FIN/571

Book value:

Is equivalent to market value for firms with fixed assets.

Generally tends to exceed market value when fixed assets are included.

Is based on historical cost.

Is more of a financial than an accounting valuation.

Is adjusted to market value whenever the market value exceeds the stated book value.

The underlying assumption of the dividend growth model is that a stock is worth:

An amount computed as the next annual dividend divided by the market rate of return.

An amount computed as the next annual dividend divided by the required rate of return.

The same amount to every investor regardless of their desired rate of return.

The present value of the future income that the stock is expected to generate.

The same amount as any other stock that pays the same current dividend and has the same required rate of return.

Which one of the following is an example of a nondiversifiable risk?

A poorly managed firm suddenly goes out of business due to lack of sales

A well-managed firm reduces its work force and automates several jobs

A key employee suddenly resigns and accepts employment with a key competitor

A well-respected chairman of the Federal Reserve Bank suddenly resigns

A well-respected president of a firm suddenly resigns

All else equal, the contribution margin must increase as:

The variable cost per unit declines.

Sales price per unit declines.

The fixed cost per unit declines.

Both the sales price and variable cost per unit increase.

The sales price minus the fixed cost per unit increases.

The market price of a bond increases when the:

Coupon rate decreases.

Discount rate decreases.

Par value decreases.

Face value decreases.

Coupon is paid annually rather than semiannually.

Under the * method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the * method, the underwriter does not purchase the shares but merely acts as an agent.

Seasoned; unseasoned

Firm commitment; best efforts

Competitive offer; negotiated offer

Best efforts; firm commitment

Negotiated offer; competitive offer

The primary goal of financial management is to:

Maintain steady growth in both sales and net earnings.

Avoid financial distress.

Maximize current dividends per share of the existing stock.

Maximize the current value per share of the existing stock.

Minimize operational costs and maximize firm efficiency.

A firm has a debt-equity ratio of .64, a pretax cost of debt of 8.5 percent, and a required return on assets of 12.6 percent. What is the cost of equity if you ignore taxes?

11.12%

8.55%

16.38%

15.22%

8.06%

Lois is purchasing an annuity that will pay $5,000 annually for 20 years, with the first annuity payment made on the date of purchase. What is the value of the annuity on the purchase date given a discount rate of 7 percent?

$56,677.98

$52,970.07

$56,191.91

$54,282.98

$66,916.21

The process of planning and managing a firm’s long-term assets is called:

Working capital management.

Capital budgeting.

Agency cost analysis.

Capital structure.

Financial depreciation.

The higher the inventory turnover, the:

Longer it takes a firm to sell its inventory.

Less time inventory items remain on the shelf.

Higher the inventory as a percentage of total assets.

Lesser the amount of inventory held by a firm.

Greater the amount of inventory held by a firm.

The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:

Geometric average return.

Risk premium.

Time premium.

Inflation premium.

Arithmetic average return.

Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are known as:

Profitability ratios.

Market value ratios.

Long-term solvency measures.

Liquidity measures.

Asset management ratios.

What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

$6,671.13

$6,643.29

$6,395.31

$6,023.58

$7,253.72

The discount rate that makes the net present value of an investment exactly equal to zero is called the:

Equalizer.

Average accounting return.

Internal rate of return.

Profitability index.

External rate of return.

Which one of these statements is correct concerning the cash cycle?

Increasing the accounts payable period increases the cash cycle.

The longer the cash cycle, the more likely a firm will need external financing.

Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.

A positive cash cycle is preferable to a negative cash cycle.

The cash cycle can exceed the operating cycle if the payables period is equal to zero.

Futures contracts contrast with forward contracts by:

Requiring contract fulfillment by the two originating parties.

Marking to the market on a weekly basis.

Providing an option for the buyer rather than an obligation.

Allowing the seller to deliver any day during the delivery month.

Allowing the parties to negotiate the contract size.

Which one of these is a correct definition?

Current liabilities are debts that must be repaid in 18 months or less.

Current assets are assets with short lives, such as inventory.

Long-term debt is defined as a residual claim on a firm’s assets.

Net working capital equals current assets plus current liabilities.

Tangible assets are fixed assets such as patents.

One disadvantage of the corporate form of business ownership is the:

Firms ability to raise cash.

Difficulties encountered when changing ownership.

Limited liability protection provided for all owners.

Double taxation of profits.

Unlimited life of the firm.

A firm has a total debt ratio of .47. This means the firm has 47 cents in debt for every:

$1 in fixed assets.

$1 in total equity.

$.53 in total equity.

$.53 in total assets.

$1 in current assets.

All else held constant, interest rate risk will increase when the time to maturity:

Increases or the coupon rate decreases.

Increases or the coupon rate increases.

Decreases and the coupon rate equals zero.

Decreases or the coupon rate decreases.

Decreases or the coupon rate increases

A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?

2.84 years

never

3.92 years

2.97 years

3.98 years

An efficient capital market is one in which:

Taxes are irrelevant.

Brokerage commissions are zero.

Security prices reflect all available information.

All investments earn the market rate of return.

Securities always offer a positive NPV.

You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years?

$6,941.11

$7,280.00

$6,760.00

$7,250.00

$7,311.62

The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:

Net capital spending.

Cash flow to retained earnings.

Cash flow to investors.

Additions to net working capital.

Operating cash flow.

Which term defines the tax rate that applies to the next dollar of taxable income earned?

Average

Marginal

Residual

Total

Deductible

The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as **_** costs.

Financial solvency

Capital structure

Indirect bankruptcy

Flotation

Direct bankruptcy

Which one of the following statements about preferred stock is true?

Preferred stock usually has a stated liquidating value of $100 per share.

There is no significant difference in the voting rights granted to preferred and common shareholders.

If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.

Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability.

Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.

An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the **_** rate.

Effective annual

Stated interest

Daily interest

Compound interest

Periodic interest

Which one of the following statements is false?

Aging schedules are used to monitor accounts receivable.

Investments in accounts receivable equal average daily sales times average collection period.

An aging schedule includes only overdue accounts.

If sales are seasonal, the percentages shown on an aging schedule will vary during the year.

Collection efforts may involve legal action.

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