Fundamentals of Business Finance - ch 1-4

You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?

8.5%

Which of the following statements is an example of a futures market transaction?

A company agrees to purchase 1000 barrels of oil for delivery in six months at a price of $70 per barrel.

Which of the following securities will likely have the highest liquidity premium?

Aaa-rated corporate bond maturing in 2015 not actively traded

All of the following statements about agency problems are true excepet:

Agency costs are paid by the managers who do not act in the shareholders' best interest.

Which of the following statements concerning private placements is most correct?

Although not selling the securities to the public, investment bankers may provide advice on the evaluation of prospective buyers and the terms of sale for private placements.

Which of the following ratios would be the best way to determine how customers are paying for their purchases?

Average collection period

Which of the following securities will likely have the highest default risk premium?

Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange

Bill is a public accountant auditing Expo Corporation. Based on information in Expo's confidential records, Bill recommends the purchase of Expo stock to his brother.

Bill is involved in insider trading prohibited by the SEC.

Which of the following statements is false?

Brokers purchase securities for their own account.

Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from

Company A has lower selling and administrative expenses, resulting in a higher net profit margin

Company A reports sales of $100,000 and net income of $15,000. Company B reports sales of $100,000 and net income of $10,000. Therefore,

Company A's cash flow may be higher or lower than Company B's cash flow even though A's net income is higher.

Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of $6 million. William's inventory balance is

$2,400,000

A firm has after-tax cash flow from operations equal to $100,000. Operating working capital increased by $20,000, and the firm purchased $30,000 of fixed assets. The firm's free cash flow was:

$50,000.

PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is PDQ's EBIT?

$900,000

At​ present, the real​ risk-free rate of interest is 1.81.8​%, while inflation is expected to be 1.51.5​% for the next two years. If a​ 2-year Treasury note yields 5.95.9​%, what is the​ maturity-risk premium for this​ 2-year Treasury​ note?

(1.818 + 151.5) - 5.959

Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?

->the firm's average collection period is likely to fall ->the firm's accounts receivable turnover might rise -the firm's sales might decrease

Secular Electric has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000. What is Secular Electric's total asset turnover?

2.26

Anton's Coffee Shop has a return on assets of 12%. Anton's assets = $100 while Anton's owner's equity = $40 and its debt equals $60. What is Anton's return on equity?

30%

The one-year interest rate is 4%. The interest rate for a two-year security is 6%. According to the unbiased expectations theory, the one-year interest rate one year from now must be equal to

8.04%.

Investors want a return that satisfies the following expectations:

Both A return for delaying consumption and An additional return for taking on risk.

The goal of most financial managers is to reduce the amount of long-term debt to zero, thus maximizing shareholder wealth.

FALSE

High Inc. has an accounts receivable turnover ratio of 7.3. Low Company has an accounts receivable turnover ratio of 5. Assuming that High and Low have the same sales level, which of the following statements is correct?

High's average collection period is less than Low's

Which of the following is the most important goal that a corporation should strive for?

Maximize shareholder wealth.

The stock market with the most stringent listing requirements is the

New York Stock Exchange (NYSE).

Company A has a higher day's sales outstanding ratio than Company B. Therefore,

Other things being equal, Company B has a cash flow advantage over Company A

Which of the following functions is NOT a major function that an investment banker​ performs?

Regulating

Which of the following is generally not a disadvantage of private​ placements?

Speed

Money market instruments include:

T-bills.

Earnings before taxes, or taxable income, is equal to operating income minus financing costs.

TRUE

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit?

The acid test ratio

John invested $1,000 in a risky investment and BIll invested $1,000 in a less risky investment. One year later, Bill's investment is worth $1,030. Which of the following statements is most correct?

The worth of John's investment cannot be determined with the information given.

In finance, we assume that investors are generally

averse to risk.

The investment banker does not underwrite the securities to be issued in which of the following?

best efforts

Flotation costs are the highest​ on:

common stock

Which of the following accounts does not belong on the asset side of a balance sheet?

common stock

The two principal sources of financing for corporations are

debt and equity.

