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Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) - Exact answer F Stocks and bonds are two types of financial instruments (T/F) - Exact answer T The matching principle in accrual accounting requires that: a. Revenues be recognized when the earnings process is complete and matches expenses to revenues recognized. b. Expenses are matched to the year in which they are incurred c. Revenues are matched to the year in which they are booked d. Revenues should be large enough to match expenses - Exact answer a A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities - Exact answer a Why is the Balance Sheet known as a permanent statement? a. Because the statement is sent to the SEC. b. Because the other statements are reset at the end of the fiscal year c. Because it is printed out and archived d. Because it persists in the minds of the shareholders. - Exact answer b How do you calculate the change in Retained Earnings? a. Ending Retained Earnings - Change in Cash b. EBIT divided by Total Assets + Dividends c. EBIT - Change in Cash - Dividends d. Net Income - Dividends - Exact answer d Which of the following is generally true? a. Gross Profit and Operating Income are the same b. Cost of Goods Sold + Operating Expenses = Net Income
c. Operating Income and EBIT are the same d. EBIT + Income Taxes = Net income - Exact answer c Which components are part of total assets? a. Cash, Accounts Receivable, Short Term Debt b. Cash Accounts Receivable, Inventory, Long Term Assets c. Accounts Payable, Long Term Assets, Long Term Debt d. Accounts Payable, Net Income, Equity - Exact answer b Which components are part of current assets? a. Cash, Accounts Receivable, Property Plant & Equipment b. Accounts Receivable, Accounts Payable, Inventory c. Long Term Debt, Property Plant & Equipment, Common Stock d. Inventory, Cash, Accounts Receivable, Short Term Investments - Exact answer d Which components are part of Total Liabilities? a. Accounts Payable, Accounts Receivable, Short Term Debt b. Long Term Debt, Common Stock, Retained Earnings c. Bonds, Accounts Payable, Mortgage d. Common Stock, Long Term Debt, Short Term Investments - Exact answer c When Fixed Assets increase what happens to Cash? a. Cash stays the same b. Cash increases c. Cash decreases d. Assets decrease - Exact answer c Which is the purpose of the statement of cash flows? a. serves as the replacement for the income statement and balance sheet b. explains the change in cash balance at one point in time c. explains the change in cash balance for one period of time d. both (a) and (b) above - Exact answer c The OIROI (Operating Income Return on Investment) uses what elements on the income statement? a. Operating Income, EBIT, Total Liabilities b. EBIT, Total Assets c. Sales, Total Assets, Equity
If a company has a high degree of financial leverage, what does that tell us about the firm's risk profile? a. Low Risk b. Appropriate Risk c. Higher ability to pay debt d. Higher profits to shareholders - Exact answer d What is the cash cycle? a. The speed of collecting cash from customers b. The amount of cash kept in banks c. The comparison of debt to cash d.The amount of time to regenerate cash - Exact answer d Why is float important to understand? a. To know how to keep the company profitable b. To know why the company needs cash c. To determine when to buy fixed assets d. To time cash expenditures e. None of the above - Exact answer d What should a company do to manage its working capital? a. Collect quickly and pay slowly b. Keep a large cash balance c. Maximize the use of long term investment d. Depreciate assets more slowly - Exact answer a What would be a source of information to determine Replacement Cost? a. Building Appraisal b. Accumulated Depreciation Expense c. Stock price d. Statement of Cash Flows - Exact answer a What does the Sarbanes-Oxley Act require companies to do? a. Have a board of directors b. Register all foreign sales c. Make estimated tax payments d. Have internal control audits - Exact answer d
FINRA (Financial Industry Regulatory Authority) does the following: (pick one) a. No foreign bribery by corporations b. Regulates bond prices c. Establishes Credit Unions d. Prosecutes naughty stock brokers e. Regulates Hedge Funds - Exact answer d If a product is made 100% domestically, what can affect its domestic market? a. International exchange rates b. International competition c. Product tariffs d. International political regulations - Exact answer b If a company makes its product in a foreign country where labor costs are much lower, what happens? a. Profits and domestic employment goes up b. Costs go up and domestic employment goes down c. Costs stay the same and domestic employment increases d. Profits go up and domestic employment decreases. - Exact answer d If the value of a dollar increases, the price of imports: a. Increases b. Decreases c. Stays the same d. Fluctuates - Exact answer b Why would a farmer buy a hedge when he signs a contract to sell produce overseas? a. To avoid tariffs b. To reduce currency risk c. To increase profits d. To avoid competition - Exact answer b A basic equation for the balance sheet is: a. Equity = Assets - Liabilities b. Liabilities = Equity + Assets c. Assets = Liabilities - Equity d. Assets = Equity - Liabilities - Exact answer a
