Answer:
Question: The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories. a. True b. False Answer Options for Question 558 a. True b. False
Answer: True
Question: The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
Answer Options:
a. True
b. False
Answer: a. True
Question: In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t – 1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is CORRECT?
Answer Options:
a. The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
b. The yield on 5-year Treasury securities must exceed the yield on 2-year Treasury securities.
c. The yield on 5-year Treasury securities must be less than the sum of the real risk-free rate plus the maturity risk premium.
d. The inflation premium for 5-year securities must be less than the inflation premium for 2-year securities.
e. The maturity risk premium on a 5-year bond should be five times the maturity risk premium on a 1-year bond.
Answer: b
Question: A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm’s stock price. a. True b. False
Answer: True
Question: If management wants to maximize its stock price, and if it believes that the dividend irrelevance theory is correct, then it must adhere to the residual dividend policy.
Answer Options:
a. True
b. False
Answer: b. False
Question: Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. a. True b. False Correct Answer: a
Answer:
Question: Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a. The periodic rate of interest is 2% and the effective rate of interest is 4%. b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. e. The periodic rate of interest is 8% and the effective rate of interest is also 8%. Correct Answer: d
Answer:
Question: The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Options:
a. True
b. False
Answer: b. False
Question: Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT?
Answer Options:
a. The yield curve for U.S. Treasury securities will be upward sloping.
b. A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
c. A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
d. The real risk-free rate cannot be constant if inflation is not expected to remain constant.
e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
Answer: e
Question: The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called “interest rate risk,” or “price risk.”
Answer Options:
a. True
b. False
Answer: a
Question: As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan). a. True b. False Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
Answer Options:
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c. A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.
d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
Answer: d
Question: One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.
Answer Options:
a. True
b. False
Answer: b. False
Question: Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly. a. True b. False Correct Answer: a
Answer:
Question: Which of the following statements is CORRECT? a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. c. The cash flows for an annuity due must all occur at the beginning of the periods. d. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month. e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. Correct Answer: c
Answer:
Question: If the information content, or signaling, hypothesis is correct, then a change in a firm’s dividend policy can have an important effect on its stock price and cost of equity.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following factors would be most likely to lead to an increase in nominal interest rates?
Answer Options:
a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment opportunities.
c. There is a decrease in expected inflation.
Answer: b
Question: If the demand curve for funds increased but the supply curve remained constant, we would expect to see the total amount of funds supplied and demanded increase and interest rates in general also increase.
Answer Options:
a. True
b. False
Answer: a
Question: Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
Answer Options:
a. True
b. False
Answer: b. False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.
Answer Options:
a. True
b. False
Answer: b
Question: The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.
Answer Options:
a. True
b. False
Answer: a. True
Question: Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. a. True b. False Correct Answer: b
Answer:
Question: If a firm uses the residual dividend model to set dividend policy, then dividends are determined as a residual after providing for the equity required to fund the capital budget. Under this model, the better the firm’s investment opportunities, the lower its payout ratio will be, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT? a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. c. The cash flows for an annuity due must all occur at the ends of the periods. d. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. Correct Answer: d
Answer: