Answer Choices:
a. True
b. False
Answer: a. True
Question: During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Other things held constant, the higher a firm’s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?
Answer Choices:
a. The TIE declines.
b. The DSO increases.
c. The quick ratio increases.
d. The current ratio declines.
e. The total assets turnover decreases.
Answer: c. The quick ratio increases.
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by:
Answer Choices:
a. Tax effects.
b. Default and liquidity risk differences.
c. Maturity risk differences.
d. Inflation differences.
e. Real risk-free rate differences.
Answer: b. Default and liquidity risk differences.
Question: Which of the following statements is CORRECT?
Answer Choices:
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 can 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 cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Answer Options for Question 37:
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 can 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 cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Answer: for Question 37: c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
Question: The “yield curve” shows the relationship between bonds’ maturities and their yields.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Answer Choices:
a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
b. Issue new common stock and use the proceeds to increase inventories.
c. Speed up the collection of receivables and use the cash generated to increase inventories.
d. Use some of its cash to purchase additional inventories.
e. Issue new common stock and use the proceeds to acquire additional fixed assets.
Answer: a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.
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 Choices:
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 10-year corporate bonds.
c. The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
d. The yield curve must be “humped.”
e. The yield curve must be upward sloping.
Answer: e. The yield curve must be upward sloping.
Question: Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total invested capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
Answer Choices:
a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times-interest-earned (TIE) ratio.
Answer Options for Question 74:
a. Company HD has a lower equity multiplier.
b. Company HD has more net income.
c. Company HD pays more in taxes.
d. Company HD has a lower ROE.
e. Company HD has a lower times-interest-earned (TIE) ratio.
Answer: for Question 74: e. Company HD has a lower times-interest-earned (TIE) ratio.
Question: If the Treasury yield curve were downward sloping, the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?
Answer Choices:
a. If the pure expectations theory holds, the Treasury yield curve must be downward sloping.
b. If the pure expectations theory holds, the corporate yield curve must be downward sloping.
c. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.
d. If inflation is expected to decline, there can be no maturity risk premium.
e. The expectations theory cannot hold if inflation is decreasing.
Answer: a. If the pure expectations theory holds, the Treasury yield curve must be downward sloping.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If a security analyst saw that a firm’s days sales outstanding (DSO) was higher than the industry average, and was increasing and trending still higher, this would be interpreted as a sign of strength.
b. A high average DSO indicates that none of its customers are paying on time. In addition, it makes no sense to evaluate the firm’s DSO with the firm’s credit terms.
c. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
d. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Answer: e. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.
Question: One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.
Answer Choices:
a. True
b. False
Answer: a. True
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 Choices:
a. True
b. False
Answer: b. False
Question: Which of the following would indicate an improvement in a company’s financial position, holding other things constant?
Answer Choices:
a. The inventory and total assets turnover ratios both decline.
b. The total debt to total capital ratio increases.
c. The profit margin declines.
d. The times-interest-earned ratio declines.
e. The current and quick ratios both increase.
Answer: e. The current and quick ratios both increase.
Question: It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if the firms being compared have the same proportion of fixed assets to total assets.
Answer Choices:
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 time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Answer Choices:
a. True
b. False
Answer: a. True