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Finance Flashcards

Finance Exam 2

A firm’s annual stockholders’ report ________.A) is only accessible to the shareholders of the firmB) summarizes and documents the firm’s financial activities during the past yearC) documents the list of all investors who bought the firm’s shares during the past yearD) summarizes and documents the firm’s financial plan and budgets during the past year B) summarizes and documents the firm’s financial activities during the past year
The rule-setting body, which authorizes generally accepted accounting principles is the ________.A) IFRSB) FASBC) SECD) Federal Reserve System B) FASB
Accounting practices and procedures used to prepare financial statements are called ________.A) SECB) IFRSC) GAAPD) IRB C) GAAP
The federal regulatory body governing the sale and listing of securities is called the ________.A) IRSB) FASBC) GAAPD) SEC D) SEC
The stockholders’ annual report must include ________.A) common-size financial statementsB) an income statementC) an advance tax statementD) the margin of safety report B) an income statement
The 2002 Sarbanes-Oxley Act was designed to ________.A) limit the compensation that could be paid to corporate CEOsB) eliminate the many disclosure and conflict-of-interest problems of corporationsC) provide uniform international accounting standardsD) provide the guidelines to minimize the tax B) eliminate the many disclosure and conflict-of-interest problems of corporations
The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________.A) the McCain-Feingold ActB) the Harkins-Oxley ActC) the Sarbanes-Harkins ActD) the Sarbanes-Oxley Act D) the Sarbanes-Oxley Act
The Public Company Accounting Oversight Board (PCAOB) ________.A) is a not-for-profit corporation that oversees auditors of public corporationsB) is a not-for-profit corporation that oversees managers of public corporationsC) is a for-profit corporation that oversees auditors of public corporationsD) is a for-profit corporation that oversees managers of public corporations A) is a not-for-profit corporation that oversees auditors of public corporations
The stockholder’s report includes ________.A) an estimated interest cost reportB) an estimated dividend reportC) a break-even sales reportD) a statement of retained earnings D) a statement of retained earnings
Total assets less net fixed assets equals ________.A) gross assetsB) current assetsC) depreciationD) liabilities and equity B) current assets
A(n) ________ provides a financial summary of a firm’s operating results during a specified period.A) income statementB) balance sheetC) statement of cash flowsD) statement of retained earnings A) income statement
Gross profit is ________.A) operating profits minus depreciationB) operating profits minus cost of goods soldC) sales revenue minus operating expensesD) sales revenue minus cost of goods sold D) sales revenue minus cost of goods sold
Operating profit is ________.A) gross profit minus operating expensesB) sales revenue minus cost of goods soldC) earnings before depreciation and taxesD) sales revenue minus depreciation expense A) gross profit minus operating expenses
Net profit after taxes is ________.A) gross profits minus operating expensesB) sales revenue minus cost of goods soldC) EBITDA minus interestD) EBIT minus interest and taxes D) EBIT minus interest and taxes
Operating profit is known as ________.A) earnings after interest and taxesB) earnings before interest and taxesC) earnings before depreciation and taxesD) earnings after tax B) earnings before interest and taxes
Earnings available for common stockholders is calculated as net profits ________.A) before taxes minus preferred dividendsB) after taxes minus preferred dividendsC) after taxes minus common dividendsD) before taxes minus common dividends B) after taxes minus preferred dividends
Which of the following is a current liability?A) accounts receivableB) cashC) notes payableD) inventory C) notes payable
Which of the following represents a current asset?A) automobilesB) buildingsC) marketable securitiesD) equipment C) marketable securities
Which of the following is a fixed asset?A) landB) accounts payableC) accrualsD) notes payable A) land
The net value of fixed assets is also called its ________.A) market valueB) par valueC) book valueD) intrinsic value C) book value
Retained earnings on the balance sheet represents the ________.A) net profit after taxesB) amount of proceeds in excess of the par value received from the original sale of common stockC) net profit after taxes minus preferred dividendsD) cumulative total of all earnings reinvested in the firm D) cumulative total of all earnings reinvested in the firm
The ________ represents a summary statement of a firm’s financial position at a given point in time.A) income statementB) balance sheetC) statement of cash flowsD) statement of retained earnings B) balance sheet
The statement of cash flows ________.A) shows the financial position of a firm at a given point of timeB) summarizes all the purchase and sale of fixed assets and raw materialsC) provides insight into a firm’s operating, investment, and financing cash flowsD) classifies a firm’s cash flows as operating, investing, financing, and other activities C) provides insight into a firm’s operating, investment, and financing cash flows
When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings.A) net profits after taxesB) interest expenseC) depreciationD) dividends D) dividends
On the balance sheet, net fixed assets represent ________.A) gross fixed assets at cost minus depreciation expenseB) gross fixed assets at market value minus depreciation expenseC) gross fixed assets at cost minus accumulated depreciationD) gross fixed assets at market value minus accumulated deprecation C) gross fixed assets at cost minus accumulated depreciation
Paid-in capital in excess of par represents the amount of proceeds ________.A) in deficit of the par value from the original sale of common stockB) in excess of the par value from the original sale of common stockC) in excess of the par value from the current value of common stockD) in excess of the par value from the intrinsic value of common stock B) in excess of the par value from the original sale of common stock
FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________.A) historical rateB) current rateC) average rateD) rate prescribed by the SEC B) current rate
Ratios provide a ________ measure of a company’s performance and condition.A) definitiveB) grossC) relativeD) absolute C) relative
Present and prospective shareholders are mainly concerned with a firm’s ________.A) risk and returnB) profitabilityC) leverageD) liquidity A) risk and return
The primary concern of creditors when assessing the strength of a firm is its ________.A) profitabilityB) leverageC) short-term liquidityD) share price C) short-term liquidity
________ analysis involves the comparison of different firms’ financial ratios at the same point in time.A) Time-seriesB) Cross-sectionalC) MarginalD) Technical B) Cross-sectional
________ analysis involves comparison of current to past performance and the evaluation of developing trends.A) Time-seriesB) Cross-sectionalC) MarginalD) Break-even A) Time-series
Which of the following is used to analyze a firm’s financial performance over different years?A) time-series analysisB) break-even analysisC) gap analysisD) marginal analysis A) time-series analysis
Which of the following is true of benchmarking?A) It is an analysis in which a firm’s ratio values are analyzed to project the fundamental values of the assets for upcoming years or business cycle.B) It is an analysis in which a firm’s ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.C) It is an analysis in which a firm’s financial performance over time is evaluated using financial ratio analysis.D) It is a financial statement analysis technique which combines cross-sectional and time-series analyses. B) It is an analysis in which a firm’s ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.
