Answer Options:
a. True
b. False
Answer:
a. True
Question: Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock’s total market value, is then calculated, and that average return is often used as an indicator of the “return on the market.”
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.
c. Capital market instruments include both long-term debt and common stocks.
d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer:
c. Capital market instruments include both long-term debt and common stocks.
Question: Which of the following statements is CORRECT? a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. b. The balance sheet for a given year tells us how much money the company earned that year. c. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders’ equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). d. If a company’s statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. e. The assets section of a typical company’s balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
Answer:
e. The assets section of a typical company’s balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
Question: The cost of common equity obtained by retaining earnings is the rate of return the marginal stockholder requires on the firm’s common stock. a. True b. False
Answer:
a. True
Question: Analysts who follow Howe Industries recently noted that, relative to the previous year, the company’s net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? a. The company cut its dividend. b. The company made large investments in fixed assets. c. The company sold a division and received cash in return. d. The company issued new common stock. e. The company issued new long-term debt.
Answer Options:
a. The company cut its dividend.
b. The company made large investments in fixed assets.
c. The company sold a division and received cash in return.
d. The company issued new common stock.
e. The company issued new long-term debt.
Answer:
b
Question: If a firm adheres strictly to the residual dividend model, the issuance of new common stock would suggest that
Answer Options:
a. the dividend payout ratio has remained constant.
b. the dividend payout ratio is increasing.
c. no dividends will be paid during the year.
d. the dividend payout ratio is decreasing.
e. the dollar amount of capital investments had decreased.
Answer:
c. no dividends will be paid during the year.
Question: Which of the following statements is CORRECT? A) The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits. B) All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. C) Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income. D) Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends. E) All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Answer:
C
Question: Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The ROA will decline. b. Taxable income will decline. c. The tax bill will increase. d. Net income will decrease. e. The times-interest-earned ratio will decrease.
Answer:
b. Taxable income will decline.
Question: Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet? a. The company repurchases common stock. b. The company pays a dividend.
Answer:
b. The company pays a dividend.
Question: Which of the following is a primary market transaction?
Answer Options:
a. You sell 200 shares of IBM stock on the NYSE through your broker.
b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock.
c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.
e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.
Answer:
c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders. a. True b. False
Answer:
a
Question: Which of the following statements is CORRECT? a. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.” b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.” c. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of “window dressing.” d. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.” e. “Window dressing” is any action that does not improve a firm’s fundamental long-run position and thus increases its intrinsic value.
Answer:
b. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”
Question: Which of the following factors could explain why Michigan Energy’s cash balance increased even though it had a negative cash flow last year? a. The company sold a new issue of bonds. b. The company made a large investment in new plant and equipment. c. The company paid a large dividend. d. The company had high depreciation expenses. e. The company repurchased 20% of its common stock.
Answer Options:
a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high depreciation expenses.
e. The company repurchased 20% of its common stock.
Answer:
a
Question: The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s outstanding common stock. a. True b. False
Answer:
b. False
Question: The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and the tax rate all remain constant. Which of the following would occur? A) The company’s taxable income would fall. B) The company’s interest expense would remain constant. C) The company would have less common equity than before. D) The company’s net income would increase. E) The company would have to pay less taxes.
Answer:
D
Question: Money markets are markets for
Answer Options:
a. Foreign currencies.
b. Consumer automobile loans.
c. Common stocks.
d. Long-term bonds.
e. Short-term debt securities such as Treasury bills and commercial paper.
Answer:
e. Short-term debt securities such as Treasury bills and commercial paper.
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders. a. True b. False
Answer:
a. True
Question: Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? A) The company had a sharp increase in its inventories. B) The company had a sharp increase in its accrued liabilities. C) The company sold a new issue of common stock. D) The company made a large capital investment early in the year. E) The company had a sharp increase in depreciation expenses.
Answer:
C