Final 432 Test 1 Questions

21 Which of the following statements is CORRECT?

a. Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. b. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. c. The AFN equation for forecasting funds requirements requires only a forecast of the firm's balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. d. If the ratios of assets to sales and spontaneous liabilities to sales do not remain constant, then the AFN equation will provide more accurate forecasts than the forecasted financial statements method. *e. A negative AFN indicates that retained earnings and spontaneous liabilities are far more than sufficient to finance the additional assets needed.*

15 Which of the following statements is CORRECT?

a. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow. *c. Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.* d. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner. e. There are economies of scale in the use of many kinds of assets. When economies occur the ratios are likely to remain constant over time as the size of the firm increases. The Economic Ordering Quantity model for establishing inventory levels demonstrates this relationship.

16 Which of the following statements is CORRECT?

a. If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN. b. Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio. *c. The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.* d. Dividend policy does not affect the requirement for external funds based on the AFN equation. e. If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.

28 Which of the following statements is CORRECT?

a. If the underlying stock pays a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit. b. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock. c. Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be. *d. Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.* e.Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.

30 An investor who writes standard call options against stock not held in his or her portfolio is said to be selling what type of options?

a. In-the-money b. Out-of-the-money c. Put *d. Naked* e. Covered

19 Which of the following statements is CORRECT?

a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm's goals. b. A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. *c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.* d. A firm's mission statement defines its lines of business and geographic area of operations. e. The corporate scope is a condensed version of the entire set of strategic plans.

26 Which of the following statements is CORRECT?

a.The market value of an option does not depends in part on the option's time to maturity and also on the variability of the underlying stock's price. *b. The potential loss on an option increases as the option sells at higher and higher prices because the profit margin gets bigger.* c.As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases. d.An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value. e. Issuing options provides companies with a low cost method of raising capital.