If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a lower current ratio? a. higher b. lower c. the same d. it doesn't matter - Exact answer a If an investor knows the idiosyncratic risk, the investor knows the: a. Profit Margin percentage b. Beta Coefficient c. Operating Leverage d. Free Cash Flow - Exact answer b Why would we reject a project based on the NPV? a. The NPV is lower than the IRR b. The NPV is lower than investment c. The NPV is a negative number d. The IRR is positive. - Exact answer c Why would we reject a project based on the IRR? a. The IRR is higher than the sum of the cash flows b. The discount rate is lower than the IRR c. The IRR is higher than the NPV d. The discount rate is higher than the IRR - Exact answer d Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements apply? a. Company A is less liquid than Company B b. Company B invests in more working current assets c. Company A uses better working capital management d. Company B has a more conservative cash policy - Exact answer b Company A offers trade credit of 2% 10 / net 30 and Company B offers trade credit at net 30. What can be said about the credit policies of each company? a. Company B has a looser credit policy b. Company A keeps more of its Accounts Receivable c. Company A can attract more customers d. Company B can attract more customer - Exact answer c
Which of the following characterizes collection float a. Longer float indicates good financial practices b. Increased float indicates slower processing time c. Accounts receivable increase with shorter float d. Liquidity is enhanced with longer float - Exact answer b Company A's inventory is larger than Company B. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? a. Company B has lower inventory float b. Company A has more cash in hand c. Company B might have higher inventory turnover d. Company A has tighter credit. - Exact answer c In regards to Accounts Payable balances, which of the following is true: a. Higher Accounts Payable is better than a lower balance b. Paying off A/P as soon as possible is good policy c. Increased Accounts Payable means faster collections d. Paying off A/P on the last day due is good policy - Exact answer d If two companies have earnings of $2,000,000, and Company X has a multiple of 1.2 and Company Z has a multiple of 2.0, what can we estimate about the value of each company? a. The value is the same b. The value of Company X is higher c. The value of Company Z is higher d. The relative value can't be determined - Exact answer c Dodd-Frank regulates which segment of the U.S. Economy? a. Fannie Mae and Freddie Mac (Housing financing) b. Banking Industry c. Multi-level Marketing Industry d. Automobile Industry - Exact answer b The SEC Securities & Exchange Commission requires companies to do the following: (pick two) a. Register all public offerings b. Change CEOs on a regular basis c. Regulates stock sales d. Prohibits foreign bribery
The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock - Exact answer F The bid-ask spread is compensation to the specialist for providing liquidity to the market. (T/F) - Exact answer T A market order to buy a stock would execute at the current ask price (T/F) - Exact answer T A market order to sell a stock would execute at the current ask price (T/F) - Exact answer T A limit order to buy a stock at $101.55 would execute at the current ask price (T/F) - Exact answer F A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55 (T/F) - Exact answer T Efficient markets are those in which prices are volatile - Exact answer F Efficient markets will often have mispriced securities - Exact answer F Inefficient markets are those in which prices will respond quickly to new information - Exact answer F Inefficient markets will often have mispriced securities. - Exact answer T Because in an efficient market all available information is built into the price of a stock - investment patterns and trends to "get rich quickly" are not easily discernable and it is difficult to predict the price - Exact answer T In an inefficient market, prices will slowly respond to new information. - Exact answer T In an efficient market, new information will move prices almost immediately (T/F) - Exact answer T What is the relationship between WACC and IRR? a. Just 2 different numbers b. IRR must exceed WACC to accept investment
