Starting to invest early for retirement increases the benefits of compound interest. True/ False
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Question 1
Starting to invest early for retirement
increases the benefits of compound interest.
True
False
Question 2
Which of the following statements is
CORRECT, assuming positive interest rates and holding other things constant?
A.
Banks A and B offer the same nominal
annual rate of interest, but A pays interest quarterly and B pays semiannually.
Deposits in Bank B will provide the higher future value if you leave your funds
on deposit.
B.
The present value of a 5-year, $250
annuity due will be lower than the PV of a similar ordinary annuity.
C.
If an investment pays 10% interest,
compounded annually, its effective annual rate will be less than 10%.
D.
A bank loan’s nominal interest rate will
always be equal to or less than its effective annual rate.
E.
A 30-year, $150,000 amortized mortgage
will have larger monthly payments than an otherwise similar 20-year mortgage.
Question 3
If a firm raises capital by selling new
bonds, it is called the “issuing firm,” and the coupon rate is
generally set equal to the required rate on bonds of equal risk.
True
False
Question 4
Which of the following statements is
CORRECT?
A.
An example of an externality is a
situation where a bank opens a new office, and that new office causes deposits
in the bank’s other offices to increase.
B.
An externality is a situation where a
project would have an adverse effect on some other part of the firm’s overall
operations. If the project would have a favorable effect on other operations,
then this is not an externality.
C.
Both the NPV and IRR methods deal
correctly with externalities, even if the externalities are not specifically
identified. However, the payback method does not.
D.
The NPV method automatically deals
correctly with externalities, even if the externalities are not specifically
identified, but the IRR method does not. This is another reason to favor the
NPV.
E.
Identifying an externality can never
lead to an increase in the calculated NPV.
Question 5
Amram Company’s current ratio is 1.9.
Considered alone, which of the following actions would reduce the company’s
current ratio?
A.
Borrow using short-term notes payable
and use the proceeds to reduce accruals.
B.
Use cash to reduce short-term notes
payable.
C.
Use cash to reduce accounts payable.
D.
Use cash to reduce accruals.
E.
Borrow using short-term notes payable
and use the proceeds to reduce long-term debt.
Question 6
An option is a contract that gives its holder
the right to buy or sell an asset at a predetermined price within a specified
period of time.
True
False
Question 7
As a firm’s sales grow, its current
assets also tend to increase. For instance, as sales increase, the firm’s
inventories generally increase, and purchases of inventories result in more
accounts payable. Thus, spontaneous liabilities that reduce AFN arise from
transactions brought on by sales increases.
True
False
Question 8
The cash flows associated with common stock
are more difficult to estimate than those related to bonds because stock has a
residual claim against the company versus a contractual obligation for a bond.
True
False
Question 9
Which of the following statements is
most CORRECT?
A.
The coupon rate on convertible debt is
normally set below the coupon rate that would be set on otherwise similar
straight debt even though investing in convertibles is more risky than
investing in straight debt.
B.
One important difference between
warrants and convertibles is that convertibles bring in additional funds when
they are converted, but exercising warrants does not bring in any additional
funds.
C.
Warrants have an option feature but
convertibles do not.
D.
Warrants can sometimes be detached and
traded separately from the debt with which they were issued, but this is
unusual.
E.
The value of a warrant to buy a safe,
stable stock should exceed the value of a warrant to buy a risky, volatile
stock, other things held constant.
Question 10
The “preferred” feature of
preferred stock means that it normally will provide a higher expected return
than will common stock.
True
False
Question 11
If a firm’s goal is to maximize its
earnings per share, this is the best way to maximize the price of the common
stock and thus shareholders’ wealth.
True
False
Question 12
If an investment project would make use
of land which the firm currently owns, the project should be charged with the
opportunity cost of the land.
True
False
Question 13
Which of the following could explain why
a business might choose to operate as a corporation rather than as a sole
proprietorship or a partnership?
A.
Corporate shareholders escape liability
for the firm’s debts, but this factor may be offset by the tax disadvantages of
the corporate form of organization.
B.
Less of a corporation’s income is
generally subjected to taxes than would be true if the firm were a partnership.
C.
Corporations generally find it relatively
difficult to raise large amounts of capital.
D.
Corporate investors are exposed to
unlimited liability.
E.
Corporations generally face relatively
few regulations.
Question 14
Which of the following statements is
CORRECT?
A.
A portfolio with a large number of
randomly selected stocks would have less market risk than a single stock that
has a beta of 0.5.
