if yields do not change, the values of premium bonds decrease toward par smoothly. C. A "call provision" allows the bond holder the option to determine when they want the company to buy back the bond. D. Treasury Bonds are pure discount loans sold by the US government as a means to borrow money for less than one year.
B. Over time, if yields do not change, the values of premium bonds decrease toward par smoothly.
Which of the following statements is FALSE? A. The current ratio provides a measure of the short-term solvency of the firm. B. Price-earnings ratio reflects the book value per share per dollar of accounting earnings for a firm. C. Total asset turnover measures how much in sales is generated by each dollar of firm assets. D. Times interest earned, also known as the interest coverage ratio, provides a relative measure of how well the firm's operating earnings can cover current interest obligations.
B. Price-earnings ratio reflects the book value per share per dollar of accounting earnings for a firm.
Which of the following statements is TRUE? A. Companies are required by law to have their bonds rated by agencies such as Moody's or S&P. B. The Fisher effect is the relationship between nominal returns, real returns, and inflation. C. Investors require higher yields on secured bonds than on unsecured bonds. D. A callable bond can be swapped for a fixed number of shares of stock before maturity at the holder's option.
B. The Fisher effect is the relationship between nominal returns, real returns, and inflation.
Which of the following should not be included in the analysis of a proposed investment? A. The current market value of an existing building to be used in the project. B. The amount paid 4 years ago for an existing building to be used in the project. C. The expected after-tax salvage value at the end of a project of an existing building to be used in the project. D. The net working capital balance remaining at the end of the project.
B. The amount paid 4 years ago for an existing building to be used in the project.
Which of the following statements is FALSE? A. An easy way to compute the value of an annuity due (such as a lease) is to compute the value of a regular annuity, and then compound the result forward one period. B. The annual percentage rate (APR) is the best way to compare two investments with different compounding periods. C. Lenders and investors prefer daily compounding to annual compounding. D. The process of paying off a loan by making regular principal reductions is called amortizing.
B. The annual percentage rate (APR) is the best way to compare two investments with different compounding periods.
Which of the following statements is FALSE? A. Over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large-company stocks, bonds, and T-Bills. B. The average return is always less than the geometric return. C. Investors who hold bonds instead of stocks over long horizons can be rational and relatively averse to risk. D. Unlike the capital gains yield, the dividend yield can never be negative.
B. The average return is always less than the geometric return.
Which of the following statements is FALSE? A. The cost of capital is the minimum required return to compensate financial investors. B. The cost of capital for a project depends primarily on the source of funds. C. The cost of equity is the return required by equity investors given the risk of the cash flows from the firm. D. A firm's WACC reflects the average risk of the existing projects undertaken by the firm.
B. The cost of capital for a project depends primarily on the source of funds.
Which of the following statements is FALSE? A. The internal rate of return is defined as the discount rate which results in a zero net present value for the project. B. The primary advantage to payback analysis is that it biases companies to invest in long-term projects that require large current expenditures on research and development. C. The average accounting return ignores cash flows is most similar to computing the return on assets (ROA). D. The profitability index reflects the value created per dollar invested.
B. The primary advantage to payback analysis is that it biases companies to invest in long-term projects that require large current expenditures on research and development.
Which of the following statements is FALSE?? A. The impacts of estimation errors and forecasting risks are small when NPVs are large and positive. B. Under intense competition, positive NPV projects are as common as negative NPV projects. C. Scenario analysis helps determine the reasonable range of expectations for a project's outcome. D. Sensitivity analysis helps identify the variable within a project that presents the greatest forecasting risk.
B. Under intense competition, positive NPV projects are as common as negative NPV projects.
Sensitivity analysis: A. looks at the most reasonably optimistic and pessimistic results for a project. B. helps identify the variable within a project that presents the greatest forecasting risk. C. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. D. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.
B. helps identify the variable within a project that presents the greatest forecasting risk.
If the financial markets are semi-strong form efficient, then: A. only the most talented analysts can determine the true value of a security. B. only individuals with private information have a marketplace advantage. C. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one individual has an advantage in the marketplace.
B. only individuals with private information have a marketplace advantage.
Operating cash flow is defined as: A. a firm's net profit over a specified period of time. B. the cash that a firm generates from its normal business activities using its existing assets. C. the change in the net working capital over a stated period of time. D. the cash that is generated and added to retained earnings.
