Question: Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

Answer Options:
a. True
b. False

Answer: b. False

Question: If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate. a. True b. False Correct Answer: b

Answer:

Question: Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results.

Answer Options:
a. True
b. False

Answer: a. True

Question: The “yield curve” shows the relationship between bonds’ maturities and their yields.

Answer Options:
a. True
b. False

Answer: a

Question: Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods. a. True b. False Correct Answer: b

Answer:

Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.

Answer Options:
a. True
b. False

Answer: b

Question: a. True b. False

Answer: True

Question: Market value ratios provide management with an indication of how investors view the firm’s past performance and especially its future prospects.

Answer Options:
a. True
b. False

Answer: a. True

Question: If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.

Answer Options:
a. True
b. False

Answer: a

Question: It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.

Answer Options:
a. True
b. False

Answer: b. False

Question: The profit margin measures net income per dollar of sales.

Answer Options:
a. True
b. False

Answer: a. True

Question: A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of the following statements is CORRECT? a. The annual payments would be larger if the interest rate were lower. b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan. c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. d. The last payment would have a higher proportion of interest than the first payment. e. The proportion of interest versus principal repayment would be the same for each of the 7 payments. Correct Answer: c

Answer:

Question: a. True b. False

Answer: False

Question: The more conservative a firm’s management is, the higher its total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is likely to be.

Answer Options:
a. True
b. False

Answer: b. False

Question: Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are not useful for visualizing complex problems prior to doing actual calculations. c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. Correct Answer: d

Answer: