FIN 310 Final
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
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
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 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.
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.
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.
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.
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 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 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.
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 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 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 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
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.
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 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.
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 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. 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.
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.
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 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 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
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 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
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. 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.
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. 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 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.
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 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 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 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 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.
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.
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.
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 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.