Cross-sectional ratio analysis is used to ________.A) correct expected problems in operationsB) isolate the causes of problemsC) provide conclusive evidence of the existence of a problemD) measure relative performance of a firm with its peers D) measure relative performance of a firm with its peers
Time-series analysis is often used to ________.A) assess developing trendsB) correct errors of judgmentC) evaluate the value of a firm or its assetsD) standardize results A) assess developing trends
In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm.A) greater than averageB) negativeC) marginalD) standard B) negative
Which of the following is a limitation of ratio analysis?A) Financial ratios cannot reveal certain specific aspects of a firm’s financial position.B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.C) It is difficult to access audited financial statements for ratio analysis.D) Ratio analysis assumes that inflation has no effect on a firm’s business. B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem.
An analyst should be careful when conducting ratio analysis to ensure that ________.A) the overall performance of a firm is not judged on a single ratioB) the role of inflation is ignoredC) ratios being compared should be calculated using financial statements dated at different points in time during the yearD) different accounting procedures are used A) the overall performance of a firm is not judged on a single ratio
The analyst should be careful when analyzing ratios that ________.A) pre-audited statements are usedB) right interpretation of the ratio value is madeC) financial data being compared need not be uniformD) inflation will not affect while comparing older to newer firms B) right interpretation of the ratio value is made
Inflation can distort ________.A) book value of inventory costsB) market value of revenueC) market value of salesD) book value of revenue A) book value of inventory costs
Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms.A) larger; smallerB) older; newerC) smaller; largerD) newer; older B) older; newer
Which of the following groups of ratios primarily measure risk?A) liquidity, activity, and profitabilityB) liquidity, profitability, and marketC) liquidity, activity, and debtD) activity, debt, and profitability C) liquidity, activity, and debt
The ________ ratios are primarily used as measures of return.A) liquidityB) activityC) debtD) profitability D) profitability
The two categories of ratios that should be utilized to assess a firm’s true liquidity are the ________.A) liquidity and market ratiosB) liquidity and profitability ratiosC) market and debt ratiosD) liquidity and activity ratios D) liquidity and activity ratios
The two basic measures of liquidity are ________.A) inventory turnover and current ratioB) current ratio and quick ratioC) gross profit margin and ROED) current ratio and total asset turnover B) current ratio and quick ratio
A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might ________.A) improve its collection practices by providing extended credit policyB) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and decreasing the current and quick ratiosC) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratiosD) increase inventory, thereby increasing current assets and the current and quick ratios C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios
If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this?A) It can meet the short-term obligations without any difficulty.B) You could determine that Ryan has a liquidity problem because Ryan’s current ratio is greater than 2 which is the rule of thumb for the current ratio.C) Nothing, you would also need the current ratio’s from the last few years of the S&P 500 Index.D) You could determine that Ryan has an activity problem because Ryan’s current ratio is greater than 2 which is the rule of thumb for the current ratio. A) It can meet the short-term obligations without any difficulty.
Which of the following is true of current ratio?A) The more predictable a firm’s cash flows, the higher the acceptable current ratio.B) A higher current ratio indicates a higher return on equity.C) The more predictable a firm’s current ratio, the higher the current liabilities.D) A higher current ratio indicates a greater degree of liquidity. D) A higher current ratio indicates a greater degree of liquidity
Which of the following is excluded when calculating quick ratio?A) accounts receivableB) accounts payableC) cashD) inventory D) inventory
________ ratios are a measure of the speed with which various accounts are converted into sales or cash.A) ActivityB) LiquidityC) DebtD) Profitability A) Activity
________ may indicate a firm is experiencing stockouts and lost sales.A) Average payment periodB) Inventory turnover ratioC) Average collection periodD) Quick B) Inventory turnover ratio
If an inventory turnover is divided into 365, it becomes a measure of ________.A) financial efficiencyB) the average age of the inventoryC) sales turnoverD) the average collection period B) the average age of the inventory
The ________ measures the activity, or liquidity, of a firm’s stock of goods.A) average collection periodB) inventory turnover ratioC) average payment periodD) total asset turnover ratio B) inventory turnover ratio
A(n) ________ is useful in evaluating credit policies.A) average payment periodB) current ratioC) average collection periodD) inventory turnover ratio C) average collection period
The ________ ratio may indicate poor collections procedures or a relaxed credit policy.A) average payment periodB) inventory turnoverC) average collection periodD) quick C) average collection period
Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements?A) debt equity ratioB) average payment periodC) quick ratioD) total asset turnover B) average payment period
________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.A) EmployeesB) StockholdersC) Lenders and suppliersD) Auditors C) Lenders and suppliers
The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. A) inventory turnoverB) total asset turnoverC) quickD) current asset turnover B) total asset turnover
A firm’s total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data?A) Its assets have been efficiently used to derive the optimum level of sales.B) Its assets have been efficiently used to derive the optimum level of net income.C) Its assets have been efficiently used to derive the minimum level of net income.D) Its assets have been efficiently used to derive the minimum level of gross profit. A) Its assets have been efficiently used to derive the optimum level of sales.