B.
If a stock has a negative beta, its
expected return must be negative.
C.
If the returns on two stocks are
perfectly positively correlated (i.e., the correlation coefficient is +1.0) and
these stocks have identical standard deviations, an equally weighted portfolio
of the two stocks will have a standard deviation that is less than that of the
individual stocks.
D.
According to the CAPM, stocks with
higher standard deviations of returns must also have higher expected returns.
E.
A portfolio with a large number of
randomly selected stocks would have more market risk than a single stock that
has a beta of 0.5, assuming that the stock’s beta was correctly calculated and
is stable.
Question 15
A firm’s AFN must come from external
sources. Typical sources include short-term bank loans, long-term bonds,
preferred stock, and common stock.
True
False
Question 16
To finance the construction of a new
plant, Pietersen Corporation must raise an additional $10,000,000 of equity
capital through the sale of common stock. The firm currently has an EPS of
$5.40 and a P/E ratio of 10, with 1,200,000 shares outstanding. If the firm
wants its ex-rights price to be $50, what subscription price must it set on the
new shares?
A.
$33.78
B.
$29.55
C.
$41.80
D.
$39.28
E.
$50.00
Question 17
A
stock is expected to pay a dividend of $0.75 at the end of the year. The
required rate of return is rs = 10.5%, and the expected constant growth rate is
g = 6.4%. What is the stock’s current price?
A.
$17.39
B.
$18.75
C.
$18.29
D.
$19.22
E.
$17.84
Question 18
The cost of debt is equal to one minus
the marginal tax rate multiplied by the average coupon rate on all outstanding
debt.
True
False
Question 19
If the current price of a stock is below
the strike price, then an option to buy the stock is worthless and will have a
zero value.
True
False
Question 20
Which of the following statements is
CORRECT?
A.
Dividends do not show up in the
statement of cash flows because dividends are considered to be a financing
activity, not an operating activity.
B.
In the statement of cash flows, a
decrease in inventories is reported as a use of cash.
C.
In the statement of cash flows, a
decrease in accounts receivable is reported as a use of cash.
D.
In the statement of cash flows, a
decrease in accounts payable is reported as a use of cash.
E.
In the statement of cash flows,
depreciation charges are reported as a use of cash.
Question 21
“Capital” is sometimes defined
as funds supplied to a firm by investors.
True
False
Question 22
Market risk refers to the tendency of a
stock to move with the general stock market. A stock with above-average market
risk will tend to be more volatile than an average stock, and its beta will be
greater than 1.0.
True
False
Question 23
The annual report contains four basic
financial statements: the income statement, balance sheet, statement of cash
flows, and statement of stockholders’ equity.
True
False
Question 24
Two important issues in corporate
governance are (1) the rules that cover the board’s ability to fire the CEO and
(2) the rules that cover the CEO’s ability to remove members of the board.
True
False
Question 25
Which of the following statements is
CORRECT?
A.
If a coupon bond is selling at par, its
current yield equals its yield to maturity.
B.
If interest rates increase, the price of
a 10-year coupon bond will decline by a greater percentage than the price of a
10-year zero coupon bond.
C.
If a bond’s yield to maturity exceeds
its annual coupon, then the bond will trade at a premium.
D.
If a coupon bond is selling at a
premium, its current yield equals its yield to maturity.
E.
If a coupon bond is selling at a
discount, its price will continue to decline until it reaches its par value at
maturity.
Question 26
The owner of a convertible bond owns, in
effect, both a bond and a call option.
True
False
Question 27
On the balance sheet, total assets must always
equal total liabilities and equity.
True
False
Question 28
The optimal distribution policy strikes that
balance between current dividends and capital gains that maximizes the firm’s
stock price.
True
False
Question 29
A proxy is a document giving one party
the authority to act for another party, including the power to vote shares of
common stock. Proxies can be important tools relating to control of firms.
True
False
Question 30
The common stock of Southern Airlines
currently sells for $33, and its 8% convertible debentures (issued at par, or
$1,000) sell for $850. Each debenture can be converted into 25 shares of common
stock at any time before 2025. What is the conversion value of the bond?
A.
$707.33
B.
$866.25
C.
$744.56
D.
$825.00
E.
$783.75
Question 31
Taylor Inc. estimates that its
average-risk projects have a WACC of 10%, its below-average risk projects have
a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of
the following projects (A, B, and C) should the company accept?
A.
All of the projects should be accepted.
B.
None of the projects should be accepted.