S-type corporations have all of the following advantages except:

distributions are taxed twice, similar to corporate dividend payments.

XYZ Corporation has a P/E ratio of 20 and EFG Corporation has a P/E ratio of 10. It is likely that

investors expect XYZ's earnings to grow faster than EFG's earnings

The goal of the firm should be:

maximization of shareholder wealth.

All of the following measure liquidity except:

operating return on assets

A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years. The project should be accepted if

the present value of the project's cash inflows exceeds the present value of the project's cash outflows.

Jeter Industries has an accounts receivable turnover ratio of 4.5. If Jeter has an accounts receivable balance of $100,000, what is Jeter's average daily credit sales?

$1,232.88

Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Li's gross profit is equal to

$1,500,000.

Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million?

$1.67 million

Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is

$10,000 if Joe is a limited partner.

The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the December 31, 2010 balance sheet shows net fixed assets of $250,000. Depreciation expense for 2009 is $25,000 and depreciation expense for 2010 is $35,000. Based on this information, the cost of fixed assets purchased during 2010 is

$135,000.

The income statement for Brit, Inc. indicates that tax expense was $20,000. The balance sheet indicates that taxes payable for the same year increased by $5,000. What amount did Brit, Inc. actually pay in taxes during this year?

$15,000

Baron, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's Total Liabilities & Equity?

$2,000,000

Racing Horse Corporation reported net income for 2010 of $200,000, sales of $540,000, expenses (excluding depreciation) of $180,000, and depreciation expense of $60,000. The company's accounts receivable balance increased by $40,000 during the year and its accounts payable balance remained the same. The company's change in cash for the year is estimated to be

$220,000.

PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is PDQ's tax liability?

$260,000

PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $40,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is PDQ's "Addition to Retained Earnings"?

$290,000

Global.Com has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is Global's net working capital?

$390,000

SRC has a debt ratio of .4, current liabilities of $18,000, and total assets of $100,000. What is the level of SRC's total liabilities?

$40,000

Lorna Doom Inc. has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT). Lorna Doom's times-interest-earned ratio is 4.2. What is Lorna Doom's net income?

$57,600

Baron, Inc. has total current assets of $1,200,000; long-term debt of $600,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's net working capital?

$700,000

Sharky's Loan Co. has an annual interest expense of $40,000. If Sharky's times-interest-earned ratio is 3.0, what is Sharky's Earnings Before Taxes (EBT)?

$80,000

Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets of $70,000. What is Acme's level of current liabilities?

$9,400

Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of $2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what is the company's current stock price?

$96 per share

A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What was the firm's cash flow from financing activities?

+$40,000 ($40,000 flowed into the firm)

Which of the following are characteristics of a limited partnership?

->Limited partners may not participate in the management of the limited partnership. ->There must be one or more general partners. ->General partners have unlimited liability.

Which of the following statements best represents the "Agency Problem"?

->Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. ->The agency problem results from the separation of management and the ownership of the firm. ->The agency problem may interfere with the implementation of maximizing shareholder wealth.

Which of the statements below are true?

->The sole proprietorship and the general partnership both feature unlimited liability. ->A corporation is the business form that is typically the most complicated (legally) to establish. ->The corporation and the limited partnership both provide at least some owners with limited liability.

Activities of the investment banker include

->assuming the risk of selling a security issue. ->selling new securities to the ultimate investors. ->providing advice to firms issuing securities.

The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups?

->corporate officers ->public accountants ->boards of directors

The one-year interest rate is 4%. The interest rate for a two-year security is 6%. The one-year interest rate one year from now is 8.34%. According to the liquidity preference theory, the risk premium for the second one-year investment is

0.30%.

CPR Corp. has cash of $100,000; short-term notes payable of $75,000, accounts receivable of $125,000; accounts payable of $140,000; inventories of $200,000; and accruals of $55,000. What is CPR's current ratio?