A firm with a total asset turnover that is lower than industry standard but with a current ratio that meets industry standard must have excessive ________.A) fixed assetsB) inventoryC) accounts receivableD) debt A) fixed assets
A firm with a total asset turnover lower than industry standard may have ________.A) excessive debtB) excessive interest costsC) insufficient salesD) insufficient fixed assets C) insufficient sales
Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________.A) the earnings per share and the return on total assetsB) the gross profit margin and the earnings per shareC) the gross profit margin and the return on total assetsD) the gross profit margin and the net profit margin D) the gross profit margin and the net profit margin
The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales.A) retained earnings statementB) common-size balance sheetC) common-size income statementD) profit and loss statement C) common-size income statement
________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods.A) Net profit marginB) Operating profit marginC) Gross profit marginD) Earnings available to common shareholders C) Gross profit margin
________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses.A) Net profit marginB) Operating profit marginC) Gross profit marginD) Earnings available to common shareholders B) Operating profit margin
A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive ________.A) general and administrative expensesB) cost of goods soldC) dividend paymentsD) principal payments A) general and administrative expenses
________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted.A) Net profit marginB) Operating profit marginC) Gross profit marginD) Earnings available to common shareholders A) Net profit margin
________ measures the overall effectiveness of management in generating profits with its available assets.A) Total asset turnoverB) Price/earnings ratioC) Return on equityD) Return on total assets D) Return on total assets
________ measures the return earned on the common stockholders’ investment in the firm.A) Net profit marginB) Price/earnings ratioC) Return on equityD) Return on total assets C) Return on equity
A ________ ratio is commonly used to assess owners’ appraisal of the share value.A) debtB) price/earningsC) return on equityD) return on total assets B) price/earnings
P/E ratio measures the ________.A) market value of the stock to earnings per shareB) intrinsic value of the stock to earnings per shareC) book value of the stock to earnings per shareD) market price of the stock to retained earnings A) market value of the stock to earnings per share
Book value per share is the ratio of ________.A) common stock equity to number of outstanding common sharesB) retained earnings to number of outstanding common sharesC) fixed assets to number of outstanding common sharesD) total liabilities to number of outstanding common shares A) common stock equity to number of outstanding common shares
The ________ is used by financial managers as a structure for dissecting a firm’s financial statements to assess its financial condition.A) statement of cash flowsB) DuPont system of analysisC) break-even analysisD) technical analysis B) DuPont system of analysis
A firm with a low net profit margin can improve its return on total assets by ________.A) increasing its debt ratioB) increasing its total asset turnoverC) decreasing its fixed asset turnoverD) decreasing its total asset turnover B) increasing its total asset turnover
Other things being equal, a decrease in total asset turnover will result in ________ in the return on total assets.A) an increaseB) a decreaseC) no changeD) an undetermined change B) a decrease
A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________.A) increasing its debt ratioB) increasing its total asset turnoverC) decreasing its debt ratioD) decreasing its total asset turnover A) increasing its debt ratio
The three basic ratios used in the DuPont system of analysis are ________.A) net profit margin, total asset turnover, and return on investmentB) net profit margin, total asset turnover, and return on equityC) net profit margin, total asset turnover, and equity multiplierD) net profit margin, financial leverage multiplier, and return on equity C) net profit margin, total asset turnover, and equity multiplier
The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing.A) operating leverageB) long-term debtC) total debtD) total assets C) total debt
Financial leverage multiplier is the ratio of ________.A) current assets to common stockholders’ equityB) total assets to common stockholders’ equityC) total assets to total debtD) current assets to current liabilities B) total assets to common stockholders’ equity
Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________.A) an increase in the return on equityB) a decrease in the gross profit marginC) an increase in the gross profit marginD) an increase in retained earnings A) an increase in the return on equity
Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.A) arbitragingB) securitizationC) depreciationD) amortization C) depreciation
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.A) taxB) financial reportingC) budgetD) cost accounting A) tax
A corporation ________.A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposesB) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposesC) can use different depreciation methods for tax and financial reporting purposesD) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes C) can use different depreciation methods for tax and financial reporting purposes
The depreciable value of an asset, under MACRS, is the ________.A) current costB) current cost minus salvage valueC) the original cost plus installationD) the original cost plus installation costs, minus salvage value C) the original cost plus installation
Given a financial manager’s preference for faster receipt of cash flows, ________.A) a longer depreciable life is preferred to a shorter oneB) a shorter depreciable life is preferred to a longer oneC) the manager is not concerned with depreciable life, because depreciation is a noncash expenseD) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost B) a shorter depreciable life is preferred to a longer one
In general, ________.A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flowsB) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flowsC) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written offD) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
The depreciable value of an asset, under MACRS, is ________.A) the full cost excluding installation costsB) the full cost minus salvage valueC) the full cost including installation costsD) the full cost including installation costs adjusted for the salvage value C) the full cost including installation costs
A firm’s operating cash flow (OCF) is defined as ________.A) gross profit minus operating expensesB) gross profit minus depreciationC) EBIT times one minus the tax rate plus depreciationD) EBIT plus depreciation C) EBIT times one minus the tax rate plus depreciation
Which of the following is an example of noncash charges?A) depreciationB) accrualsC) interest expenseD) dividends paid A) depreciation
Which of the following is a source of cash flows?A) increase in marketable securitiesB) increase in accounts payableC) decrease in notes payableD) repurchase of stock B) increase in accounts payable
________ is a noncash charge.A) Labor expenseB) DepreciationC) SalariesD) Rent B) Depreciation
In the statement of cash flows, retained earnings are handled through the adjustment of ________.A) “Revenue” and “Cost” accountsB) “Current Assets” and “Current Liabilities” accountsC) “Depreciation” and “Purchases” accountsD) “Net Profits After Taxes” and “Dividends Paid” accounts D) “Net Profits After Taxes” and “Dividends Paid” accounts
The cash flows from operating activities section of the statement of cash flows includes ________.A) principal receivedB) cost of raw materialsC) dividends paidD) stock repurchases B) cost of raw materials
The cash flows from operating activities section of the statement of cash flows includes ________.A) labor expenseB) proceeds from the sale of fixed assetsC) principal paidD) dividends paid A) labor expense
The cash flows from financing activities section of the statement of cash flows includes ________.A) labour expenseB) cost of raw materialsC) purchase of long-term assetsD) dividends paid D) dividends paid