B. the cash that a firm generates from its normal business activities using its existing assets.
Which of the following statements is FALSE? A. The yield to maturity is a bond's rate of return that is required by the market place. B. When a bond's yield to maturity is less than a bond's coupon rate, the bond is selling at a premium. C. A convertible bond initially sells at a deep discount and pays no interest payments. D. The invoice amount that an investor actually pays to purchase an outstanding bond is not its 'clean' quoted price.
C. A convertible bond initially sells at a deep discount and pays no interest payments.
Which of the following statements is TRUE? A. All secondary markets are dealer markets. B. All secondary markets are broker markets. C. All stock trades between existing shareholders are secondary market transactions. D. All stock transactions are secondary market transactions.
C. All stock trades between existing shareholders are secondary market transactions.
Which of the following statements is TRUE? A. In a sole proprietorship, the owner has limited liability and full control. B. In a partnership, ownership can be transferred quickly, and capital can be raised easily. C. Corporations face double taxation, meaning the corporation pays taxes on income before dividends, while the owners pay personal taxes on dividends and capital gains. D. Intended to improve public disclosures, the Sarbanes-Oxley Act has likely increased the number of small companies going public in the USA.
C. Corporations face double taxation, meaning the corporation pays taxes on income before dividends, while the owners pay personal taxes on dividends and capital gains.
Which of the following statements is FALSE? A. The bid price is the price that a dealer is willing to pay for a security and is lower than the ask price. B. Bonds trade less frequently than stocks. C. In the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company. D. Dividends received by corporations have a 70% to 100% exclusion from taxable income.
C. In the stock market, the secondary market is the market where new securities are originally sold to investors by the issuing company.
BNM is comparing different capital structures. Plan A is all equity with 20m (million) shares outstanding. Plan B would result in 14m shares and $150m in debt. Plan C would result in 11m shares and $225m in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare these plans assuming that expected EBIT is $45m. Of the three plans, the firm will have the highest expected EPS with _____ and the lowest expected EPS with _____. A. Plan A; Plan B B. Plan A; Plan C C. Plan C; Plan A D. Plan B; Plan C
C. Leverage increases expected EPS and ROE (but increases their riskiness too) Expected EPS(All-equity Plan A) = $45m/20m = $2.25 Expected EPS(Plan B) = [$45m - ($150m × 0.08)/14m = $2.36 Expected EPS(Plan C) = [$45m - ($225m × 0.08)]/11m = $2.45
Which of the following statements is TRUE? A. Opportunity costs are those values that have already been incurred, cannot be recouped, and should not be considered in an investment decision. B. Under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets. C. Managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a project's true Net Present Value. D. Forecasting risk is more troublesome when NPV estimates are particularly large.
C. Managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a project's true Net Present Value.
If any, which of the following statements is FALSE? A. NPV measures the value created by taking on an investment B. NPV indicates how much a project will improve owner wealth C. NPV is the discounted present value of a project's expected future accounting net income at the required return, subtracting the initial investment D. None of the above statements is false
C. NPV is the discounted present value of a project's expected future accounting net income at the required return, subtracting the initial investment
Which of the following is NOT an advantage to the corporate form of organization? A. Ability to raise large sums of equity capital B. Ease of ownership transfer C. Profits taxed at the corporate level D. Limited liability for all owners
C. Profits taxed at the corporate level
Which one of the following situations is most apt to create an agency conflict? A. Giving all employees a bonus if a certain level of efficiency is maintained B. Hiring an independent consultant to study the operating efficiency of the firm C. Rejecting a profitable project to protect employee jobs D. Selling an under producing segment of the firm
C. Rejecting a profitable project to protect employee jobs
Which of the following statements is FALSE? A. Legal bankruptcy occurs when the firm or creditors bring petitions to a federal court for bankruptcy. B. Bankruptcy refers to the legal proceeding for liquidating or reorganizing a business. C. Technical insolvency occurs when a firm has a negative net worth, because the book value of its liabilities are less than the book value of its assets. D. Liquidation is the termination of the firm as a going concern, whereas reorganization is the financial restructuring of a struggling firm to attempt to continue operations as a going concern.
C. Technical insolvency occurs when a firm has a negative net worth, because the book value of its liabilities are less than the book value of its assets.
