Multiple Choice Answers

Dimensions of risk include ___________. A. the certainty of a negative outcome B. uncertainty about the future outcome C. uncertainty about yesterday’s outcome D. the impossibility of the same return

One problem with using negative values for w1 (the proportion invested in the riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the same as __________. A. the current rate of interest B. the prime rate of interest C. the nominal rate of interest D. the lending rate of interest

The Principle of __________ implies that the expected return for an asset equals its required return. A. Risk-Return Trade-Off B. Capital Market Efficiency C. Signaling D. Comparative Advantage

__________ says to calculate the incremental after-tax cash flows connected with working capital decisions. A. The Principle of Incremental Benefits B. The Signaling Principle C. The Options Principle D. The Principle of Time Value of Money

Stony Products has a payables turnover of six times. What is Stony’s payables deferral period (PDP)? A. about 30.42 days B. about 56.50 days C. about 60.83 days D. none of these

Firms make short-term financial decisions just about every day solving such questions as __________. A. Where should we borrow? B. Where should we invest our cash? C. How much liquidity should we have? D. all of these

__________ says to calculate the incremental after-tax cash flows connected with working capital decisions. A. The Options Principle B. The Signaling Principle C. The Principle of Incremental Benefits D. The Principle of Time Value of Money

 

Which of the following statements is (are) true? A. The “dating 120” or the “60 extra” mean that the clock does not start until 120 or 60 days after the invoice date. B. Prox or proximate refers to the next month. C. Invoices with “10th prox” must be paid by the 10th of the next month. D. all of these

Which (if any) of the following statements is false? A. The invoice is a written statement about goods that were ordered, along with their prices and the payment dates. In other words, the invoice is simply the bill for purchases. B. For the 4/10, net 40 credit terms, you are offering a total credit period of 30 days from the date of the invoice, a discount period of 10 days, and a 4% discount if paid on or before the discount period expires. C. When a firm is using invoice billing, the invoice that accompanies shipment is a separate bill to be paid. D. none of these

Most credit sales are made on an open account basis, which means __________. A. that suppliers cannot dictate the terms of the purchase. B. that customers simply purchase what they want. C. that suppliers dictate the terms of the purchase. D. that customers cannot simply purchase what they want.

An all-equity-financed firm would __________. A. pay corporate income taxes if its taxable income is positive. B. not pay any income taxes because interest would exactly offset its taxable income. C. pay corporate income taxes because it would have interest expense. D. not pay corporate income taxes because it would have no interest expense.

A profitable firm would __________. A. pay corporate income taxes because it would have interest expense. B. pay corporate income taxes because it would not have interest expense. C. pay corporate income taxes if it had a positive taxable income. D. none of these

An investor’s risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true? A. Each stock in the portfolio will have a beta greater than one. B. Each stock in the portfolio has its own beta. C. Selling any stock in this portfolio will lower the beta of the portfolio. D. An investor cannot change the risk of this portfolio by her choice about personal leverage (lending or borrowing).

Boeing Corporation is a world leader in commercial aircraft. In the face of competition, Boeing often faces a critical __________ decision: whether to develop a new generation of passenger aircraft. A. dividend B. present value C. payback D. capital budgeting

The capital budgeting process can be broken down into five steps. These steps include which of the following? A. Generate ideas for capital budgeting projects B. Prepare proposals C. Review existing projects and facilities D. all of these

Which of the following statements is true?
A. A security is a claim issued by a firm that pays owners interest, not dividends.
B. A call option analyzes conflicts of interest and behavior in a principal-agent relationship.
C. An agent-manager can never make bad decisions.
D. The difference between the value of one action and the value of the best alternative is called an opportunity cost.

 

Book value, or net book value, refers to
A. the statement of a firm’s financial position at one point in time, including its assets and the claims on those assets by creditors and owners
B. the price for which something could be bought or sold in a reasonable length of time, where reasonable length of time is defined in terms of the item’s liquidity
C. an agent-manager never making bad decisions
D. the net of assets less liabilities shown in the accounting statements

Assume that the par value of a bond is $1,000. Consider a bond where the coupon rate is 9% and the current yield is 10%. Which of the following statements is true?
A. The current yield was less than 9% when the bond was first issued.
B. The current yield was greater than 9% when the bond was first issued.
C. The market value of the bond is more than $1,000.
D. The market value of the bond is less than $1,000.
If the yield to maturity for a bond is less than the bond’s coupon rate, the market value of the bond is __________.
A. greater than the par value
B. less than the par value
C. equal to the par value
D. cannot tell
For investors, the proper measure of a stock’s risk is its __________.
A. nondiversifiable risk
B. specific risk
C. nonsystematic risk
D. standard deviation
Which of these investments would you expect to have the highest rate of return for the next 20 years?
A. U.S. Treasury bills
B. Long-term corporate bonds
C. Intermediate-term U.S. government bonds
D. Money market funds
Dimensions of risk include __________.
A. uncertainty about the future outcome
B. the certainty of a negative outcome
C. the impossibility of the same return
D. uncertainty about yesterday’s outcome
One problem with using negative values for the proportion invested in the riskless asset to represent a borrowed amount is that the implied borrowing rate of interest is the same as the __________.
A. prime rate of interest
B. current rate of interest
C. lending rate of interest
D. nominal rate of interest
If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in
A. high beta stocks
B. low beta stocks
C. stocks with large amounts of unique risk
D. stocks that plot below the security market line
Stony Products has an inventory conversion period (ICP) of about 70 days. The receivables collection period (RCP) is 30 days. The payables deferral period (PDP) is about 40 days. What is Stony’s cash conversion cycle (CCC)?
A. 100 days
B. 60 days
C. 140 days
D. 70 days
The main source of short-term operating capital is _________.
A. trade credit
B. bank loans
C. bonds
D. sale of treasury stock
An investor’s risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true?
A. Each stock in the portfolio has its own beta.
B. Selling any stock in this portfolio will lower the beta of the portfolio.
C. An investor cannot change the risk of this portfolio by her choice about personal leverage.
D. Each stock in the portfolio will have a beta greater than 1.
An all-equity-financed firm would __________.
A. not pay any income taxes, because interest would exactly offset its taxable income.
B. pay corporate income taxes, because it would have interest expense.
C. not pay corporate income taxes, because it would have no interest expense.
D. pay corporate income taxes if its taxable income is positive.
If a firm wants to lower its weighted average cost of capital (WACC), one way to do so would be to
A. sell more common shares
B. sell more bonds
C. pay a cash dividend
D. issue a stock dividend
Boeing is a world leader in commercial aircraft. In the face of competition, Boeing® often faces a critical __________ decision: whether to develop a new generation of passenger aircraft.
A. present value
B. payback
C. capital budgeting
D. dividend
Ideas for capital budgeting projects come from all levels within an organization. The bottom-up process results in ideas moving __________ through organization.
A. downward
B. upward
C. sideways
D. any way

Due to asymmetric information, the market fears that a firm issuing securities will do so when the stock is _________.
A. being sold by insiders
B. undervalued
C. caught up in a bear market
D. overvalued

Which of the following statements is true?
A. The Principle of Incremental Benefits says to consider the possible ways to minimize the value lost to capital market imperfections, such as asymmetric taxes, asymmetric information, and transaction costs.
B. The Principle of Valuable Ideas suggests to look for opportunities to create value by issuing securities that are in short supply, perhaps resulting from changes in tax law.
C. The Time Value of Money Principle advises to include any time-value-of-money tax benefits from capital structure choices.
D. all of these