c. WACC must exceed IRR to accept investment d. WACC and IRR are the same thing - Exact answer b What is the relationship between NPV and IRR? a. Both must exceed WACC to accept investment b. If discount rate equals IRR, NPV is equal to zero. c. NPV must exceed WACC to accept investment d. If discount rate equals IRR, should accept investment - Exact answer b If a firm's financial and operating leverage is high, what is the implication? a. The firm is more profitable b. Profits are more volatile as sales fluctuate c. The firm is less profitable d. The two leverages offset each other - - neutral impact - Exact answer b If an industry, such as autos, has very high fixed costs and very cyclical sales, what is the implication for financial leverage? a. Use high financial leverage to offset high fixed costs b. Use low financial leverage to offset high operating leverage c. It has no implication at all d. None of the above - Exact answer b The SGR measures: a. Historical dividend growth rate b. Sales growth rate c. Potential sales growth with internal funding d. None of the above - Exact answer c The SEC Securities & Exchange Commission requires public companies to do the following: a. File audited financial statements with SEC b. Change CEOs on a regular basis e. Regulates the Money Supply d. Prohibits foreign bribery - Exact answer a What does the Sarbanes-Oxley Act require companies to do? a. Have a board of directors b. Register all foreign sales c. Make estimated tax payments d. Have internal control audits - Exact answer d
Which section of the Statement of Cash Flows describes the production and sales of the firm's product? a. Cash Flow Operations b. Cash Flow Investing c. Cash Flow Financing. d. Cash Flow Securities - Exact answer a For calculating cash flows, why is depreciation added to Net Income? a. To offset taxes b. Depreciation is a non-cash deduction c. To determine pre-tax income d. None of the above - Exact answer b The fundamental concept underlying the valuation of all financial assets is: a. The application of the PE ratio b. Use of the Gordon Model c. The present value of anticipated cash flows. d. The future value of cash flows - Exact answer c What explains the size of the yield spread of junk bonds over Treasury? a. It is the value of the expected default loss b. It depends the firm'a profit c. It is the probability of default d. It is a "psychological' reaction of investors. - Exact answer a What does Beta measure? a. The default risk of a stock b. The relative riskiness of an individual stock c. Indicates the market value of the stock d. Stocks to avoid purchasing - Exact answer b What is the most effective use of financial statements in valuing a stock? a. Use the book value of equity on the balance sheet b. Use GAAP earnnings c. Use data to estimate future earnings d. Read the footnotes - Exact answer c If market interest rates rise, what impact does it have on a given bond? a. Its price decreases
b. It will have a discount price c. No impact since the coupon rate is fixed d. Its price increases - Exact answer a What impact did the recent corporate tax cut have on a firm's WACC? a. It decreased WACC b. It increased WACC c. No impact since WACC depend on firm risk d. None of the above - Exact answer b Why do firms often use "sensitivity" tests in analyzing investment projects a. Required by the SEC b. Uncertainty of forecast assumptions c. Auditors require it. d. Required section of financial statements - Exact answer b If debt is less costly than equity, why don't firms maximize debt use? a. Excessive debt inceases risk of banruptcy b. Restricted by Federal tax regulations c. It reduces the benfits of financial leverage d. It increases operating leverage - Exact answer a Why does a firm's investment opportunities affect it dividend payout ratio? a. Maximization of shareholder wealth strategy b. Limited access to market financing c. Attempts to increase stock price d. All of the above - Exact answer d If two annuities have the same payments and term, why is an Annuity Due more valuable than an Ordinary Annuity? a. The have equal value b. Annuity Due payments occur earlier c. Annuity Due uses a lower discount rate d. Ordinary annuities are consider more risky - Exact answer b What is the impact of rising interest rates on foreign exchange? a. Makes USD decline in value b. Has no impact on USD c. Increases the value of USD d. Increases the value of EUR - Exact answer c
a. High PE ratios reflect higher expected growth rates b. Low PE stocks are cheap c. PE is the ratio of price to earnings d. High Beta stocks have lower PE ratios - Exact answer b If a firm cannot access markets sufficiently to meet their DFN, what strategies might they use? a. Slow sales growth b. Lower dividend payout c. Increase the net margin d. All of the above. - Exact answer d Dodd-Frank regulates which segment of the U.S. Economy? a. Fannie Mae and Freddie Mac (Housing financing) b. Banking Industry c. Multi-level Marketing Industry d. Automobile Industry - Exact answer b Which is not true of both stocks and bonds a. Market value derived from expected cash flows b. Market value varies over time c. Have voting rights d. Trade in both primary and secondary markets - Exact answer c The value of a corporation is best measured by a. Equity on the Balance Sheet b. Assets minus Liabilities on the Balance Sheet c. Market capitalization d. Its book value - Exact answer c Which is not a component of the DuPont formula? a. Net Income to Sales b. Debt to Equity Ratio c. Sales to Asset Ratio d. Assets to Equity Ratio - Exact answer b What metric converts FV to PV? a. The discount rate b. Time c. The PE ratio