Which of the following statements is FALSE? A. The book value of equity rarely equals the market value of equity except when the market-to-book ratio is 1.0. B. The book value of equity is the residual difference between assets and liabilities. C. The book value of equity increases when a company pays dividends. D. The ultimate goal of financial managers is to maximize the current market value of the company's existing equity.
C. The book value of equity increases when a company pays dividends.
Under Munich, a footwear manufacturer, recently announced that they have just designed a new footwear product which includes the latest technology. This news is totally unexpected and viewed as a major advancement in the footwear industry. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? A. The price of Under Munich doesn't change, but then it increases one week after the announcement. B. The price of all stocks quickly increase in value and then all but Under Munich stock fall back to their original values. C. The price of Under Munich's stock suddenly increases, and then remains at that price. D. The price of Under Munich's stock increases rapidly, and then settles back to its pre-announcement level.
C. The price of Under Munich's stock suddenly increases, and then remains at that price.
Which of the following statements is FALSE? A. Since errors of commission are often readily apparent, managers have a tendency to be cautious when evaluating new projects B. Errors of omission can result in lost potential value as much as errors of commission can destroy value. C. Type 1 errors occur when managers reject projects whose true NPVs are positive D. Errors in projected cash flows create large forecasting risks when their net present values are particularly small in magnitude.
C. Type 1 errors occur when managers reject projects whose true NPVs are positive
Which of the following statements is TRUE? A. Bank loans, private placements to funds and insurance companies, and investment bank transactions are all activities in the secondary markets. B. Like general partners, the owners of a corporation have unlimited liability for business debts. C. While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders. D. The Sarbanes-Oxley Act of 2002 dramatically streamlined American corporate regulations resulting in billions of dollars in overall savings.
C. While maximizing stockholder wealth is the relevant goal of the corporation, sometimes management goals are pursued at the expense of the stockholders.
If any, which of the following does NOT have the potential to increase the net present value of a proposed investment? A. The ability to immediately shut down a project should the project become unprofitable B. The ability to wait until the economy improves before making the investment C. The option to increase production beyond that initially projected D. All of the above have the potential to increase the NPV of a proposed investment
D. All of the above have the potential to increase the NPV of a proposed investment
Which of the following is NOT an effective means of aligning management goals with shareholder interests? A. Employee stock options B. Threat of a takeover C. Management bonuses tied to performance goals D. Compensating managers with salaries significantly higher than their peers
D. Compensating managers with salaries significantly higher than their peers
Which of the following statements is FALSE? A. The cost of debt for bonds is the same as the yield implied by their market quoted prices, except when that promised yield is too high due, for example, to the high default probabilities for junk bonds. B. The cost of preferred stock equals its dividend yield as a percent of the current price, rather than the preferred dividend as a percent of its stated liquidating value, which is usually $100. C. Judgment is typically required when estimating the cost of equity, particularly when a company pays no dividends and when its beta estimate is imprecise. D. Due to its lower priority and greater risk, a firm's cost of equity can sometimes be, and often is, less that its after-tax cost of debt.
D. Due to its lower priority and greater risk, a firm's cost of equity can sometimes be, and often is, less that its after-tax cost of debt.
Which of the following statements is FALSE? A. Across a longer time period, a single cash flow grows to a larger future value B. For a higher interest rate, a single cash flow has a smaller present value C. If its payments last longer, an annuity has a larger present value D. For a higher interest rate, an annuity has a smaller future value
D. For a higher interest rate, an annuity has a smaller future value
A call provision in a bond... A. Limits the actions of the borrower. B. Protects the borrower from unscrupulous practices by the lender. C. Allows the issuer to repurchase the bonds on the open market prior to maturity. D. Grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price.
D. Grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price.
Which of the following statements is FALSE? A. Financial ratios help compare over time companies of different sizes and industries, and since not all sources calculate them the same way, managers should understand how they are derived. B. Asset utilization ratios describe how efficiently, or intensively, a firm uses its assets to generate sales. C. To a firm's creditors, particularly short-term creditors such as suppliers, the higher the current ratio is, the better. D. Higher margin, turnover, leverage, and dividends all generally allow a firm to grow faster over the long run.
D. Higher margin, turnover, leverage, and dividends all generally allow a firm to grow faster over the long run.
Which of the following statements is FALSE? A. The Gordon Growth Model assumes constant dividend growth and implies that stock prices grow at the same rate. B. A stock's price is the present value of the expected dividends and capital gains. C. Dealers buy and sell securities from their own inventory, while brokers bring buyers and sellers together to complete transactions. D. Holders of preferred stock have greater voting rights in corporate decisions than holders of common stock.
