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 to deal with situations where some of the cash flows occur annually but others occur quarterly. d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. Correct Answer: e

Answer:

Question: Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value. a. True b. False Correct Answer: b

Answer:

Question: If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. a. True b. False Correct Answer: a

Answer:

Question: In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.

Answer Options:
a. True
b. False

Answer: b. False

Question: The operating margin measures operating income per dollar of assets.

Answer Options:
a. True
b. False

Answer: b. False

Question: If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

Answer Options:
a. The yield on a 10-year bond would be less than that on a 1-year bill.
b. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yields on the two securities would be equal.
e. It is impossible to tell without knowing the relative risks of the two securities.

Answer: a

Question: Which of the following statements is CORRECT?

Answer Options:
a. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
b. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
c. The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond.
d. If inflation is expected to increase, then the yield on a 2-year bond should exceed that on a 3-year bond.

Answer: a

Question: Other things held constant, the more debt a firm uses, the lower its profit margin will be.

Answer Options:
a. True
b. False

Answer: a. True

Question: Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to repurchase some of its own stock, thus increasing leverage. Assuming that the firm’s operating results (PM, TATO) do not change, the firm’s ROE will increase.

Answer Options:
a. True
b. False

Answer: a. True

Question: There are two types of dividend reinvestment plans. Under one type of plan, the firm uses the cash that would have been paid as dividends to buy stock on the open market. Under the other type, the company issues new stock, keeps the cash that would have been paid out, and in effect sells new stock to those investors who choose to reinvest their dividends.

Answer Options:
a. True
b. False

Answer: a. True