Principles
of finance fin 301 Midterm examination
1. If
bank pays 5% compounded semi-annually, the true rate of interest is less than
5% annually.
a. True
b. False
2. An
annuity of $100 for 10 years is currently less valuable if interest rates are
10% instead of 12%
a. True
a. True
b. False
3. It
takes longer than 8 years to retire a $24,000 loan at 8% if the annual payment
is $3,000.
a. True
b. False
4. If
a person buys a stock for $10 and sells it after ten years for $20, the annual
compound return is 10%.
a. True
b. False
5. If
Liabilities are decreased or assets increased, that generates a cash inflow.
a. True
b. False
6. If
inventory is sold on credit, the quick ratio declines.
a. True
b. False
7. If
accounts receivable are collected, the quick ratio increases.
a. True
b. False
8.
The numerical value of the quick ratio
can never exceed the numerical value of the current ratio.
a. True
b. False
9.
If a firm sells inventory at cost for
cash, its total assets rise.
a. True
b. False
10. The
higher the ratio of debt to total assets, the smaller is the use of
financial leverage.
a. True
b. False
11. The
use of financial leverage may permit the firm to increase the return on
equity.
a. True
b. False
12. Accountants
suggest that assets should always be valued at their market value.
a. True
b. False
13. If a
firm's current assets and current liabilities decline, the firm had a cash
inflow.
a. True
b. False
14. Accounts
receivable are adjusted for doubtful accounts (Ie, accounts that may not be
paid).
a. True
b. False
15. A
cash dividend reduces the firm’s assets.
a. True
b. False
16.
The required return for
an investment in a stock increases if the firm's beta declines.
a.
True
b.
False
17. One measure of the safety of a preferred
stock's dividend is the ratio of dividends to earnings before interest and
taxes.
a.
True
b.
False
- Federal
income taxes favor the retention of earnings over the distribution of
earnings.
a. True
b. False
19. A
stock dividend decreases retained earnings.
a. True
b. False
20.
The dividend‑growth
model may be applied only if it is assumed that the growth in dividends will be
constant.
a. True
b. False
21. The
return on an investment in stock depends on both dividends and capital gains.
a. True
b. False
22. Arrearage
means cumulative preferred stock's dividend is not being paid.
a. True
b. False
23. An
increase in the required return on the market will tend to decrease stock
prices.
a. True
b. False
24. A 5% stock
dividend reduces a firm's total equity.
a.
True
b.
False
25. The P/E ratio measures a stock's price
relative to the firm's equity
a. True
b. False
26.
Preferred stock dividends are paid after interest but before dividends to
common stock.
a. True
b. False
27.
Income
bonds are the safest bonds issued by a firm.
a.
True
b.
False
28.
Many bonds have a call feature that permits the firm to retire the bonds prior
to maturity.
a. True
b. False
29.
Bonds only sell for a discount when the firm is having financial difficulty.
a.
True
b.
False
30.
The current yield and yield to maturity are equal when the bond is initially
sold for its face value.
a. True
b. False
31.
The
highest credit rating is triple A.
c. True
d. False
32. The document
stating the terms of a bond is the indenture.
a. True
b. False
Part II Multiple
choice
33. The present
value of a dollar
1. Increases
with lower interest rates
2. increases
with higher interest rates
3. increases
with longer periods of time
4. decreases
with longer periods of time
a. 1
and 3
b. 1
and 4
c. 2
and 3
d. 2
and 4
34. Which
is the largest if the interest rate is 10%?
a. present value of $100 after
five years
b. present value of $100 annuity for five years
c. future value of $100 annuity for five years
d. future value of $100 after five years
b. present value of $100 annuity for five years
c. future value of $100 annuity for five years
d. future value of $100 after five years
35. Liabilities equal
a. assets
b. equity
c. equity minus
assets
d.assets minus equity
36. Which
of the following is a cash inflow?
a. an increase
in accounts receivable
b. a decrease in
inventory
c. distributing
cash dividends
d. a decrease in
long-term debt
37. A high
current ratio suggests that the firm
a. has a small
amount of long-term debt
b. is carrying
little inventory
c. is able to
meet its current obligations
d. is profitable
38. Which of the
following is equity?
1. investments
2. additional
paid-in capital
3. retained
earnings
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
39. According to
the dividend-growth model, the value of a stock does NOT depend on
a. future dividends
b. past dividends
c. future growth
d. investor’s required rate of return
40. A stock
dividend causes the firm’s
a. Liabilities to
remain the same
b. Assets to
increase
c. Equity to
increase
d. Assets to
decrease
41. Preferred
stock and bonds are similar because
a. both are a source of financial leverage
a. both are a source of financial leverage
b. they both have voting power
c. interest and dividend payments are legal obligations
d. neither interest nor dividends are tax deductible
d. neither interest nor dividends are tax deductible
42. When risk
analysis is introduced into the dividend-growth model, the required rate of
return considers the firm’s
a. beta coefficient
b. growth rate
c. dividend
d. post dividends
43. Which of the
following are true concerning dividend reinvestment plans?
1. Taxes are
deferred.
2. They offer
stockholders a convenient means to save.
3. The firm may pay
the brokerage and other fees associated with the plans
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
44. Dividends
are paid on the
a. declaration date.
b. distribution date.
c. ex
dividend date.
d. date of record.
45. Common
features of preferred stock include
a. Variable,
cumulative dividends
b. Variable,
noncumulative dividends
c. Fixed,
noncumulative dividends
d. Fixed,
cumulative dividends
46. Interest
is exempt from federal income taxation on
a. equipment trust certificates
a. equipment trust certificates
b. zero coupon
bonds
c. federal bonds such as
savings bonds
d. state of Florida bonds
d. state of Florida bonds
47. Which
of the following bonds is supported by collateral?
a. Convertible bonds
a. Convertible bonds
b. Income
bonds
c. Equipment trust certificates
d. debentures
48.
Which of the following reduces the investor's risk associated with investing in
bonds?
1.
A Sinking fund
2.
A variable interest rate
3.
A call feature
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
49. If a bond is selling for a discount,
that implies
1.
interest rates have fallen
2.
interest rates have risen
3.
the yield to maturity exceeds the current yield
4.
the yield to maturity is less than the current yield
c. 1
and 3
d. 1
and 4
e. 2
and 3
f. 2
and 4
50. The yield to maturity on a bond is
a.
the interest paid divided by the price of the bond
b.
the bond’s coupon divided by the principal amount
c.
the price appreciation earned by the bond
d.
interest plus price appreciation (or loss) achieved by holding the bond to
maturity.
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