Financial Management Test 2

Created by cmullen13 

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What is generally the largest source of short-term credit for small firms?
A) Bank Loans
B) Trade Credit
C) Commercial Paper
D) Installment loans

Trade Credit

Commercial paper is popular with many firms because..

it can usually be issued below the prime rate

which of the following is not a characteristic of commercial paper?
A) issued by large firms
B) one-to-two year maturity
C) rates are usually below prime rates on business loans
D) all of the above

one-to-two year maturity

Bank loans to business firms...
A) are usually short-term in nature
B) are preferred by the banker to be self-liquidating
C) Are preferred by the banker to be floating rate
D) all of these

All of these

in determining the cost of bank financing, which is the important factor?
A) prime rate
B) nominal rate
C) effective rate
D) discount rate

effective rate

A dollar today is worth more than a dollar to be received in the future because..
A) of the risk of nonpayment in the future
B) the dollar can be invested today and earn interest
C) inflation will reduce purchasing power of a future dollar
D) none of the above

The dollar can be invested today and earn interest

An annuity can be defined as..
A) a payment at a fixed interest rate.
B) a series of payments of unequal amount
C) a series of consecutive payments of equal amounts
D) a series of yearly payments

a series of consecutive payments of equal amounts

As the time period until receipt increases, the present value of an amount at a fixed interest rate...
A) decreases
B) remains the same
C) increases
D) not enough information to tell

decreases

In determining the future value of a single amount, one measures...
A) the future value of periodic payments at a given interest rate
B)the present value of an amount discounted at a given interest rate
C) the future value of an amount allowed to grow at a given interest rate.
D) the present value of periodic payments at a given interest rate.

the future value of an amount allowed to grow at a given interest rate

Babe Ruth JR has agreed to play for the Rangers for $8 million per year for 10 years. What table would you use to calculate the value of this contract in today's dollars?
A) present value of annuity
B) present value of single amount
C) future value of an annuity
D) future value of a single amount

present value of an annuity

In a general sense, the value of any asset is the...
A) value of the dividends received from the asset
B) present value of the cash flows received from the investment
C) value of past dividends and price increases for the asset
D) future value of the expected earnings discounted by the asset's cost of capital

present value of the cash flows received from the investment

a bond which has a yield to maturity greater than its coupon rate will sell for a price
A) below par
B) at par
C) above par
D) none of these

below par

The dividend valuation model stresses the...
A) importance of earnings per share
B) importance of dividends and legal rules for maximum payment
C) relationship of dividends to market prices
D) relationship of dividends to earnings per share

relationship of dividends to market prices

the relationship between a bond's price and the yield to maturity...
A) changes at a constant level for each percentage change in yield
B) is an inverse relationship
C) is a linear relationship
D) none of the above

is an inverse relationship

the value of a common stock is based on its...
A) past performance
B) historic dividends
C) current earnings
D) value of future benefits to the holder

value of future benefits to the holder

financial capital does not include...
A) common stock
B) bonds
C) preferred stock
D) working capital

working capital

the overall weighted average cost of capital is used instead of costs of specific sources of funds because
A) use of the cost of specific sources of capital would make investment decisions inconsistent
B) a project with the lowest return would be accepted under the specific cost of criteria
C) investments funded by low cost debt would have an average over other investments
D) Both A and C are correct

both A and C are correct

The pre-tax cost of debt for a new issue of debt is determined by.
A) the investor's required rate of return on stock
B) the coupon rate on existing debt
C) the yield to maturity of outstanding bonds
D) all of the above

the yield to maturity of outstanding bonds.

The after-tax cost of preferred stock to the issuing corporation...
A) is the same as the before-tax cost
B) is usually lower than the cost of debt
C) is dependent on the firm's tax bracket
D) none of the above

is the same as the before-tax cost

A firm's cost of financing in an overall sense, is equal to its...
A) weighted average cost of capital
B) past yield for various kinds of securities
C) current yield for various kinds of securities
D) all of the above

all of these

The first step in the capital budgeting process is
A) collection of data
B) idea development
C) assign probabilities
D) determine cash flow

idea development

Capital budgeting is primarily concerned with...
A) capital formation in the economy
B) planning future financing needs
C) evaluating investment alternatives
D) minimizing the cost of capital

evaluating investment alternatives

Which of the following is not a time-adjusted method for ranking investment proposals?
A) net present value method
B) payback method
C) internal rate of return method
D) all are time adjusted methods

payback method

A characteristic of capital budgeting is...
A) a large amount of money is never involved
B) the internal rate of return must be less than the cost of capital
C) the internal rate of return must be greater than the cost of capital
D) the time horizon is at least five years

the internal rate of return must be greater than the cost of capital

The internal rate of return and net present value methods...
A) always give the same investment decision answer
B) never give the same investment decision answer
C) usually give the same investment decision answer
D) always give answers different from the payback method

always give the same investment decision answer

to determine the future value of an amount that will earn 8% interest paid quarterly for five years, the number of periods and discount rate will be:
A) 8%, 5
B) 2%, 5
C) 32%, 20
D) 8%, 20
E) 2%, 20

2%, 20

the owner of a building that costs $100,000 who wishes to determine that annual rent necessary to earn a 10% return on the investment in 10 years should use the:
A) present value formula (solve for FV)
B) present value of annuity formula (solve for A
C) future value formula (solve for PV)
D) any of the above are correct

present value of annuity formula (solve for A)

the interest rate used to determine the present value of future cash flows is known as the
A) anniuity
B) interest factor
C) internal value
D) discount rate
E) interpolation

Discount rate

a series of consecutive end-of-period payments or receipts of equal amount is called a(n):
A) annuity
B) future value
C) present value
D) uneven series
E) annuity due.

annuity

the required rate of return on a corporate bond is often called the:
A) risk premuim
B) yield to maturity
C) real rate of return
D) approximate yield to maturity
E) present value

yield to maturity

the primary determinant of the value of a share of stock is the:
A) P/E ratio
B) EPS
C) discount rate
D) present value of an expected stream of future dividends
E) risk premium

present value of an expected stream of future dividends

A firm's cost of capital is
A) set by its board of directors
B) market determined
C) set by the management of the firm
D) the same for each firm in an industry
E) set by the SEC

market determined

in the net present value method, cash flows are discounted at:
A) the cost of capital
B) the internal rate of return
C) the net profit margin
D) the MACRS
E) The ADR

the cost of capital

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