The three categories of a firm’s statement of cash flows are ________.A) cash flow from operating activities, cash flow from investment activities, and cash flow fromnoncash activitiesB) cash flow from operating activities, cash flow from noncash activities, and cash flow fromfinancing activitiesC) cash flow from equity activities, cash flow from investment activities, and cash flow fromfinancing activitiesD) cash flow from operating activities, cash flow from investment activities, and cash flow fromfinancing activities D) cash flow from operating activities, cash flow from investment activities, and cash flow fromfinancing activities
Which of the following is a cash inflow?A) a decrease in accounts payableB) a decrease in accounts receivableC) an increase in dividend paymentD) a decrease in accrued liabilities B) a decrease in accounts receivable
Which of the following is a cash outflow?A) an increase in accounts payableB) a decrease in notes receivableC) an increase in accounts receivableD) an increase in accrued liabilities C) an increase in accounts receivable
Which of the following line items of the statement of cash flows must be obtained from the income statement?A) accruals in current liabilitiesB) interest expensesC) accounts receivableD) cash dividends paid on both preferred and common stocks B) interest expenses
Cash flows directly related to production and sale of a firm’s products and services are called ________.A) cash flow from operating activitiesB) cash flow from investment activitiesC) cash flow from financing activitiesD) cash flow from equity activities A) cash flow from operating activities
Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________.A) operating activitiesB) investment activitiesC) financing activitiesD) equity activities B) investment activities
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.A) operating activitiesB) investment activitiesC) financing activitiesD) miscellaneous activities C) financing activities
A corporation sold a fixed asset for $100,000. This is ________.A) an investment cash flow and a source of fundsB) an operating cash flow and a source of fundsC) an operating cash flow and a use of fundsD) an investment cash flow and a use of funds A) an investment cash flow and a source of funds
A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________.A) an investment cash flowB) a financing cash flowC) a financing cash flow and investment cash flow, respectivelyD) a financing cash flow and operating cash flow, respectively C) a financing cash flow and investment cash flow, respectively
Which of the following is a cash flow from financing activities?A) purchase of a long-term assetB) decrease in accounts payableC) increase in accounts payableD) repurchasing stock D) repurchasing stock
Which of the following represents a cash flow from operating activities?A) dividends paidB) increase or decrease in current liabilitiesC) increase or decrease in fixed assetsD) repurchasing stock B) increase or decrease in current liabilities
A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________.A) low profitabilityB) insolvencyC) inability to receive creditD) high leverage B) insolvency
The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.A) short-term; long-termB) short-term; short-termC) long-term; long-termD) long-term; short-term D) long-term; short-term
Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.A) one to two; two to tenB) five to ten; ten to twentyC) zero to one; five to tenD) one to ten; ten to fifteen A) one to two; two to ten
The key aspects of a financial planning process are ________.A) cash planning and investment planningB) operations planning and investment planningC) investment planning and profit planningD) cash planning and profit planning D) cash planning and profit planning
Pro forma financial statements are used for ________.A) cash budgetingB) preparing financial statementsC) profit planningD) auditing C) profit planning
Which of the following would be the least likely to utilize a cash budget?A) top managementB) middle managementC) public investorsD) lenders C) public investors
The primary purpose in preparing pro forma financial statements is ________.A) for cash planningB) to ensure the ability to pay dividendsC) to reduce riskD) for profit planning D) for profit planning
________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing.A) Short-term financial plansB) Long-term financial plansC) Pro forma statementsD) Cash budgeting B) Long-term financial plans
________ generally reflect(s) the anticipated financial impact of planned long-term actions.A) A cash budgetB) Strategic financial plansC) Operating financial plansD) A pro forma income statement B) Strategic financial plans
In general, firms that are subject to a high degree of ________, relatively short production cycles, or both, tend to use shorter planning horizons.A) profitabilityB) financial certaintyC) operating uncertaintyD) financial planning C) operating uncertainty
The key outputs of the short-term financial planning process are the ________.A) cash budget, pro forma income statement, and pro forma balance sheetB) sales forecast and capital assets journalC) sales forecast and schedule of changes in working capitalD) income statement, balance sheet, and source and use statement A) cash budget, pro forma income statement, and pro forma balance sheet
Key inputs to short-term financial planning are ________.A) cash flow statements and income statementB) pro forma financial statementsC) sales forecasts, and operating and financial dataD) leverage analysis and pro forma income statement C) sales forecasts, and operating and financial data
Once sales are forecasted, ________ must be generated to estimate required raw materials.A) a production planB) a cash budgetC) an operating budgetD) a pro forma statement A) a production plan
An external sales forecast is based on ________.A) the relationships between a firm’s sales and certain key economic indicators such as GDP and consumer confidenceB) a buildup, or consensus of sales forecasts through a firm’s own sales channelsC) the prediction of a firm’s sales over a given period through the analysis of the sales trends of its competitorsD) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales A) the relationships between a firm’s sales and certain key economic indicators such as GDP and consumer confidence
An internal forecast is based on ________.A) a buildup, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional factors such as production capabilitiesB) the relationships between a firm’s sales and certain economic indicatorsC) the prediction of a firm’s sales over a given period through surveys sent to financial analystsD) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales A) a buildup, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional factors such as production capabilities
A firm’s final sales forecast is usually a function of ________.A) its net incomeB) the salesperson’s estimates of demandC) internal and external factors in combinationD) its accounts receivable C) internal and external factors in combination
The key input to the short-term financial planning process is ________.A) the audit reportB) the pro forma balance sheetC) the sales forecastD) the pro forma income statement C) the sales forecast
In preparing a cash budget, the ________ seasonal and uncertain a firm’s cash flows, the ________ the number of budgeting intervals it should use.A) more; greaterB) more; fewerC) less; greaterD) less; fewer A) more; greater
The key input to any cash budget is ________.A) the sales forecastB) the production planC) the pro forma balance sheetD) the current tax laws A) the sales forecast
Of the following components of a cash budget, generally the easiest to estimate would be the ________.A) cash salesB) cash receiptsC) cash disbursementsD) month-to-month short-term borrowing C) cash disbursements
Cash disbursements include ________.A) amortization expenseB) rent paymentsC) depreciation expenseD) depletion B) rent payments
A projected excess cash balance for a month may be ________.A) financed with short-term securitiesB) financed with long-term securitiesC) invested in marketable securitiesD) invested in long-term securities C) invested in marketable securities
If a firm expects short-term cash surpluses, it can plan ________.A) long-term investmentsB) short-term borrowingC) short-term investmentsD) leverage decisions C) short-term investments
Which of the following represents a way of coping with uncertainty in a cash budget?A) careful estimation of cash budgets outputs B) developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected salesC) always using the prior year’s data for estimates of the futureD) using scenario analysis, or “what if” approach, to analyze cash flows under a variety of circumstances D) using scenario analysis, or “what if” approach, to analyze cash flows under a variety of circumstances
One way a firm can reduce the amount of cash it needs in any month is to ________.A) slow down the payment of receivablesB) delay the payment of wagesC) accrue taxesD) speed up payment of accounts payable B) delay the payment of wages
