CFMS
A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
True
A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock
True
Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.
True
Money markets are markets for
Short-term debt securities such as Treasury Bonds and commercial bills
Which of the following statements is CORRECT?
As they are generally defined, money market transactions involve debt securities with maturities of less than one year
You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
A secondary market rransaction
Which of the following statements is CORRECT?
In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
Which of the following statements is CORRECT?
The New York Stock Exchange is an auction market, and it has a physical location.
During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining
True
If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
True
The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk."
True
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?
If the pure expectations theory holds, the Treasury yield curve must be downward sloping
Which of the following factors would be most likely to lead to an increase in nominal interest rates?
A new technology like the Internet has just been introduced, and it increases investment opportunities
Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public. Other things held constant, what would be the most likely effect on short-term securities' prices and interest rates?
Prices would decline and interest rates would rise
Which of the following statements is CORRECT?
If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping
Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
Maturity risk premiums could help to explain the yield curve's upward slope.
Which of the following statements is CORRECT?
The higher the maturity risk premium, the higher the probability that the yield curve will be inverted
Which of the following statements is most correct?
70% of the dividends received by corporations is excluded from taxable income
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors
could explain this situation?
The company sold a new issue of common stock
The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis
over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Nantell's operating income (EBIT) will increase
Assume that Besley Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for shareholder reporting and
income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm's
accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?
The firm's cash position in 2014 and 2015 would increase.
A start-up firm is making an initial investment in new plant and equipment. Assume that currently
its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
The firm's cash flow would increase
Which of the following statements is CORRECT?
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
The company's net income would increase.
Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?
$17.83
Brown Fashions Inc.'s December 31, 2014, balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2014, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/14, assuming no common stock was either issued or retired during 2014?
$22.00
Considered alone, which of the following would increase a company's current ratio?
An increase in accounts receivable.
Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?
The quick ratio increases
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Which of the following statements is CORRECT?
Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash
Companies E and P each reported the same earnings per share (EPS), but Company E's stock trades at a higher price. Which of the following statements is CORRECT?
Company E trades at a higher P/E ratio.
A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?
Increase EBIT while holding sales and assets constant
Which of the following would indicate an improvement in a company's financial position, holding other things constant?
The current and quick ratios both increase
If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?
Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge
Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?
Borrow using short-term notes payable and use the proceeds to reduce long-term debt
Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
Default and liquidity risk differences.
Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
Adding a call provision.
Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
The required rate of return would increase because the bond would then be more risky to a bondholder
A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT
The bond's expected capital gains yield is zero
A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
The bond's yield to maturity is greater than its coupon rate.
If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
A 10-year zero coupon bond
An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
False
Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return
False
Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.
True
Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the
amount over and above the risk-free rate that is required to compensate stock investors for assuming an average amount of risk.
True
For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?
The beta of the portfolio is equal to the weighted average of the betas of the individual stocks
Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?
Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable risk
Net working capital is defined as current assets divided by current liabilities
False
Other things held constant, which of the following will cause an increase in net working capital?
Merchandise is sold at a profit, but the sale is on credit
Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
Take steps to reduce the DSO
Which of the following statements best represents what finance is about?
Creating and maintenance of economic wealth
Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
Access to the capital markets
The goal of the firm should be:
maximization of shareholder wealth
Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States?
Corporations have the ability to raise larger sums of capital than the other forms of business organization
Difficulty in finding profitable projects is due to:
competitive markets
Which of the following is NOT a principle of basic financial management?
Profit is king
The corporation is the most effective form of organization in terms of raising capital
True
Ethical dilemmas frequently exist in finance
True
Which of the following is NOT an advantage of the sole proprietorship?
Limited liability
What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?
Owners have unlimited liability
Which of the following is NOT true for limited partnerships?
Limited partners can only manage the business
In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost?
Sole proprietorship, general partnership, limited partnership, corporation
Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?
Corporation
Which one of the following categories of owners enjoys limited liability?
Shareholders (common stock) of a corporation
Which of the following is a characteristic of a limited partnership?
All of the Above
Which of the following categories of owners have limited liability?
Shareholders of a corporation
Which of the following types of business forms is the most ideal in terms of attracting new capital?
A public corporation
Which forms of organization are free of initial legal requirements?
Both A and B
Which of the following is a significant disadvantage of a general partnership?
Each partner is fully responsible for the liabilities incurred by the partnership
For these types of organization, no distinction is made between business and personal assets.
Both A and B
Which of the following forms of business organization is the dominant economic force in the United States?
Corporation
A limited liability company (LLC) is:
A and C
Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:
an initial public offering
Corporations receive money from investors with:
All of the above
IBM issuing new shares of common stock would be classified as:
a new seasoned issue
The sole proprietorship is the same as the individual for liability purposes.
True
In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm
True
There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership
False
The owners of a corporation are liable for the corporation’s obligations up to the amount of their investment
True
General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to trasnfer their ownership
False
Ultimate control in a corporation is vested in the board of directors
False
Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship
False
Limited partners may actively manage the business
False
The life of a corporation is not dependent upon the status of the investors
True
A sole proprietorship is the most desirable business form in all circumstances
False
In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner
False
In a general partnership, each partner is liable for the partnership’s obligations only up to a percentage of the obligation equal to that partner’s percentage of ownership of the partnership
False
Maximization of shareholder wealth as a goal is superior to profit maximization because:
A and C
Which of the following best describes the goal of the firm?
The maximization of the total market value of the firm’s common stock
Profit maximization does not adequately describe the goal of the firm because:
A and B
Working capital management involves investment and financing decisions related to:
current assets and current liabilities
The goal of managing working capital, such as an inventory, should be to minimize the:
aggregate of carrying and shortage costs
Zap company follows an aggressive financing policy in its working capital management while Zing Corporation follows a conservative financing policy. Which one of the following statements
is correct?
Zap has a low current ratio while Zing has a high current ratio
Which of the following would increase risk?
Increase the amount of short-term borrowing
The longer the firm's accounts payable period, the
less the firm must invest in working capital
The average length of time a peso is tied up in current asset is called the:
cash conversion period
All these factors are used in credit policy administration except:
peso amount if receivables
All but which of the following is considered in determining credit policy?
accounts payable deferral period
The use of safety stock by a firm will
increase inventory costs
In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.
True