1.57

During the period 1984 to 2008, the average yield on 3-Month U.S. Treasury bills was 4.76%, the average inflation rate was 2.97%, the average yield on 30-year Treasury bonds was 6.89%, and the average return on 30-year Aaa-Rated Corporate Bonds was 7.73%. The real risk-free short-term interest rate is

1.79%.

Roxbury has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; total assets of $995,000; and interest expense of $18,000. What is Roxbury's times interest earned ratio?

11.4

S. Panya has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is S. Panya's return on equity?

14.0%

KPR, Inc. has current assets of $10,000,000, current liabilities of $4,500,000, inventory of $1,000,000, and sales of $12,000,000. What is the acid test ratio?

2.0

Given an accounts receivable turnover of 10 and annual credit sales of $900,000, the average collection period is

36.50 days

The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is

4.9%.

Solid State, Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is Solid State's debt ratio?

43.7%

You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?

5.0%

At​ present, 10-year Treasury bonds are yielding 4.34.3​% while a​ 10-year corporate bond is yielding 6.16.1​%. If the​ liquidity-risk premium on the corporate bond is 0.40.4​%, what is the corporate​ bond's default-risk​ premium? Note that a Treasuty security should have no​ default-risk premium and​ liquidity-risk premium.

6.16 = 43.3 + premium + 0.40 6.16 = 4.73 + premium 1.4 = premium

The three basic types of issues addressed by the study of finance are

capital budgeting, capital structure decisions, and working capital management.

A company borrows $2,000,000 and uses the money to purchase high technology machinery for its operations. These are examples of

cash flow from financing and cash flow from investing.

All of the following are equity accounts on a balance sheet except:

cash.

Insurance companies invest in the "long-end" of the securities market by purchasing securities with longer maturities. In which of the following instruments would an insurance company be least likely to invest most of its assets?

commercial paper

Which of the following categories of owners enjoy limited liability?

common shareholders of a corporation

All of the following securities are sold in money markets except:

common stock

The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue?

common stock

Which of the following relationships is true regarding the costs of issuing the following securities?

common stock > preferred stock > bonds

Capital market transactions include which of the following?

common stock of a public corporation

The true owners of the corporation are the

common stockholders.

If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods?

competitive bid purchase

The financial manager most directly responsible for producing the company's financial statements and directing its cost accounting functions is the

controller.

Capital market instruments include

corporate equities.

The prime lending rate is the base rate on

corporate loans.

Which of the following forms of business organization has the greatest ability to attract new capital?

corporation

Which of the following forms of business organization limits the liability of owners?

corporation

Which of the following forms of business organizations provide limited liability to all its owners?

corporation

In terms of the costs to organize each, which of the following sequences is correct, moving from highest to lowest cost?

corporation, limited partnership, general partnership, sole proprietorship

Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?

corporations

A corporate treasurer is typically responsible for each of the following duties except:

cost accounting.

Which of the following does not provide an indication of liquidity?

debt ratio

Which of the following would not normally be considered a "flotation cost"?

dividends

Advantages of the corporate form of business organization include:

easier transfer of ownership.

Private placements are

especially appealing to new, small, and medium-sized companies.

Investment firms, such as Goldman Sachs, assist the transfer of capital by

facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital).

Which of the following is not considered to be a disadvantage of the sole proprietorship form of business organization?

fewer regulations and reporting requirements

Which of the following statements is most correct concerning flotation costs?

flotation costs are higher for common stocks than for preferred stocks and bonds due to the higher level of risk associated with owning common stock

All of the following business organizations provide limited liability to their owners except:

general partnership.

Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?

higher interest costs

Working capital management is concerned with

how a firm can best manage its cash flows as they arise in its day-to-day operations.

All of the following will improve a firm's liquidity position except:

increase the average collection period

All of the following are benefits of organized stock exchanges except:

increased stock price volatility.

