Answer Options:
a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
Answer:
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
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. a. True b. False
Answer:
a. True
Question: Leasing is typically a financing and not a capital budgeting decision. The decision to acquire the asset is a “done deal” before the lease analysis begins. Therefore, in a lease analysis, we are concerned simply with whether to finance the asset with a lease or with a loan. a. True b. False
Answer:
b. False
Question: The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income. a. True b. False
Answer:
b. False
Question: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods. a. True b. False
Answer:
a. True
Question: Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The return on invested capital measures the total return that a company has provided for its investors. a. True b. False
Answer:
a. True
Question: FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the a. residual value as a fixed asset. b. residual value as a liability. c. present value of future lease payments as an asset and also showing this same amount as an offsetting liability. d. undiscounted sum of future lease payments as an asset and as an offsetting liability. e. undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.
Answer:
c. present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
Question: The owner of a convertible bond owns, in effect, both a bond and a call option.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm. a. True b. False
Answer:
a. True
Question: The higher the firm’s flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and retained earnings, whose cost is the average return on the assets that are acquired. a. True b. False
Answer:
b. False
Question: Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A’s total debt to total capital ratio (measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)) is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin.
Answer Options:
a. True
b. False
Answer:
b. 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. a. True b. False
Answer:
b. False
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: The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income. a. True b. False
Answer:
b. False