Answer: e
Question: Accruals arise automatically from a firm’s operations and are “free” capital in the sense that no explicit interest must normally be paid on accrued liabilities.
Answer Options:
a. True
b. False
Answer: True
Question: If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
Answer Options:
a. True
b. False
Answer: True
Question: When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following is NOT a key element in strategic planning as it is described in the text?
Answer Options:
a. The mission statement.
b. The statement of the corporation’s scope.
c. The statement of cash flows.
d. The statement of corporate objectives.
e. The operating plan.
Answer: c. The statement of cash flows.
Question: For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.
Answer Options:
a. True
b. False
Answer: True
Question: The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm’s stock, other things held constant.
Answer Options:
a. True
b. False
Answer: False
Question: The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT? a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm’s goals. b. A firm’s corporate purpose states the general philosophy of the business and provides managers with specific operational objectives. c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon. d. A firm’s mission statement defines its lines of business and geographic area of operations. e. The corporate scope is a condensed version of the entire set of strategic plans.
Answer: c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
Question: Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should a. consist mainly of long-term securities because they pay higher rates. b. consist mainly of short-term securities because they pay higher rates. c. consist mainly of U.S. Treasury securities to minimize interest rate risk. d. consist mainly of short-term securities to minimize interest rate risk. e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Answer: d
Question: Which of the following statements is CORRECT? a. Trade credit is provided only to relatively large, strong firms. b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. e. Commercial paper is typically offered at a long-term maturity of at least five years.
Answer: b
Question: Which of the following statements is CORRECT? a. An option’s value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can’t sell for more than its exercise value. b. As a stock’s price increases, the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases. c. If the company is consistently profitable, its call options will always be in the money. d. The market value of an option depends in part on the option’s length of time until expiration and on the variability of the underlying stock’s price. e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.
Answer: d. The market value of an option depends in part on the option’s length of time until expiration and on the variability of the underlying stock’s price.
Question: A 6-month call option on Romer Technologies’ stock has a strike price of $45 and sells in the market for $8.25. Romer’s current stock price is $48. What is the exercise value of the option? a. $3.00 b. $3.75 c. $4.69 d. $5.86 e. $7.32
Answer: a. $3.00
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.
Answer Options:
a. True
b. False
Answer: False