Three ways that savings can be transferred through the financial markets include all of the following except

indirect transfer using the venture capital firm.

The real rate of return is the return earned above the

inflation risk premium.

A firm's financing costs include

interest exposure.

The current ratio of a firm would be decreased by which of the following?

inventories are sold on a long-term credit basis

Which of the following accounts belongs on the asset side of a balance sheet?

inventory

Advantages of private placements do not include which of the following?

investor protection through extensive regulation

The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense for any instances of misconduct except:

investors

Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that

investors' required rate of return is 12%

A corporate financial manager trying to maximize shareholder value

is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust

Executive compensation in the United States

is dominated by performance-based compensation designed to reduce agency problems.

Ethical behavior

is essential in business because unethical behavior destroys trust and business relationships.

Limited partnerships are not as prevalent as corporations because

it is easier to transfer ownership by selling common stock than it is to sell partnership.

The current ratio of a firm would be increased by which of the following?

land held for investment is sold for cash

A company borrows $10,000 and puts the money into its checking account. This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was

less than one

For a retailer with inventory to sell, the acid-test ratio will be

less than the current ratio, thus providing a more stringent measure of liquidity

Bill, a local inventor, developed a diet pill that he believes will solve the obesity problem in the United States. Bill wants to create a new company, 50% owned by Bill and 50% owned by a major drug company. Although he believes the pills are safe, Bill is concerned about liability if someone becomes sick or dies. The best form of business organization for the new company is ________.

limited liability company with Bill and the drug company owning equal shares

Which of the following is not true for a limited partnership?

limited liability for its owners

A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

liquidity

An actively traded, AAA-rated, Intel Corporation bond, maturing in 2015, provides an expected yield of 8%. The AAA-rated bond of a local Chicago-based company, not actively traded on any exchange, maturing in 2015, provides an expected yield to investors of 10%. The difference in expected yields is primarily due to

liquidity premium

Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by

liquidity premiums

Which of the following accounts does not belong in the equity section of a balance sheet?

long-term debt

Which of the following is an advantage of the general partnership form of business organization?

low cost of formation

The recent financial crises was exacerbated by

managers who underestimated the real risks of their decisions and borrowed excessively.

Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?

maximization of the total market value of the firm's common stock

The primary goal of a publicly owned corporation is to ________.

maximize shareholder wealth

Shareholder wealth maximization means:

maximizing the price of existing common stock.

Which of the following refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings?

money market

Which of the following transactions will increase a corporation's operating return on assets?

negotiate a new contract that lowers raw material costs by 10%

Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a

negotiated purchase.

The increase in owners equity for a given period is equal to

net income minus dividends.

Which of the following is an advantage of the sole proprietorship?

no significant legal requirements for starting the business

What would you expect the nominal rate of interest to be if the real rate is 4.24.2​% and the expected inflation rate is 6.76.7​%?

nominal rate of interest = 0.04242 + 0.06767 + (0.04242 x 0.06767)

Financial intermediaries

offer indirect securities.

When an investment banking firm "underwrites" an issue of securities, the firm is performing which of the following?

offering to purchase the securities from the firm, thereby assuming the risk of resale to investors

A basis point is equal to

one-hundredth of one percent.

A limited partnership provides limited liability to

only to limited partners who do not participate in the management of the business.

Suppose XYZ Corporation is traded on the New York Stock Exchange. XYZ's closing price on Monday is $20 per share. After the market closes on Monday, XYZ makes a surprise announcement that it has obtained a major new customer. XYZ's stock will likely

open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded.

Examples of uses of cash include

paying cash dividends to stockholders.

Which of the following is an advantage of organized stock exchanges?

providing a continuous market

Which of the following is an advantage of using private placements for debt?

reduced costs from the elimination of the registration statement for the SEC, investment-banking underwriting fees and distribution costs

The Securities and Exchange Commission (SEC)

regulates both primary and secondary markets.

Maximization of shareholder wealth

represents a zero sum game in which one corporation gains at the expense of others.