D. Holders of preferred stock have greater voting rights in corporate decisions than holders of common stock.
Which of the following will increase the sustainable rate of growth for a firm? A. Decreasing the profit margin B. Increasing the dividend payout ratio C. Decreasing the asset turnover D. Increasing the target debt-equity ratio
D. Increasing the target debt-equity ratio
Which of the following statements is TRUE? A. Leverage reduces the expected values of both EBIT and net income. B. Leverage increases expected ROE but decreases expected EPS. C. Leverage decreases the volatility of both ROE and EPS. D. Investors can create their own leverage within their own portfolios.
D. Investors can create their own leverage within their own portfolios.
Which of the following statements is FALSE? A. The average tax rate is the total tax expense divided by the total taxable income. B. The marginal tax rate is the tax rate that applies to the next dollar of taxable income that a firm earns. C. The average tax rate is always less than or equal to, and often considerably less than, the marginal tax rate. D. Managers should use the average tax rate when making decisions regarding new investments and financing choices.
D. Managers should use the average tax rate when making decisions regarding new investments and financing choices.
If any, which of the following statements is FALSE? A. Capital Budgeting is the process of planning and managing a firm's long-term investments where managers identify investments that are worth more than they cost to acquire. B. Capital Structure is the mix of debt and equity maintained by a firm to finance operations, where the firm decides how much to borrow and what the cheapest sources of funds are. C. Working Capital Management is the day-to-day management of finances that determines how much cash and inventory should be kept on hand, whether to sell on credit to customers, and how to obtain short-term financing. D. None of the above statements is false.
D. None of the above statements is false.
Which of the following statements is TRUE? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always strictly greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The EAR is the best measure of the actual rate you are paying on a loan.
D. The EAR is the best measure of the actual rate you are paying on a loan.
Which of the following statements is FALSE? A. The future value of a single cash flow grows across a longer time period B. The present value of a single cash flow falls with a higher interest rate C. The present value of an annuity grows if the annuity lasts longer D. The future value of an annuity falls with a higher interest rate
D. The future value of an annuity falls with a higher interest rate
Which one of the following statements is TRUE? A. The risk-free rate of return has a risk premium of 1.0. B. The reward for bearing risk is called the standard deviation. C. Risks and expected return are inversely related. D. The higher the expected rate of return, the wider the distribution of returns.
D. The higher the expected rate of return, the wider the distribution of returns.
Which of the following statements is TRUE? A. The coupon rate on a previously issued bond represents the rate of return required by today's participants in the market place. B. When a bond's yield to maturity is less than its coupon rate, the bond is selling at a discount. C. The market prices of bonds with higher coupons are more sensitive to changes in market interest rates. D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.
D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.
Today, Courtney wants to invest an amount less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? A. The period of time she has to wait until she reaches her goal is not affected by the compounding of interest. B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. C. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. D. The period of time she has to wait decreases as the amount she invests today increases.
D. The period of time she has to wait decreases as the amount she invests today increases.
Which of the following statements is FALSE? A. Interest expense reduces taxable income and net income but not EBIT. B. When a company repurchases its shares using proceeds from new issues of debt, its future expected earnings per share increases. C. 'Homemade leverage' is the use of personal borrowing to adjust the overall amount of financial leverage to which the individual investor is exposed. D. Under M&M assumptions which ignore special benefits and costs of debt, leverage has a substantial impact on total firm value and on WACC.
D. Under M&M assumptions which ignore special benefits and costs of debt, leverage has a substantial impact on total firm value and on WACC.
Which of the following statements is FALSE? A. When market yields rise, the price of discount bonds fall further below par or face value. B. When market yields rise, the price of long-term bonds fall by a greater percent than short-term bonds. C. When market yields rise, the price of bonds with small coupons fall by a greater percent than those with large coupons. D. When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.
D. When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic firm-specific risk associated with an individual security? A. Security beta multiplied by the market rate of return B. Market risk premium C. Risk-free rate of return D. Zero
D. Zero
Firms that compile financial statements according to GAAP: A. record income and expenses at the time they affect the firm's cash flows B. have no discretion of recording either revenue or expense items C. must record all expenses when incurred D. can still manipulate their earnings to some degree
D. can still manipulate their earnings to some degree