C.
Project A, which is of average risk and
has a return of 9%.
D.
Project B, which is of below-average
risk and has a return of 8.5%.
E.
Project C, which is of above-average
risk and has a return of 11%.
Question 32
A firm should never accept a project if
its acceptance would lead to an increase in the firm’s cost of capital (its
WACC).
True
False
Question 33
Time lines can be constructed in
situations where some of the cash flows occur annually but others occur
quarterly.
True
False
Question 34
ESOPs were originally designed to help
improve worker productivity, but today they are also used to help prevent
hostile takeovers.
True
False
Question 35
Many leases written today combine the
features of operating and financial leases. Such leases are often called
“combination leases.”
True
False
Question 36
Operating leases help to shift the risk
of obsolescence from the user to the lessor.
True
False
Question 37
The form of organization for a business
is not an important issue, as this decision has very little effect on the
income and wealth of the firm’s owners.
True
False
Question 38
A warrant is an option, and as such it
cannot be used as a “sweetener.”
True
False
Question 39
Projects S and L are equally risky,
mutually exclusive, and have normal cash flows. Project S has an IRR of 15%,
while Project L’s IRR is 12%. The two projects have the same NPV when the WACC
is 7%. Which of the following statements is CORRECT?
A.
If the WACC is 10%, both projects will
have positive NPVs.
B.
Project S’s NPV is more sensitive to
changes in WACC than Project L’s.
C.
If the WACC is 10%, both projects will
have a negative NPV.
D.
If the WACC is 6%, Project S will have
the higher NPV.
E.
If the WACC is 13%, Project S will have
the lower NPV.
Question 40
High current and quick ratios always
indicate that a firm is managing its liquidity position well.
True
False
Question 41
Other things held constant, an increase
in the cost of capital will result in a decrease in a project’s IRR.
True
False
Question 42
The desire for floating-rate bonds, and
consequently their increased usage, arose out of the experience of the early
1980s, when inflation pushed interest rates up to very high levels and thus
caused sharp declines in the prices of outstanding bonds.
True
False
Question 43
Convertible debentures for Kulik
Corporation were issued at their $1,000 par value in 2012. At any time prior to
maturity on February 1, 2032, a debenture holder can exchange a bond for 25
shares of common stock. What is the conversion price, Pc?
A.
$44.10
B.
$42.00
C.
$46.31
D.
$48.62
E.
$40.00
Question 44
BLW Corporation is considering the terms
to be set on the options it plans to issue to its executives. Which of the
following actions would decrease the value of the options, other things held
constant?
A.
BLW’s stock price becomes more risky
(higher variance).
B.
The exercise price of the option is
increased.
C.
The Federal Reserve takes actions that
increase the risk-free rate.
D.
The life of the option is increased,
i.e., the time until it expires is lengthened.
E.
BLW’s stock price suddenly increases.
Question 45
In the lease versus buy decision,
leasing is often preferable
A.
because lease obligations do not affect
the firm’s risk as seen by investors.
B.
because it has no effect on the firm’s
ability to borrow to make other investments.
C.
because the lessee owns the property at
the end of the least term.
D.
because, generally, no down payment is
required, and there are no indirect interest costs.
E.
because the lessee may have greater
flexibility in abandoning the project in which the leased property is used than
if the lessee bought and owned the asset.
Question 46
Because of improvements in forecasting
techniques, estimating the cash flows associated with a project has become the
easiest step in the capital budgeting process.
True
False
Question 47
Ratio analysis involves analyzing
financial statements in order to appraise a firm’s financial position and strength.
True
False
Question 48
The tighter the probability distribution
of its expected future returns, the greater the risk of a given investment as
measured by its standard deviation.
True
False
Question 49
Heavy use of off-balance sheet lease
financing will tend to
A.
affect a company’s cash flows but not
its degree of risk.
B.
make a company appear more risky than it
actually is because its stated debt ratio will be increased.
C.
have no effect on either cash flows or
risk because the cash flows are already reflected in the income statement.
D.
make a company appear less risky than it
actually is because its stated debt ratio will appear lower.
E.
affect the lessee’s cash flows but only
due to tax effects.
Question 50
The term “additional funds needed
(AFN)” is generally defined as follows:
A.
The amount of assets required per dollar
of sales.
B.
The amount of internally generated cash
in a given year minus the amount of cash needed to acquire the new assets
needed to support growth.
C.
Funds that a firm must raise externally
from non-spontaneous sources, i.e., by borrowing or by selling new stock to
support operations.