The primary purpose in preparing pro forma financial statements is ________.A) for cash planningB) to ensure the ability to pay dividendsC) for risk analysisD) for profit planning D) for profit planning
________ are projected financial statements.A) Pro forma statementsB) Statements of retained earningsC) Cash budgetsD) Cash flow statements A) Pro forma statements
The key inputs for preparing pro forma income statements using the simplified approaches are the ________.A) sales forecast for the preceding year and financial statements for the coming yearB) sales forecast for the coming year and the cash budget for the preceding yearC) sales forecast for the coming year and financial statements for the preceding yearD) cash budget for the coming year and sales forecast for the preceding year C) sales forecast for the coming year and financial statements for the preceding year
In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.A) pro forma income statement, balance sheet, and cash budgetB) pro forma balance sheet and cash budgetC) cash budget and statement of retained earningsD) pro forma income statement and pro forma balance sheet B) pro forma balance sheet and cash budget
A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected?A) pro forma income statement and pro forma balance sheetB) previous year income statement and previous year balance sheet C) previous year income statement and statement of retained earningsD) pro forma income statement and proxy statement A) pro forma income statement and pro forma balance sheet
A firm plans to depreciate a five year asset in the next planning period. The statements that will be directly affected are the ________.A) pro forma income statement, pro forma balance sheet, and cash budgetB) pro forma balance sheet, cash budget, and statement of retained earningsC) cash budget and pro forma balance sheetD) pro forma income statement and pro forma balance sheet D) pro forma income statement and pro forma balance sheet
In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.A) overstate costs and overstate profitsB) overstate costs and understate profitsC) understate costs and overstate profitsD) understate costs and understate profits B) overstate costs and understate profits
The percentage-of-sales method of preparing pro forma income statements assumes that ________.A) sales are fixedB) all costs inversely vary with salesC) all costs are independentD) all costs are variable D) all costs are variable
The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________.A) percentage of projected salesB) percentage of average sales over a periodC) percentage of projected total assetsD) percentage of average total assets over a period A) percentage of projected sales
The best way to adjust for the presence of fixed costs when using the simplified approach for pro forma income statement preparation is ________.A) to proportionately vary the fixed costs with the change in salesB) to adjust for projected fixed-asset outlaysC) to disproportionately vary the costs with the change in salesD) to break the firm’s historical costs into fixed and variable components D) to break the firm’s historical costs into fixed and variable components
The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ profits when sales are increasing.A) accurately predictB) overstateC) understateD) have no effect on C) understate
For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________.A) overestimate profits when sales are increasingB) underestimate profits when sales are increasingC) underestimate profits when assets are increasingD) overestimate profits when assets are increasing B) underestimate profits when sales are increasing
In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________.A) understate retained earnings and understate the additional financing neededB) overstate retained earnings and overstate the additional financing neededC) understate retained earnings and overstate the financing neededD) overstate retained earnings and understate the financing needed C) understate retained earnings and overstate the financing needed
Under the judgmental approach for developing a pro forma balance sheet, the “plug” figure required to bring the statement into balance may be called the ________.A) cash balanceB) retained earningsC) external financing requiredD) accounts receivable C) external financing required
The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure.A) percent-of-salesB) accrualC) judgmentalD) cash C) judgmental
A firm has prepared the coming year’s pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________.A) repurchase common stock totaling $230,000B) arrange for a loan of $230,000C) do nothing; the balance sheet balancesD) invest in marketable securities totaling $230,000 B) arrange for a loan of $230,000
A firm has prepared the coming year’s pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to ________.A) sell common stock totaling $250,000B) arrange for a loan of $250,000C) do nothing; the balance sheet balancesD) invest in marketable securities totaling $250,000 D) invest in marketable securities totaling $250,000
A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.A) that it forecasts income and then expresses the various income statement items as percentages of projected incomeB) the assumption that the firm faces linear total revenue and total operating cost functionsC) the assumption that the firm’s past financial condition is an accurate predictor of its futureD) the difficulty faced in calculation and preparation of such statements C) the assumption that the firm’s past financial condition is an accurate predictor of its future
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.A) understate profits when sales are decreasingB) understate profits when sales are increasingC) overstate profits when sales are increasingD) neither understate nor overstate profits B) understate profits when sales are increasing
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.A) understate profits when sales are decreasing and overstate profits when sales are increasingB) understate profits, no matter what the change in sales, as long as fixed costs are presentC) understate profits when sales are increasing and overstate profits when sales are decreasingD) overstate profits, no matter what the change in sales, as long as fixed costs are present C) understate profits when sales are increasing and overstate profits when sales are decreasing
The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.A) the assumption that the values of certain accounts can be forced to take on desired levelsB) the assumption that the firm faces linear total revenue and total operating cost functionsC) the assumption that the firm’s past financial condition is an accurate predictor of its futureD) ease of calculation and preparation A) the assumption that the values of certain accounts can be forced to take on desired levels
If transportation costs were a huge portion of a firm’s expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.A) use the percentage of transportation costs from last year’s salesB) decrease the percentage of transportation costs from the percentage of last year’s salesC) increase the percentage of transportation costs from the percentage of last year’s salesD) double the percentage of transportation costs from the percentage of last year’s sales C) increase the percentage of transportation costs from the percentage of last year’s sales
________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period.A) Discount interestB) Compound interestC) Primary interestD) Future value B) Compound interest
The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________.A) future valueB) present valueC) future value of an annuityD) compounded value B) present value
The future value of a dollar ________ as the interest rate increases and ________ the further in the future an initial deposit is to be received.A) decreases; decreasesB) decreases; increasesC) increases; increasesD) increases; decreases C) increases; increases
The annual rate of return is referred to as the ________.A) discount rateB) marginal rateC) risk-free rateD) marginal cost A) discount rate
Which of the following is true of annuities?A) An ordinary annuity is an equal payment paid or received at the beginning of each period.B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period.C) An annuity due is an equal stream of cash flows is paid or received at the beginning of each period.D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period. C) An annuity due is an equal stream of cash flows is paid or received at the beginning of each period.