Which of the following accounts belongs in the equity section of a balance sheet?

retained earnings

Gross profit is equal to

sales - cost of goods sold.

ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n)

savings surplus unit

John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the

secondary market.

Money market transactions include which of the following?

securities that have a maturity of less than one year

The acid-test ratio of a firm would be unaffected by which of the following?

several short-term loans are consolidated and paid off using long-term debt

Which of the following categories of owners have limited liability?

shareholders of a corporation

Common-sized balance sheets

show each balance sheet account as a percentage of total assets

Which of the following is not a benefit provided by the existence of organized security exchanges?

standardization of all debt agreements

Which of the following is not a valid theory that attempts to explain the shape of the term structure of interest rates?

the Fisher Effect theory

General Motors raises money by selling a new issue of common stock. This transaction occurs in

the capital market

Determining the best way to raise money to fund a firm's long-term investments is called

the capital structure decision.

Jones Finance Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore

the cash balance at the end of 2010 cannot be determined from the information given.

Jones Finance Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore,

the cash balance at the end of 2010 cannot be determined from the information given.

All of the following would result in an increase in stockholders equity except:

the company purchased treasury stock.

A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore,

the corporate bonds are direct securities and the life insurance policies are indirect securities.

The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore,

the corporation's gross profit margin is greater than 20%.

Joe, a risk-averse investor, is trying to choose between investment A and investment B. If investment A is riskier than investment B and Joe selects investment A anyway, then

the expected return for investment A will be higher than the expected return for investment B.

The current ratio of a firm would equal its quick ratio whenever:

the firm has no inventory

Assume that a firm issues a six-month note to purchase inventory. Which of the following is true if the current ratio before the purchase is 1.0?

the firm's quick ratio might decrease

Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, which investment would be chosen?

the government bond

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible?

the high levels of debt increased the riskiness of HighLev relative to its competitors

A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project,

the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.

All of the following are typically advantages of private placements except:

the possibility of future SEC registration.

When a company repurchases its own common stock, it is likely that

the stock price will increase because the company views the stock as undervalued.

The CEO of HIgh Tech Internatinoal decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company's cash flows are not changed. If capital markets are efficient, then

the stock price will not be affected by the accounting change.

An example of a secondary market transaction involving a capital market security is

the transfer of a previously-issued security with a very long maturity.

Which of the following ratios would be the poorest indicator of how rapidly the firm's credit accounts are being collected?

times interest earned

To measure value, the concept of time value of money is used

to bring the future benefits and costs of a project, measured by its cash flows, back to the present.

A corporation sells securities to an investment banking firm on January 1st. The next day an international oil crisis causes stock prices to drop dramatically. The corporation is immune from the drop in price of its stock due to which function of the investment banking firm?

underwriting

The investment banker performs what three basic functions?

underwriting, distributing, and advising

Commercial banks that also provide investment banking services are called

universal banks.

A "normal" yield curve is

upward sloping.

Financial analysis

uses historical financial statements to measure a company's performance and in making financial projections of future performance

Capital budgeting is concerned with

what long-term investments a firm should undertake.

Investors generally don't like risk. Therefore, a typical investor

will only take on additional risk if he expects to be compensated in the form of additional return.

What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?

yield curve

Which differences in the accounting practices of firms limit the usefulness of financial​ ratios?

Different firms choose different methods to depreciate their fixed assets. Differences such as these can make the computed ratios of different firms difficult to compare. Different firms choose different methods to allocate their inventory. Differences such as these can make the computed ratios of different firms difficult to compare.

A corporation's operating profit margin is equal to

EBIT divided by Sales.

Which of the following statements concerning Economic Value Added (EVA) is most correct?

EVA can be negative even if operating profits are positive

A company with a current ratio higher than industry average must also have a quick ratio higher than industry average because both ratios measure liquidity.

FALSE

An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date.

FALSE

Financial ratios are useful for evaluating performance but should not be used for making financial projections.

