summa 2

• Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

  A Real estate investment

  B. good reputation of the company

  C. equipment owned by the firm

  D. money due from a customer

  E. an item held by the firm for future sale

  B
• Which one of the following will increase the value of a firm's net working capital?

  A using cash to pay a supplier

  B. depreciating an asset

  C. collecting an accounts receivable

  D. purchasing inventory on credit

  E. selling inventory at a profit

  E
• Which one of the following must be true if a firm had a negative cash flow from assets?

  A The firm borrowed money

  B. The firm acquired new fixed assets

  C. The firm had a net loss for the period

  D. The firm utilized outside funding

  E. Newly issued shares of stock were sold

  D
• You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?

  A improvements to the surrounding area by other store owners

  B. construction of a new restricted access highway located between the store and the surrounding residential areas

  C. addition of a stop light at the main entrance to the store's parking lot

  B
• The higher the degree of financial leverage employed by a firm, the:

  A higher the probability that the firm will encounter financial distress

  B. lower the amount of debt incurred

  C. less debt a firm has per dollar of total assets

  D. higher the number of outstanding shares of stock

  E. lower the balance in accounts payable

  A
• Which one of the following statements related to liquidity is correct?

  A Liquid assets tend to earn a high rate of return

  B. Liquid assets are valuable to a firm

  C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained

  D. Inventory is more liquid than accounts receivable because inventory is tangible

  E. Any asset that can be sold within the next year is considered liquid

  B
• Which one of the following is a use of cash?

  A increase in notes payable

  B. decrease in inventory

  C. increase in long-term debt

  D. decrease in accounts receivables

  E. decrease in common stock

  E
• A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit?

  A cash

  B. current

  C. debt-equity

  D. quick

  E. total debt

  A
• Evaluate the following statements:

  S1. For the risk-averse manager, the required return decreases for an increase in risk.

  S2. Most managers are risk‑averse, since for a given increase in risk they require an increase in return.

  A FALSE, FALSE

  B. FALSE, TRUE

  C. TRUE, FALSE

  D. TRUE, TRUE

  B
• TRUE OR FALSE

  The financial manager’s goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

  False
• TRUE OR FALSE

  In no case will creating portfolios of assets result in greater risk than that of the riskiest asset included in the portfolio.

  True
• TRUE OR FALSE

  Foreign exchange risk is the risk that arises from the danger that a host government might take actions that are harmful to foreign investors or from the possibility that political turmoil in a country might endanger investment made in that country by foreign nationals.

  False - Country Risk
• TRUE OR FALSE

  The inclusion of assets from countries that are less sensitive to the U.S. business cycle reduces the portfolio’s responsiveness to market movement and to foreign currency fluctuation.

  True
• TRUE OR FALSE

  Greater risk aversion results in lower required returns for each level of risk, whereas a reduction in risk aversion would cause the required return for each level of risk to increase.

  False
• -- is the tendency to avoid risk.

  Risk aversion
• greater risk aversion, -- required returns for each level of risk

  higher
• TRUE OR FALSE

  Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm’s revenue stability and the structure of its operating costs (fixed vs. variable).

  False
• TRUE OR FALSE

  Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments rise in value when the interest rates rise and decline in value when interest rates fall.

  False
• TRUE OR FALSE

  Liquidity risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

  False
• TRUE OR FALSE

  Interest rate risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

  False
• TRUE OR FALSE

  Inflation risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

  False
• Prime-grade commercial paper will most likely have a higher annual return than:

  A a Treasury bill

  B. a preferred stock

  C. a common stock

  D. an investment‑grade bond

  A
• A collection of assets is called a(n):

  portfolio
• The goal of an efficient portfolio is to:

  A maximize risk for a given level of return.

  B. maximize risk in order to maximize profit.

  C. minimize profit in order to minimize risk.

  D. minimize risk for a given level of return.

  D
• An increase in the Treasury Bill rate _________ the required rate of return of a common stock.

  A has no effect on

  B. increases

  C. decreases

  D. cannot be determined by

  B
• Examples of events that increase risk aversion include:

  1. a stock market crash
  2. assassination of a key political leader
  3. the outbreak of war

  A all 3

  B. only 2 and 3

  C. only 1 and 2

  D. only 1 and 3

  E. 2 only

  F. 1 only

  A
• Evaluate the following statements:

  S1. Financial services are concerned with the duties of the financial manager.

  S2. Finance is concerned with the process institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses and government.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  A
• Evaluate the following statements:

  S1. The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.

  S2. The corporate controller typically handles the accounting activities, such as tax management, data processing, and cost and financial accounting.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  D
• Evaluate the following statements:

  S1. The financial manager prepares financial statements that recognize revenue at the point of sale and expenses when incurred.

  S2. High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  A
• Evaluate the following statements:

  S1. Financing decisions deal with the left-hand side of the firm’s balance sheet and involve the most appropriate mix of current and fixed assets.

  S2. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm’s stock, financial managers should accept only those actions that are expected to increase the firm’s profitability.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  C
• Evaluate the following statements carefully:

  S1. To achieve the goal of profit maximization, for each alternative being considered, the financial manager would select the one that is expected to result in the highest monetary return.

  S2. The wealth of corporate owners is measured by the share price of the stock.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  D
• Evaluate the following statements carefully:

  S1. Return and risk are the key determinants of share price, which represents the wealth of the owners in the firm.

  S2. The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk.

  A only S1 is FALSE

  B. only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  D
• Higher risk tends to result in a higher share price since the stockholder must be compensated for the greater risk.

  False
• Where risk is involved, stockholders expect to earn higher rates of return on investments of lower risk and vice versa.

  False
• Evaluate the following statements carefully:

  S1. Credit unions are the largest type of financial intermediary that handle individual savings.

  S2. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares and uses the proceeds to acquire bonds and stocks issued by various business and governmental units.

  A Only S1 is FALSE

  B. Only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  C
• Evaluate the following statements carefully:

  S1. Primary and secondary markets are markets for short-term and long-term securities, respectively.

  S2. Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments.

  A Only S1 is FALSE

  B. Only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  C
• Evaluate the following statements carefully:

  S1. Money markets involve the trading of securities with maturities of one year or less while capital markets involve the buying and selling of securities with maturities of more than one year.

  S2. A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

  A Only S1 is FALSE

  B. Only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  D
• Evaluate the following statements carefully:

  S1. A public offering is the sale of a new security issue—typically debt or preferred stock—directly to an investor or group of investors.

  S2. Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in a currency other than the local currency of the country where the bank is located.

  A Only S1 is FALSE

  B. Only S2 is FALSE

  C. All are FALSE

  D. All are TRUE

  A
• A primary market is a financial market in which pre-owned securities are traded.

  False
• The Over-the-Counter (OTC) exchange is not an organization but an intangible market for trading securities which are not listed by the organized exchanges.

  True