d. None of the above - Exact answer a The interest rate on a corporate bond does not reflect a. Risk b. Inflation c. Face Value d. U.S. Treasury rates - Exact answer c PV ordinarily is less than FV. What would cause the opposite? a. Compounding b. Negative interest rates c. The exchange rate d. The Federal Reserve - Exact answer b Which would likely have the lowest price? a. 3-month commercial paper b. Zero coupon bond c. 5-year Treasury note d. AAA corporate note - Exact answer b Junk bonds are those whose rating is below a. AAA b. AA c. A d. BBB - Exact answer d Diversification protects against a. Systematic risk b. Market risk c. Idiosyncratic risk d. Inflation risk - Exact answer c Which is the best diversification for stock investment? a. Auto company and grocery chain b. Walmart and Costco c. Home buider and auto company d. Boeing and Lockheed - Exact answer a If you are assessing a firm's ability to meet short term obligations, you would use which ratio?
D. Options - Exact answer c Why is it a challenge for a fund manager to review financial statements from other countries? A. Because the U.S. Financial Accounting Standards Board is in the beginning stages of working with the International Accounting Standards Board on converging reporting standards. B. Because the U.S. Generally Accepted Accounting Principles and the International Financial Reporting Standards vary. C. Because the U.S. Financial Accounting Standards and the International Accounting Standards Board abandoned the project to converge financial reporting rules. D. Because the U.S. Financial Accounting Standards Board does not work with the International Accounting Standards Board on mitigating differences in reporting standards. - Exact answer b What is true about the content and structure of an income statement? A. It reports the expenses and liabilities at a point in time. B. It reports the revenues and expenses for a period of time. C. It reports the assets and expenses for a period of time. D. It reports the assets, liabilities, and equity at a point in time. - Exact answer b What is true when income for tax purposes is higher than accounting income A. Accounting income tax expenses is the same as actual income tax payable. B. Actual income taxes payable will be lower than accounting income tax expense. C. Actual income taxes payable will be the same as accounting income tax expense. D. Actual income taxes payable will be higher than accounting income tax expense. - Exact answer d What does the statement of cash flows report? A. A firm's cash balance at a point in time B. A firm's cash net income for a point in time C. A firm's cash balance and changes for a period of time D. A firm's cash net income for a period of time - Exact answer c
What does net income measure that the cash flow from operating activities does not? A. Credit sales to customers B. Payments made to suppliers of goods and services C. Depreciation expenses D. Payments to employees or other expenses - Exact answer b Which measure of cash flow is commonly used to evaluate the change in revenue and costs? A. Cash flow from operating activities B. Free cash flow to the firm C. Cash flow from financing activities D. Free cash flow to equity - Exact answer a An analyst is comparing the ratios of two firms and needs to address accounting differences. What would be considered an accounting difference between the two firms? A. The firms have different auditors B. The firms use different inventory methods C. The firms have different fiscal years D. The firms are in different industries - Exact answer b For the year 2013, a firm has a return on equity (ROE) that is greater than return on assets (ROA). Which conclusion would an analyst draw from these numbers? A. The firm is ineffectively using debt. B. The firm is ineffectively managing their inventory C. The firm is effectively managing their inventory D. The firm is effectively using debt - Exact answer d What is an example of an estimate used in recording transactions? A. Deciding whether to expense or depreciate a fixed asset B. Deciding the cost of fixed asset when calculating depreciation expense C. Deciding the salvage value of a fixed asset when calculating depreciation expense D. Deciding whether to sell a fixed asset - Exact answer c What is the coupon rate (yield) of a bond? A. The interest accrued on the bond through expiration
