FINA 350

Which of the following is not a reason to illustrate the fact that net present value method is better than internal rate of return:

NPV is difficult to compute

The current ratio is

a liquidity ratio

Liquidity ratios measure the company's

ability to pay its short-term obligations

It is a given fact that the general level of stock prices and the prevailing interest on debt investments has:

an inverse relationship

The net cash flows from an investment project

are earnings after tax plus depreciation

The balance sheet budget summarizes the effect of the budgeting system on the firm's

assets, liabilities and net worth

Which of the following does not represent a category of float?

collection float

A bond's yield to maturity is the rate of return that equates the present value of principal and interest payments to the

current market price of the bond

The dollar value of a stockholder's wealth is obtained by multiplying the number of shares owned by the

current stock price per share

The discounted cash flow model of valuation is: Po = D1/(Ke - g). How would Po change with a corresponding increase in risk for the firm all other things constant?

decrease

The portfolio effect states that as more assets are added to a portfolio, the risk of the portfolio

decreases

Beta may be used to classify stocks into which of the two following categories?

defensive stocks and aggressive stocks

Which of the following is not a part of a balance sheet?

dividends

A project is acceptable when its internal rate of return is greater than

firm's cost of capital

Favorable financial leverage occurs when the firm's return on investment (ROI) is greater than the

fixed cost of borrowing

In order to calculate the acid test ratio, one needs to deduct _____ from the current assets before dividing it by current liabilities.

inventories

Which of the following current assets is generally considered least liquid?

inventories

The relationship between a bond's price and yield to maturity:

is inverse

Net working capital

is the excess of current assets over current liabilities

The average rate of return method is inferior to the net present value method because

it does not consider the time value of money

Which of the following is not an advantage of internal rate of return method:

it requires prior computation of the cost of capital

With respect to an accept-reject decision, the firm should reject the investment project if

its net present value is less than zero and its internal rate of return exceeds zero but less than its cost of capital

Defensive stocks have a beta value

less than one

Which of the following principles reflects the ability of fixed costs to magnify the rate of return?

leverage

Current assets are listed on the balance sheet in order of their

liquidity

Aggressive stocks have a beta value

more than one

The profit margin on sales is _________ divided by sales.

net income after taxes

Which of the following is not classified as a current asset?

notes payable

Two projects are mutually exclusive if

one is adopted, the other one cannot be adopted

Which one of the following capital budgeting methods does not take into account the time value of money?

payback

Which of the following capital budgeting methods are considered unsophisticated?

payback and average rate of return

Which one of the following statements regarding the payback method is incorrect?

payback method acknowledges explicitly the cash flows beyond the payback period

The most commonly used capital budgeting methods under certainty are

payback, average rate of return, net present value, internal rate of return

A bond with a market price of $1,050 is said to be selling at

premium

The valuation principle states that the value of an asset is equal to the

present value of its expected cash flows

The following diversification alternatives are available to a firm along with their correlation coefficients. Which one should the firm select if it chooses to reduce its overall riskiness?

road construction - .4

The primary goal of the firm is to maximize

stockholders wealth

Which of the following financial statements reflect the firm's financial position at a point in time?

the balance sheet

Ratio Analysis involves the use of

the balance sheet and the income statement

The after-tax cost of a bond is equal to

the before tax cost of the bond times (1 - tax rate)

In order to calculate the weighted average cost of capital, one must compute

the cost of individual components of the capital structure and the percentage composition of the capital structure

Generally speaking, the higher the risk of a project

the higher the expected return

The internal rate of return is the discount rate which will equate the present value of net cash inflows to

the initial cost of investment

The profitability index is obtained by dividing the present value of net cash inflows by

the net investment

When the net present value of a project is zero, the discount rate is

the project's internal rate of return

On the topic of cash management, the term "float" refers to

the status of funds in the process of collection

Return on investment is net income after taxes divided by

total assets

Which of the following is not used to speed up the cash collection into the firm?

use of float

The interest rate which equates the present value of the coupon interest payments and the principal repayment of a bond to its market price is called the

yield to maturity

If a firm has a current ratio of one, its net working capital is

zero

When a project's cash flows are discounted by its internal rate of return, it has a

zero net present value