D.
Funds that are obtained automatically
from routine business transactions.
E.
A forecasting approach in which the
forecasted percentage of sales for each balance sheet account is held constant.
Question 1Starting to invest early for retirement
increases the benefits of compound interest. True FalseQuestion 2Which of the following statements is
CORRECT, assuming positive interest rates and holding other things constant?
A.Banks A and B offer the same nominal
annual rate of interest, but A pays interest quarterly and B pays semiannually.
Deposits in Bank B will provide the higher future value if you leave your funds
on deposit.
B.The present value of a 5-year, $250
annuity due will be lower than the PV of a similar ordinary annuity.
C.If an investment pays 10% interest,
compounded annually, its effective annual rate will be less than 10%.
D.A bank loan’s nominal interest rate will
always be equal to or less than its effective annual rate.
E.A 30-year, $150,000 amortized mortgage
will have larger monthly payments than an otherwise similar 20-year mortgage.Question 3If a firm raises capital by selling new
bonds, it is called the “issuing firm,” and the coupon rate is
generally set equal to the required rate on bonds of equal risk. True FalseQuestion 4Which of the following statements is
CORRECT?
A.An example of an externality is a
situation where a bank opens a new office, and that new office causes deposits
in the bank’s other offices to increase.
B.An externality is a situation where a
project would have an adverse effect on some other part of the firm’s overall
operations. If the project would have a favorable effect on other operations,
then this is not an externality.
C.Both the NPV and IRR methods deal
correctly with externalities, even if the externalities are not specifically
identified. However, the payback method does not.
D.The NPV method automatically deals
correctly with externalities, even if the externalities are not specifically
identified, but the IRR method does not. This is another reason to favor the
NPV.
E.Identifying an externality can never
lead to an increase in the calculated NPV.Question 5Amram Company’s current ratio is 1.9.
Considered alone, which of the following actions would reduce the company’s
current ratio? A.Borrow using short-term notes payable
and use the proceeds to reduce accruals.
B.Use cash to reduce short-term notes
payable.
C.Use cash to reduce accounts payable.
D.Use cash to reduce accruals.
E.Borrow using short-term notes payable
and use the proceeds to reduce long-term debt. Question 6 An option is a contract that gives its holder
the right to buy or sell an asset at a predetermined price within a specified
period of time. True FalseQuestion 7As a firm’s sales grow, its current
assets also tend to increase. For instance, as sales increase, the firm’s
inventories generally increase, and purchases of inventories result in more
accounts payable. Thus, spontaneous liabilities that reduce AFN arise from
transactions brought on by sales increases. True FalseQuestion 8 The cash flows associated with common stock
are more difficult to estimate than those related to bonds because stock has a
residual claim against the company versus a contractual obligation for a bond. True FalseQuestion 9Which of the following statements is
most CORRECT?
A.The coupon rate on convertible debt is
normally set below the coupon rate that would be set on otherwise similar
straight debt even though investing in convertibles is more risky than
investing in straight debt.
B.One important difference between
warrants and convertibles is that convertibles bring in additional funds when
they are converted, but exercising warrants does not bring in any additional
funds.
C.Warrants have an option feature but
convertibles do not.
D.Warrants can sometimes be detached and
traded separately from the debt with which they were issued, but this is
unusual.
E.The value of a warrant to buy a safe,
stable stock should exceed the value of a warrant to buy a risky, volatile
stock, other things held constant.Question 10The “preferred” feature of
preferred stock means that it normally will provide a higher expected return
than will common stock.True FalseQuestion 11If a firm’s goal is to maximize its
earnings per share, this is the best way to maximize the price of the common
stock and thus shareholders’ wealth. True FalseQuestion 12If an investment project would make use
of land which the firm currently owns, the project should be charged with the
opportunity cost of the land. True FalseQuestion 13Which of the following could explain why
a business might choose to operate as a corporation rather than as a sole
proprietorship or a partnership?
A.Corporate shareholders escape liability
for the firm’s debts, but this factor may be offset by the tax disadvantages of
the corporate form of organization.
B.Less of a corporation’s income is
generally subjected to taxes than would be true if the firm were a partnership.
C.Corporations generally find it relatively
difficult to raise large amounts of capital.
D.Corporate investors are exposed to
unlimited liability.
E.Corporations generally face relatively
few regulations.Question 14Which of the following statements is
CORRECT?
A.A portfolio with a large number of
randomly selected stocks would have less market risk than a single stock that
has a beta of 0.5.