An annuity with an infinite life is called a(n) ________.A) perpetuityB) primiaC) optionD) deep discount A) perpetuity
A(n) ________ is an annuity with an infinite life making continual annual payments.A) amortized loanB) principalC) perpetuityD) APR C) perpetuity
In comparing an ordinary annuity and an annuity due, which of the following is true?A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.C) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due. A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
If the present value of a perpetual income stream is increasing, the discount rate must be ________.A) increasingB) decreasingC) changing unpredictablyD) increasing proportionally B) decreasing
The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.A) effectiveB) nominalC) discountedD) continuous B) nominal
The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate.A) effectiveB) nominalC) discountedD) continuous A) effective
The time value concept/calculation used in amortizing a loan is ________.A) future value of a dollarB) future value of an annuityC) present value of a dollarD) present value of an annuity D) present value of an annuity
The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.A) indentureB) debentureC) loan documentD) promissory note A) indenture
A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________.A) common stockB) corporate bondC) indentureD) preferred stock B) corporate bond
A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture.A) trusteeB) investment bankerC) bond issuerD) bond rating agency A) trustee
A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity.A) redemption clauseB) sinking-fund requirementC) conversion featureD) subordination clause B) sinking-fund requirement
Bond indentures include restrictive covenants.These provisions protect the bondholders against ________.A) increase in inflation rateB) increase in borrower’s riskC) decrease in liquidity riskD) maturity risk B) increase in borrower’s risk
Which of the following is a restrictive covenant?A) to maintain satisfactory accounting recordsB) to pay the taxes dueC) to supply audited financial statementsD) to impose fixed asset restrictions D) to impose fixed asset restrictions
The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investment alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm C) ensure a cash shortage does not cause an inability to meet current obligations
The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investments alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm B) limit the amount of fixed-payment obligations
The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investment alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) prevent the firm from liquidation and ensure its ability to repay the debt D) prevent the firm from liquidation and ensure its ability to repay the debt
The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________.A) assure the lender that additional borrowing is constrainedB) limit the amount of fixed-payment obligationsC) limit the realization of current assets to cashD) limit the payment of annual cash dividends C) limit the realization of current assets to cash
The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________.A) maintain a minimum level of liquidityB) limit the amount of fixed-payment obligationsC) ensure a long-run cash shortage does not cause an inability to meet current obligationsD) protect the original lender in the priority of claims during liquidation D) protect the original lender in the priority of claims during liquidation
________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.A) Security interestB) SubordinationC) Sinking fund requirementD) Bond indenture B) Subordination
The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.A) assure the lender that additional borrowing is constrained or may be subordinated to the original loanB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) avoid default of payments to bondholders D) avoid default of payments to bondholders
An example of a standard debt provision is to ________.A) limit the corporation’s annual cash dividend paymentsB) pay taxes and other liabilities when dueC) restrict the corporation from disposing of fixed assetsD) maintain a minimum level of liquidity B) pay taxes and other liabilities when due
The cost of a long-term debt generally ________ that of a short-term debt.A) is less thanB) is equal toC) is greater thanD) is less than or equal to C) is greater than
Which of the following affects the cost of a bond?A) maturity of a bondB) dividend policyC) fixed assets purchased from the proceeds of bond issueD) money market regulations A) maturity of a bond
To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________.A) charges a higher interest rate on long-term loansB) reserves the right to change the terms of the loan at any timeC) includes excessively restrictive debt provisionsD) reserves the right to demand immediate payment at any time A) charges a higher interest rate on long-term loans
The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________.A) not relatedB) inversely relatedC) independentD) perfectly positively correlated B) inversely related
The ________ in the capital market is the basis for determining a bond’s coupon interest rate. A) cost of moneyB) weighted average cost of capitalC) bond’s face valueD) average coupon interest rate A) cost of money
Which of the following is an advantage for a firm to issue common stock over long-term debt?A) the cost of equity financing is less than the cost of debt financingB) the primary claim of equityholders on income and assets in the event of liquidationC) no maturity date on which the par value of the issue must be repaidD) the tax deductibility of dividends which lowers the cost of equity financing C) no maturity date on which the par value of the issue must be repaid
Which of the following is a difference between common stock and bonds?A) Bondholders have a voice in management; common stockholders do not.B) Bondholders have a senior claim on assets and income relative to stockholders.C) Stocks have a stated maturity but bonds do not.D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not. B) Bondholders have a senior claim on assets and income relative to stockholders.
Holders of equity capital ________.A) own the firmB) receive interest paymentsC) receive guaranteed incomeD) have loaned money to the firm A) own the firm
Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.A) fixed dividend paymentsB) greater returns from their investment in the firm’s stockC) all profits to be paid out in dividendsD) warrants to be attached to the stock issue B) greater returns from their investment in the firm’s stock
If bankruptcy were to occur, ________ would have the first claim on assets.A) preferred stockholdersB) unsecured creditorsC) equity stockholdersD) secured creditors D) secured creditors
Which of the following typically applies to common stock but not to preferred stock?A) par valueB) dividend yieldC) legally considered as equity in the firmD) voting rights D) voting rights
Which of the following is true of common stocks?A) The common stock of a corporation can be either privately or publicly owned.B) Firms often issue common stock with no par value.C) Preemptive rights often result in a dilution of ownership.D) A firm’s corporate charter indicates the rate at which dividends are paid. A) The common stock of a corporation can be either privately or publicly owned.
Which of the following is true of equity?A) equityholders do not have voting rights.B) It does not mature, so repayment is not required.C) It is a temporary form of financing for a firm.D) Equity financing is obtained from creditors. B) It does not mature, so repayment is not required.