FALSE

Fixed assets are assets whose balances will remain the same throughout the year.

FALSE

Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued.

FALSE

One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of pricing information.

FALSE

Preferred stock is traded in the money market, while common stock is traded in the capital market.

FALSE

The astute financial manager will seek to attain the highest current ratio possible

FALSE

Which of the following might use financial ratios for the purposes​ stated?

Firm managers to evaluate the​ firm's performance. Lenders to decide whether or not to make a loan to the company. Investors to decide whether or not to invest in a company. Major suppliers to decide whether or not to grant credit terms to a company. ​Credit-rating agencies to determine the​ firm's creditworthiness.

Which of the following is an example of both a capital market and a primary market transaction?

Ford Motor Company sells a new issue of common stock to raise funds through a public offering.

Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period?

Income Statement

Which of the following best describes cash flow from financing activities?

Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid.

The five basic principles of finance include all of the following except

Incremental profits determine value.

Which of the following is generally NOT an advantage of private​ placements?

Interest costs

Which of the following is NOT a benefit provided by the existence of organized security​ exchanges?

Keeping​ long-term bond prices below 8 percent

All of the following forms of business organizations provide limited liability to all owners except:

Limited Partnership

Which of the following describe what is meant by the​ "NASDAQ system"?

NASDAQ is a telecommunications system that provides a national information link among the brokers and dealers operating in the​ over-the-counter markets. NASDAQ stands for National Association of Security Dealers Automated Quotation System. NASDAQ is a quotation​ system, not a transactions system. The final trade is still consummated by direct negotiation between traders.

The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called

NASDAQ.

Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a higher times interest earned ratio than Butler. If Nelson and Butler both have the same amount of total assets, then

Nelson may have more non-interest bearing liabilities, such as accounts payable, than Butler has

Which of the following statements concerning net income is most correct?

Net income represents income that may be reinvested in the firm or distributed to its owners.

Which of the following has the most significant influence on return on equity?

Operating income

Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years. Therefore,

Project B may be preferred to Project A if the opportunity cost of money is high enough.

Consider the after-tax cash flows for Project S and Project L:A rational person would prefer ________.

Project S because the money can be reinvested sooner

All of the following contributed to recent financial crises except

Relying on the efficiency of financial markets.

An income statement may be represented as follows:

Sales - Expenses = Profits

The basic format of an income statement is

Sales - Expenses = Profits

Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2008 (from highest to lowest standard deviation of returns)?

Small firm common stocks, Common stocks, Long-term corporate bonds, Treasury bills

Why should you be careful when comparing a firm with industry​ norms?

Sometimes it is difficult to identify the industry to which your firm​ belongs, so you must select your peers and construct your own norm. Accounting practices differ widely among firms. These differences can make the computed ratios of different firms difficult to compare. Many firms experience seasonal changes in their operations. An industry average is not necessarily a desirable target ratio or norm. You may wish to be in the top​ 10%. Published peer group or industry averages are only approximations.

A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity.

TRUE

A common method of evaluating a firm's financial ratios is to compare the current values of the firm's ratios to its own ratios from prior periods. This is referred to as trend analysis.

TRUE

A firm's income statement reports the results from operating the business --for a period-- of time, while the firm's balance sheet provides a snapshot of the firm's financial position-- at a specific point in time--

TRUE

A liquidity-risk premium is the additional return required by investors for securities that cannot quickly be converted into cash at a reasonably predictable price.

TRUE

Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company.

TRUE

Financial ratios are used by personnel in marketing, human resources, and other groups within a firm, not just by the finance and accounting personnel.

TRUE

Financial ratios that are higher than industry averages may indicate problems that are as detrimental to the firm as ratios that are too low.

TRUE

If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

TRUE

In the United​ States, financial statements are prepared following the Financial Accounting Standards​ Board's generally accepted accounting principles​ (GAAP).

TRUE

Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price.

TRUE

Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and helping businesses raise new capital.