B.If a stock has a negative beta, its
expected return must be negative.
C.If the returns on two stocks are
perfectly positively correlated (i.e., the correlation coefficient is +1.0) and
these stocks have identical standard deviations, an equally weighted portfolio
of the two stocks will have a standard deviation that is less than that of the
individual stocks.
D.According to the CAPM, stocks with
higher standard deviations of returns must also have higher expected returns.
E.A portfolio with a large number of
randomly selected stocks would have more market risk than a single stock that
has a beta of 0.5, assuming that the stock’s beta was correctly calculated and
is stable.Question 15A firm’s AFN must come from external
sources. Typical sources include short-term bank loans, long-term bonds,
preferred stock, and common stock. True FalseQuestion 16To finance the construction of a new
plant, Pietersen Corporation must raise an additional $10,000,000 of equity
capital through the sale of common stock. The firm currently has an EPS of
$5.40 and a P/E ratio of 10, with 1,200,000 shares outstanding. If the firm
wants its ex-rights price to be $50, what subscription price must it set on the
new shares?
A.$33.78
B.$29.55
C.$41.80
D.$39.28
E.$50.00Question 17 A
stock is expected to pay a dividend of $0.75 at the end of the year. The
required rate of return is rs = 10.5%, and the expected constant growth rate is
g = 6.4%. What is the stock’s current price?
A.$17.39
B.$18.75
C.$18.29
D.$19.22
E.$17.84Question 18The cost of debt is equal to one minus
the marginal tax rate multiplied by the average coupon rate on all outstanding
debt. True FalseQuestion 19If the current price of a stock is below
the strike price, then an option to buy the stock is worthless and will have a
zero value. True FalseQuestion 20Which of the following statements is
CORRECT?
A.Dividends do not show up in the
statement of cash flows because dividends are considered to be a financing
activity, not an operating activity.
B.In the statement of cash flows, a
decrease in inventories is reported as a use of cash.
C.In the statement of cash flows, a
decrease in accounts receivable is reported as a use of cash.
D.In the statement of cash flows, a
decrease in accounts payable is reported as a use of cash.
E.In the statement of cash flows,
depreciation charges are reported as a use of cash.Question 21″Capital” is sometimes defined
as funds supplied to a firm by investors. True FalseQuestion 22Market risk refers to the tendency of a
stock to move with the general stock market. A stock with above-average market
risk will tend to be more volatile than an average stock, and its beta will be
greater than 1.0. True FalseQuestion 23The annual report contains four basic
financial statements: the income statement, balance sheet, statement of cash
flows, and statement of stockholders’ equity. True FalseQuestion 24Two important issues in corporate
governance are (1) the rules that cover the board’s ability to fire the CEO and
(2) the rules that cover the CEO’s ability to remove members of the board. True FalseQuestion 25Which of the following statements is
CORRECT?
A.If a coupon bond is selling at par, its
current yield equals its yield to maturity.
B.If interest rates increase, the price of
a 10-year coupon bond will decline by a greater percentage than the price of a
10-year zero coupon bond.
C.If a bond’s yield to maturity exceeds
its annual coupon, then the bond will trade at a premium.
D.If a coupon bond is selling at a
premium, its current yield equals its yield to maturity.
E.If a coupon bond is selling at a
discount, its price will continue to decline until it reaches its par value at
maturity.Question 26The owner of a convertible bond owns, in
effect, both a bond and a call option.True FalseQuestion 27 On the balance sheet, total assets must always
equal total liabilities and equity. TrueFalseQuestion 28 The optimal distribution policy strikes that
balance between current dividends and capital gains that maximizes the firm’s
stock price. True FalseQuestion 29A proxy is a document giving one party
the authority to act for another party, including the power to vote shares of
common stock. Proxies can be important tools relating to control of firms. True FalseQuestion 30The common stock of Southern Airlines
currently sells for $33, and its 8% convertible debentures (issued at par, or
$1,000) sell for $850. Each debenture can be converted into 25 shares of common
stock at any time before 2025. What is the conversion value of the bond?
A.$707.33
B.$866.25
C.$744.56
D.$825.00
E.$783.75Question 31Taylor Inc. estimates that its
average-risk projects have a WACC of 10%, its below-average risk projects have
a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of
the following projects (A, B, and C) should the company accept?
A.All of the projects should be accepted.
B.None of the projects should be accepted.
C.Project A, which is of average risk and
has a return of 9%.