Equity capital can be raised through ________.A) the money marketB) the NYSE bond marketC) the stock marketD) a private placement with an insurance company C) the stock market
Common stockholders are sometimes referred to as ________.A) non preemptive right holdersB) managersC) creditorsD) residual owners D) residual owners
Which of the following is true of common stock?A) It is often considered quasi-debt due to fixed payment obligation.B) It has less restrictive covenants than debt.C) It gives the holder voting rights which permit selection of the firm’s directors.D) Its holders have priority over preferred stockholders in the event of liquidation of assets. C) It gives the holder voting rights which permit selection of the firm’s directors.
A proxy statement is a statement transferring ________.A) the ownership of a bondholder to another partyB) the votes of a bondholder to the another partyC) the votes of a stockholder to another partyD) the ownership of a stockholder to another party C) the votes of a stockholder to another party
Which of the following is typically a feature of common stock?A) Most common stocks are callable.B) Most common stocks are cumulative.C) Common stocks have a maturity value.D) Common stocks may or may not pay dividends. D) Common stocks may or may not pay dividends.
ADRs are ________.A) securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. marketsB) securities, backed by Securities Exchange Commission (SEC), that permit all investors to hold shares of U.S. companies and trade them in U.S. marketsC) securities, backed by American depositary shares (ADSs), that permit non-U.S. investors to hold shares of U.S. companies and trade them in U.S. marketsD) securities, backed by Securities Exchange Commission (SEC), that permit U.S. investors to hold shares of non-U.S. companies and trade them in international markets A) securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.A) Preferred stockholdersB) Common stockholdersC) BondholdersD) Creditors A) Preferred stockholders
Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.A) cumulativeB) nonparticipatingC) participatingD) convertible A) cumulative
From a corporation’s point of view, a disadvantage of issuing preferred stock is ________.A) that it increases financial leverageB) that it has to give fixed payments as well as voting rights to the holdersC) its excellent merger securityD) that the dividends are not tax-deductible D) that the dividends are not tax-deductible
Which of the following is a disadvantage of issuing preferred stock from the common stockholders’ perspective?A) There is a seniority of preferred stockholder’s claim over common stockholders.B) The preferred stockholders have superior voting rights in the selection of board of directors.C) The preferred stockholders are always paid a higher proportion of dividend payments.D) Issuance of preferred stocks will result in a higher risk, to the disadvantage of common stockholders. A) There is a seniority of preferred stockholder’s claim over common stockholders
The cost of preferred stock is ________.A) lower than the cost of long-term debtB) higher than the cost of common stockC) higher than the cost of long-term debt and lower than the cost of common stockD) lower than the cost of convertible long-term debt and higher than the cost of common stock C) higher than the cost of long-term debt and lower than the cost of common stock
Preferred stock is characterized by ________.A) voting rightsB) maturity dateC) quasi-debt natureD) preemptive rights C) quasi-debt nature
A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________.A) force the company into bankruptcyB) suit against the shareholdersC) force the retirement of the preferred stock at or above its par valueD) force the company to repurchase the shares at a stated amount below par C) force the retirement of the preferred stock at or above its par value
Which of the following is true of preferred stocks?A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.B) Like bonds, preferred stocks are due for payment on a fixed maturity date along with interest.C) Restrictive covenants of preferred stocks include provisions about listing of stocks on the securities exchange and determining the price of stock.D) A firm’s bond indenture indicates how many authorized preferred shares and bonds it can issue. A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.
Preferred stockholders ________.A) do not have preference over common stockholders in the case of liquidationB) have preference over bondholders in the case of liquidationC) do not have preference over bondholders in the case of liquidationD) have preference over creditors in the case of liquidation C) do not have preference over bondholders in the case of liquidation
Which of the following is usually a right of a preferred stockholder?A) right to convert shares to common stock on demandB) preemptive right to participate in the issuance of new common sharesC) right to receive dividend payments before any dividends are paid to common stockholdersD) right to sue company in bankruptcy proceedings if promised preferred dividends are not paid C) right to receive dividend payments before any dividends are paid to common stockholders
Which of the following is typically a feature of preferred stocks?A) They are settled prior to common stocks during liquidation.B) They are mostly noncumulative in nature.C) They are paid dividends that grow at a constant rate.D) They carry voting rights and have maturity date. A) They are settled prior to common stocks during liquidation.
Regarding the tax treatment of payments to securities holders, it is true that ________.A) interest and preferred stock dividends are not tax-deductible, while common stock dividends are tax deductibleB) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductibleC) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductibleD) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible
Which of the following is a marketable security?A) mutual fundsB) treasury billC) provident fundD) forward contracts B) treasury bill
Which of the following is true of outstanding shares?A) A firm cannot sell more shares than the outstanding shares mentioned in the charter.B) Authorized shares become outstanding shares when they are issued or sold to investors.C) Outstanding shares are indicated in a firm’s corporate charter.D) Outstanding shares are the shares repurchased by the firm. B) Authorized shares become outstanding shares when they are issued or sold to investors.
Shares of stock currently owned by a firm’s shareholders are called ________.A) authorized sharesB) issued sharesC) outstanding sharesD) treasury shares C) outstanding shares
If a firm has class A and class B common stock outstanding, it means that ________.A) each class receives a different dividendB) the par value of each class is differentC) the dividend paid to one of the classes is tax deductible by the corporationD) one of the classes is probably nonvoting stock D) one of the classes is probably nonvoting stock
Common stockholders expect to earn a return by receiving ________.A) semiannual interestB) fixed periodic paymentsC) dividendsD) annual interest C) dividends
The purpose of nonvoting common stock is to ________.A) limit the voting power of the managementB) allow the minority interest to elect one directorC) raise capital without giving up any voting controlD) give preference on distribution of earnings to those shareholders who own the stock C) raise capital without giving up any voting control
A proxy statement gives shareholders the right ________.A) of one vote for each share ownedB) to give up their vote to another partyC) to maintain their proportionate ownership in the corporation when new common stock is issuedD) to sell their share of stock at a premium B) to give up their vote to another party
A proxy battle is the attempt by ________.A) the creditors of a bankrupt corporation to seize assets of the corporationB) the management to dismiss the board of directors for their incapability to manage the operationsC) a nonmanagement group to unseat the existing management and gain control of the firmD) the employees to form trade unions to influence decisions on behalf of members C) a nonmanagement group to unseat the existing management and gain control of the firm
The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.A) hostile takeoverB) bankruptcy proceedingC) proxy battleD) management buyout C) proxy battle
Which of the following is true of par value of a common stock?A) It is determined on the basis of the stock’s market value.B) It is an arbitrary value established for legal purposes in a firm’s corporate charter.C) It indicates the market value at which the stock was originally sold.D) It allows stockholders to purchase additional shares at a price below the market price. B) It is an arbitrary value established for legal purposes in a firm’s corporate charter.