TRUE

Profits-to-Sales relationships are defined as profit margins.

TRUE

Ratios are used to standardize financial information, thereby making it easier to interpret.

TRUE

Ratios that examine profit relative to investment are useful in evaluating the overall effectiveness of the firm's management.

TRUE

The bid price is the price that a dealer will pay for a security; the asked price is the price at which she will sell a security.

TRUE

The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.

TRUE

The investment banker performs three basic functions: (1) underwriting, (2) distributing, and (3) advising.

TRUE

The money market includes transactions in short-term financial instruments.

TRUE

The negotiated purchase is the most prevalent method of securities distribution in the private sector.

TRUE

The rate of return available on the next best investment alternative for the saver refers to the opportunity cost of funds

TRUE

The statement of cash flow explains the changes that took place in the firm's cash balance over the period of interest.

TRUE

The​ maturity-risk premium can be defined as the additional return required by investors in​ longer-term securities​ (bonds in this​ case) to compensate them for the greater risk of price fluctuations on those securities caused by interest rate​ changes; whereas, the​ liquidity-risk premium is defined as the additional return required by investors in securities that cannot be quickly converted into cash at a reasonably predictable price.

TRUE

Assume that you won the Lotta Dough Lotto jackpot for $20 million. Further assume that you were offered a choice to receive the $20 million today, or receive it in equal installments of $1 million per year for 20 years. According to one of the principles of finance, which would you take?

The $20 million today because it would be worth more than if you would receive it in equal installments of $1 million per year for 20 years.

Assume that you went to Las Vegas and hit the jackpot for $5 million. Further assume that you were offered a choice to receive the $5 million today, or receive it in two years. According to one of the principles of finance, which would you take?

The $5 million today because it would be worth more than if you would receive it in two years.

The CEO of JLI Corp. decided to expand into a new market in 2010. At the end of 2010, JLI's stock price had decreased 5% since the beginning of the year. Which of the following statements is most correct?

The CEO's decision may have been optimal, keeping the stock price from falling more than 5% for the year.

In which of the following cases will the agency problem between shareholders and managers be the greatest?

The common stock of the company is owned by many diverse shareholders, with no shareholder owning more than 1% of the outstanding stock.

Two companies have identical assets and operating activities. Which of the follow statements is true?

The company with more debt will have lower net income due to interest expense.

Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio?

The company writes a $30,000 check to pay off some existing accounts payable

Which of the following statements about the corporate form of business organization is true?

The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

An inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that

The firm's products are in inventory for fewer days before they are sold than is average for the industry

Which of the following statements about investment banking in the United States is most correct?

The investment banking industry is dominated by large banks that are also investment bankers.

An investor is considering two equally risky investments. Investment A is expected to return $1,000 per year for the next 5 years. Investment B is expected to return $6,000 at the end of 5 years. Which of the following statements is most correct if both investments A and B have the same cost?

The investor may select investment A or investment B depending on the opportunity cost of money.

A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is most correct?

The manager should select the project that causes the stock price to increase the most, which could be The manager should select project A because it maximizes profits or The manager should select the project that maximizes long-term profits, not just one year of profits.

What are profit​ margins? What are the different types of profit​ margins?

The profit margins are the​ profits-to-sales relationships. Three types are gross profit​ margin, operating profit​ margin, and net profit margin.

Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing. The change will allow the corporation to report higher income and higher assets, although the physical inventory has not changed. Which of the following statements is most correct?

The stock price is likely to be unaffected because the stock market is efficient.

High Tech Corp. cut its research and development budget in 2010 by $4,000,000 in order to improve its cash flow for the year. Which of the following statements is most correct?

The stock price may decrease because investors may predict that future cash flows will decrease due to the lack of innovation and new products.

The purpose of doing a financial analysis is all of the following​ except:

To prepare GAAP financial statements.

Cash and credit management are typically the responsibility of the

Treasurer

Which of the following represents the correct ordering of returns over the period 1926 to 2008 (from lowest to highest return)?