D.Project B, which is of below-average
risk and has a return of 8.5%.
E.Project C, which is of above-average
risk and has a return of 11%.Question 32A firm should never accept a project if
its acceptance would lead to an increase in the firm’s cost of capital (its
WACC). TrueFalseQuestion 33Time lines can be constructed in
situations where some of the cash flows occur annually but others occur
quarterly. True FalseQuestion 34ESOPs were originally designed to help
improve worker productivity, but today they are also used to help prevent
hostile takeovers. True FalseQuestion 35Many leases written today combine the
features of operating and financial leases. Such leases are often called
“combination leases.” True FalseQuestion 36Operating leases help to shift the risk
of obsolescence from the user to the lessor. True FalseQuestion 37The form of organization for a business
is not an important issue, as this decision has very little effect on the
income and wealth of the firm’s owners. True FalseQuestion 38A warrant is an option, and as such it
cannot be used as a “sweetener.” True FalseQuestion 39Projects S and L are equally risky,
mutually exclusive, and have normal cash flows. Project S has an IRR of 15%,
while Project L’s IRR is 12%. The two projects have the same NPV when the WACC
is 7%. Which of the following statements is CORRECT?
A.If the WACC is 10%, both projects will
have positive NPVs.
B.Project S’s NPV is more sensitive to
changes in WACC than Project L’s.
C.If the WACC is 10%, both projects will
have a negative NPV.
D.If the WACC is 6%, Project S will have
the higher NPV.
E.If the WACC is 13%, Project S will have
the lower NPV.Question 40High current and quick ratios always
indicate that a firm is managing its liquidity position well. True FalseQuestion 41Other things held constant, an increase
in the cost of capital will result in a decrease in a project’s IRR. True FalseQuestion 42The desire for floating-rate bonds, and
consequently their increased usage, arose out of the experience of the early
1980s, when inflation pushed interest rates up to very high levels and thus
caused sharp declines in the prices of outstanding bonds. True FalseQuestion 43Convertible debentures for Kulik
Corporation were issued at their $1,000 par value in 2012. At any time prior to
maturity on February 1, 2032, a debenture holder can exchange a bond for 25
shares of common stock. What is the conversion price, Pc?
A.$44.10
B.$42.00
C.$46.31
D.$48.62
E.$40.00Question 44BLW Corporation is considering the terms
to be set on the options it plans to issue to its executives. Which of the
following actions would decrease the value of the options, other things held
constant?
A.BLW’s stock price becomes more risky
(higher variance).
B.The exercise price of the option is
increased.
C.The Federal Reserve takes actions that
increase the risk-free rate.
D.The life of the option is increased,
i.e., the time until it expires is lengthened.
E.BLW’s stock price suddenly increases.Question 45In the lease versus buy decision,
leasing is often preferable
A.because lease obligations do not affect
the firm’s risk as seen by investors.
B.because it has no effect on the firm’s
ability to borrow to make other investments.
C.because the lessee owns the property at
the end of the least term.
D.because, generally, no down payment is
required, and there are no indirect interest costs.
E.because the lessee may have greater
flexibility in abandoning the project in which the leased property is used than
if the lessee bought and owned the asset.Question 46Because of improvements in forecasting
techniques, estimating the cash flows associated with a project has become the
easiest step in the capital budgeting process.True FalseQuestion 47Ratio analysis involves analyzing
financial statements in order to appraise a firm’s financial position and strength. True FalseQuestion 48The tighter the probability distribution
of its expected future returns, the greater the risk of a given investment as
measured by its standard deviation. True FalseQuestion 49Heavy use of off-balance sheet lease
financing will tend to
A.affect a company’s cash flows but not
its degree of risk.
B.make a company appear more risky than it
actually is because its stated debt ratio will be increased.
C.have no effect on either cash flows or
risk because the cash flows are already reflected in the income statement.
D.make a company appear less risky than it
actually is because its stated debt ratio will appear lower.
E.affect the lessee’s cash flows but only
due to tax effects.Question 50The term “additional funds needed
(AFN)” is generally defined as follows:
A.The amount of assets required per dollar
of sales.
B.The amount of internally generated cash
in a given year minus the amount of cash needed to acquire the new assets
needed to support growth.
C.Funds that a firm must raise externally
from non-spontaneous sources, i.e., by borrowing or by selling new stock to
support operations.
D.Funds that are obtained automatically
from routine business transactions.
E.A forecasting approach in which the
forecasted percentage of sales for each balance sheet account is held constant.
