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11.

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

A) An over-the-counter market transaction.

B) A money market transaction.

C) A primary market transaction.

D) A secondary market transaction.

E) A futures market transaction.

12.

Which of the following actions would be most likely to reduce conflicts between stockholders and bondholders?

A) A government regulation that banned the use of convertible bonds.

B) Including restrictive covenants in the company’s bond indenture (which is the contract between the company and its bondholders).

C) The passage of laws that make it harder for hostile takeovers to succeed.

D) The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year.

E) Compensating managers with more stock options and less cash income.

13.

Consider the following balance sheet, for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.

Cash $ 50,000 Accounts payable $ 100,000

Inventory 200,000 Accruals 100,000

Accounts receivable 250,000 Total CL $ 200,000

Total CA $ 500,000 Debt 200,000

Net fixed assets $ 900,000 Common stock 200,000

Retained earnings 800,000

Total assets $1,400,000 Total L & E $1,400,000

A) True

B) False

14.

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

A) True

B) False

15.

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.

A) False

B) True

16.

Which of the following statements is CORRECT?

A) Hedge funds have more in common with commercial banks than with any other type of financial institution.

B) Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.

C) Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and such investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

D) Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

E) Hedge funds have more in common with investment banks than with any other type of financial institution.

17.

Which of the following statements is NOT CORRECT?

A) It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

B) The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.

C) When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held."

D) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market.

E) "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.

18.

Which of the following statements is CORRECT?

A) The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

B) The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.

C) Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.

D) The threat of takeover generally increases potential conflicts between stockholders and managers.

E) One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.

19.

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

A) Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

B) The outstanding balance declines at a slower rate in the later years of the loan’s life.

C) The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

D) The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

E) Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

210.

Which of the following statements is CORRECT?

A) Because of their simplified organization, it is easier for sole proprietors and partnerships to raise large amounts of outside capital than it is for corporations.

B) Bond covenants are an effective way to resolve conflicts between shareholders and managers.

C) Corporations face few regulations and more favorable tax treatment than do sole proprietorships and partnerships.

D) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.

E) One advantage to forming a corporation is that the owners of the firm have limited liability.

211.

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 35% and the personal tax rate for the firm's investors is 38%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

A) $20,424

B) $21,266

C) $21,700

D) $20,841

E) $20,015

212.

Last year Besset Company’s operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company’s financial statements were prepared under generally accepted accounting principles (GAAP)?

A) The company sold some of its fixed assets.

B) The company repurchased some of its common stock.

C) The company had high depreciation expenses.

D) The company retired a large amount of its long-term debt.

E) The company dramatically increased its capital expenditures.

213.

Which of the following statements is CORRECT?

A) A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.

B) Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm’s managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt.

C) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

D) A hostile takeover is the main method of transferring ownership interest in a corporation.

E) Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

214.

Which of the following statements is CORRECT?

A) IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.

B) In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.

C) It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

D) It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In that case, the company is said to have "left money on the table."

E) The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.

215.

Which of the following statements is CORRECT?

A) If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

B) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.

C) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

D) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.

E) If you solve for I and get a negative number, then you must have made a mistake.

216.

Starting to invest early for retirement reduces the benefits of compound interest

A) True

B) False

217.

You have the following data on three stocks shown below. You decide to use the data on these stocks to form an index, and you want to find the average earned rate of return for 2008 on your index. If you follow the averaging procedure used to calculate the S&P 500 Index return, what would your index's rate of return be? Hints: Rates of return are based on beginning-of-year prices, and the S&P Index is weighted by market values of the companies in the index.

Shares

Beginning Ending Outstanding

Stock Dividend Price Price (millions)

A $1.50 $30.00 $32.00 5.00

B $2.00 $28.50 $27.00 4.50

C $0.75 $20.00 $24.00 20.00

A) 16.07%

B) 18.65%

C) 16.92%

D) 17.76%

E) 19.59%

218.

Which of the following statements is most correct?

A) Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain.

B) The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.

C) 70% of the interest received by corporations is excluded from taxable income.

D) Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders.

E) 70% of the dividends received by corporations is excluded from taxable income.

219.

A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

A) Use some of its cash to purchase additional inventories.

B) Issue new common stock and use the proceeds to acquire additional fixed assets.

C) Speed up the collection of receivables and use the cash generated to increase inventories.

D) 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.

E) Issue new common stock and use the proceeds to increase inventories.

320.

Which of the following statements is CORRECT?

A) The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.

B) The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.

C) The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.

D) The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

E) The statement of cash flows shows how much the firm’s cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.

321.

Which of the following statements is CORRECT?

A) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.

B) The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.

C) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.

D) An increase in a firm’s debt ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.

E) An increase in the DSO, other things held constant, could be expected to increase the ROE.

322.

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

A) The firm will find it more difficult to raise additional capital to support its growth

B) Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.

C) The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.

D) Assuming the firm is profitable, none of its income will be subject to federal income taxes.

E) The company will probably be subject to fewer regulations and required disclosures.

323.

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 can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

D) 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.

E) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

324.

Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

A) False

B) True

325.

If a firm's fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.

A) True

B) False

326.

Which of the following statements is CORRECT?

A) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

B) If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

C) If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio.

D) If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal.

E) If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate.

327.

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

A) The firm’s tax payments would increase.

B) The firm’s operating income (EBIT) would increase.

C) The firm’s taxable income would increase.

D) The firm’s reported net income would increase.

E) The firm’s cash flow would increase.

328.

Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?

A) The DSO increases.

B) The total assets turnover decreases.

C) The current ratio declines.

D) The quick ratio increases.

E) The TIE declines.

329.

Starting to invest early for retirement reduces the benefits of compound interest.

A) False

B) True

430.

Which of the following statements is CORRECT?

A) Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.

B) The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer market.

C) A liquid security is a security whose value is derived from the price of some other "underlying" asset.

D) While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

E) Money markets are markets for long-term debt and common stocks.

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