________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.A) Rights offeringB) Treasury stocksC) Preemptive rightsD) Proxy statements A) Rights offering
Which of the following is true of a common stock?A) It gives voting rights which permit determination of the amount of dividend receivable.B) It gives claims on income and assets which are superior to the claims of creditors of the firm.C) Dividends on commonstock are fully tax-deductible.D) There is no fixed dividend payment obligation for the company. D) There is no fixed dividend payment obligation for the company.
Stock rights provide the stockholder with ________.A) the right to purchase additional shares in direct proportion to their number of owned sharesB) the right to elect the board of directorsC) cumulative voting privileges over the preference stockholdersD) the opportunity to receive extraordinary earnings A) the right to purchase additional shares in direct proportion to their number of owned shares
The preemptive right gives shareholders the right ________.A) to caste one vote for each share owned at the annual meeting of the companyB) to give up their vote to another party if they do not attend the annual meetingC) to maintain their proportionate ownership in the corporation when new common stock is issuedD) to sell their share of stock at a premium in the event of liquidation C) to maintain their proportionate ownership in the corporation when new common stock is issued
A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue.A) securities analystB) trust officerC) commercial loan officerD) investment banker D) investment banker
Which of the following is true of securities analysts?A) They raise initial external equity finance privately for firms.B) They are primarily involved in underwriting of securities.C) They find prospective buyers for new stocks or bonds issue.D) They use a variety of models and techniques to value stocks. D) They use a variety of models and techniques to value stocks.
In a ________, new shares are sold to the existing shareholders.A) private placementB) public offeringC) rights offeringD) direct placement C) rights offering
Treasury stock refers to the ________.A) sale of stock at a price greater than the par valueB) stock issued by the US governmentC) repurchase of outstanding stockD) authorization of additional shares of stock by the board of directors C) repurchase of outstanding stock
Which of the following is an attribute of investment bankers?A) They make long-term investments for banking institutions.B) They bear the risk of selling a security issue.C) They act as middlemen between the issuer and the banker.D) They provide the issuer with advice relating to the amounts of dividend to be paid. B) They bear the risk of selling a security issue.
Which of the following is true of the issuance of nonvoting common stock?A) It is issued in the event of a hostile takeover to preserve the interests of existing owners.B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.C) It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding.D) It tends to result in the dilution of voting rights of current stockholders. B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.
A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________.A) underwriting syndicateB) selling groupC) investment banking consortiumD) broker pool A) underwriting syndicate
Rational buyers and sellers use their assessment of an asset’s risk and return to determine its value. Relative to this concept, which of the following is true?A) To a buyer the asset’s value represents the minimum price that he or she would pay to acquire it.B) To a seller the asset’s value represents the maximum sale price.C) To a buyer the asset’s value represents the maximum price that he or she would pay to acquire it.D) To a seller the asset’s value represents the price at which he acquired the asset. C) To a buyer the asset’s value represents the maximum price that he or she would pay to acquire it.
According to the efficient market hypothesis, prices of actively traded stocks ________.A) can be under- or over-valued in an efficient marketB) can only be under-valued in an efficient marketC) do not differ from their true values in an efficient marketD) can only be over-valued in an efficient market C) do not differ from their true values in an efficient market
If expected return is less than required return on an asset, rational investors will ________.A) buy the asset, which will drive the price up and cause expected return to reach the level of the required returnB) sell the asset, which will drive the price down and cause the expected return to reach the level of the required returnC) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnD) buy the asset, since price is expected to increase B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
If the expected return is above the required return on an asset, rational investors will ________.A) buy the asset, which will drive the price up and cause expected return to reach the level of the required returnB) buy the asset, which will drive the price down and cause the expected return to reach the level of the required returnC) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnD) sell the asset, since price is expected to decrease A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
Which of the following is true of efficient-market hypothesis?A) Securities are typically in disequilibrium, meaning they are fairly priced and their expected returns are more than their required returns.B) Insider trading scandals have proven that stocks are not fully and fairly priced; as a result, it would be worthwhile for investors should spend time searching for mispriced (over- or under-valued) stocks.C) At any point in time, security prices fully reflect all internal information available about the firm and its securities, and these prices are insensitive to new information.D) Since stocks are fully and fairly priced, it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued) securities. D) Since stocks are fully and fairly priced, it follows that investors should not waste their time trying to find and capitalize on miss-priced (undervalued or overvalued) securities.
Preferred stock is valued as if it were a ________.A) fixed-income obligationB) bondC) perpetuityD) common stock C) perpetuity
The ________ is utilized to value preferred stock.A) capital asset pricing modelB) arbitrage pricing modelC) zero-growth modelD) Black-Scholes model C) zero-growth model
In the Gordon model, the value of a common stock is the ________.A) net value of all assets which are liquidated for their exact accounting valueB) actual amount each common stockholder would expect to receive if the firm’s assets are soldC) present value of a non-growing dividend streamD) present value of a constant growing dividend stream D) present value of a constant growing dividend stream
________ is the value of a firm’s ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.A) Liquidation valueB) Book valueC) The P/E multipleD) The present value of the common stock B) Book value
________ is the actual amount each common stockholder would expect to receive if a firm’s assets are sold for their market value, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.A) Liquidation valueB) Book valueC) The P/E multipleD) The present value of the dividends A) Liquidation value
________ is a guide to a firm’s value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry.A) Liquidation valueB) Book valueC) The P/E multipleD) The present value of the dividends C) The P/E multiple
Which of the following valuation methods is superior to others in the list since it considers expected earnings?A) liquidation valueB) book valueC) P/E multipleD) present value of the interest C) P/E multiple
The use of the ________ is especially helpful in valuing firms that are not publicly traded.A) liquidation valueB) book valueC) P/E multipleD) present value of the dividends C) P/E multiple

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