Treasury bills, Long-term corporate bonds, Common stocks, Small firm common stocks

Which of the following securities will likely have the highest maturity risk premium?

U.S. Treasury Bond maturing in 2027

Identify the major reasons why underdeveloped countries remain underdeveloped.

Underdeveloped countries lack effective financial market systems. Underdeveloped countries lack political stability.

What are the two major categories of flotation​ costs?

Underwriters' spread Issuing Costs

Which method listed below is NOT a method by which securities are distributed to final​ investors?

Upset Agreement

Common examples of financial intermediaries include all of the following except

Venture Capital Firms.

Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler's net income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million. Therefore,

Wheeler paid a dividend in 2010 of $2 million.

Prices of securities that are traded in the Over-the-Counter Markets are determined by

a "bid" and "ask" negotiation process of broker-dealers of these securities.

Spandra Electronics wants to raise money by selling stock. After talking to several investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock. Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of

a commission or best-efforts agreement.

Prices of securities that are traded on the organized exchanges are determined by

a continuous auction process reflecting the sentiments of buyers and sellers.

When comparing inventory turnover ratios, other things being equal,

a higher inventory turnover is preferred to improve liquidity

The New York Stock Exchange (NYSE) is

a hybrid market, allowing for face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.

During the past year the growth corporation increased its sales from $1,000,000 to $2,000,000 and its EBIT from $250,000 to $400,000. The result of this growth will be

a lower operating profit margin and higher net income

An example of a primary market transaction involving a money market security is

a new issue of a security with a very short maturity.

An example of a primary market transaction is

a new issue of common stock by AT&T.

In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an examples of

a primary market transaction.

The principle of risk-return tradeoff means that

a rational investor will only take on higher risk if he expects a higher return.

What information does a firm's statement of cash flows provide to the viewing public?

a report documenting a firm's cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time

What information does a firm's income statement provide to the viewing public?

a report of revenues and expenses for a defined period of time

Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock. According to one of the principles of finance, what would induce the investor to purchase the corporate stock?

a return that is substantially higher than 3.5%

General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as

a seasoned equity offering because GE has sold common stock before.

The Sarbanes-Oxley Act, or SOX,

accomplishes both holds corporate advisors strictly accountable in a legal sense for any instances of misconduct and pretexts the interests of shareholders by providing greater protection against accounting fraud and financial misconduct.

Which of the following accounts belong in the liability section of a balance sheet?

accounts payable

Which of the following accounts does NOT belong on the asset side of a balance sheet?

accruals

All of the following are income statement items except:

accrued expenses.

Which of the following accounts does not belong in the liability section of a balance sheet?

additional paid-in capital

When evaluating an investment project, which of the following best describes the financial information needed by the decision maker?

after-tax incremental cash flows to the company as a whole

A "Dutch auction" was used by Google to raise money in 2004. A Dutch auction involves

allowing investors to submit bids saying how many shares they'd like to buy and at what price.

A commitment fee is

an amount paid on the unused portion of a loan in a private placement.

A wealthy private investor providing a direct transfer of funds is called

an angel investor.

The expected return on a riskless asset is greater than zero due to

an expected return for delaying consumption.

What information does a firm's balance sheet provide to the viewing public?

an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date

In order to reduce agency problems, managers may be provided compensation that includes:

an option to buy the company's stock.

Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways. Which of the following methods guarantees the corporation with a pre-determined price for the securities?

an underwriting

All of the following statements about balance sheets are true except:

balance sheets show average asset balances over a one-year period.

Company A and Company B both report the same level of sales and net income. Therefore,

both A and B will report the same Net Profit Margin.

Which of the following categories of owners have unlimited liability?

both general partners in a limited partnership and sole proprietors

The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because

both oil and gas exploration investments have a greater variability in possible returns and the preferred stock is more liquid

Which form of organization is free of initial legal requirements?

both sole proprietorship and general partnership