TRUE/FALSE QUESTIONS QUIZ 1-3 Flashcards
In a competitive marketplace, “good ethics” is a wonderful idea but an impractical standard, because there are simply too few benefits to be gained from maintaining high business ethics.
FALSE
The disadvantages associated with a proprietorship are similar to those of a partnership. A major difference between these two forms of business organization is that a partnership requires a legal agreement that commits the partners’ personal assets, which means that partnerships have little difficulty raising large amounts of capital (similar to corporations).
FALSE
Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation
FALSE
Having the manager’s compensation tied to the company’s performance increases the agency problem that corporations face
FALSE
A firm’s net income reported on its income statement must equal the operating cash flows on the statement of cash flows
FALSE
In 2010, the Securities and Exchange Commission (SEC) announced its support for Generally Accepted Accounting Principles (GAAP)
FALSE
Cultural differences do not impact the multinational corporations as they expand into different geographic regions
FALSE
No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to effectively compete, even if those cost-increasing actions yield significant benefits to the firm.
FALSE
Retained earnings is the amount of cash that has been generated by the firm through its operations but has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts, and thus these cash accounts, when added together, will always be equal to the total retained earnings of the firm
FALSE
Managers of firms that use alternative accounting techniques to inflate current earnings are likely to generate long-term benefits to the shareholders of the firm
FALSE
Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products
TRUE
The balance sheet includes historical values that can impact the validity of a firm’s financial ratios.
TRUE
In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm
TRUE
When generating financial statements, the Securities and Exchange Commission (SEC) allows publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP) if IFRS is the accounting system used in their home country
TRUE
In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by companies with policies that are more aligned with stockholder interests
TRUE
Noncash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books
TRUE
The term multinational corporation is used to describe a firm that operates in two or more countries.
TRUE
During or near peaks of business activity, yield curves generally are either flat or downward sloping.
FALSE
Inflation leads to an increase in the purchasing power of investors.
FALSE
The real rate of interest is composed of a risk-free rate of interest plus the default risk premium and liquidity premium that reflects the riskiness of the security.
FALSE
The present value of an uneven cash flow can be determined by using the annuity equations
FALSE
Bonds with higher liquidity must offer higher interest rates in the market, because such investments can be easily converted into cash on short notice at or near the amounts originally invested
FALSE
The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase
FALSE
The present value of an investment increases as the opportunity cost rate increases
FALSE
Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up
TRUE
One of the disadvantages of issuing a zero-coupon bond is that any tax shield associated with the bond’s price appreciation cannot be claimed until the bond matures.
FALSE
A common stock’s par value is always equal to the market value of the stock on the last day of the fiscal year in which the stock is issued
FALSE
In general, when rates in the financial markets increase, the prices (values) of financial assets decrease
TRUE
An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations
TRUE
According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the stated conversion price
FALSE
The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding
TRUE
Firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from less efficient firms or from those whose products are not in demand.
TRUE
Stock prices move opposite to the changes in the dividends stockholders expect to be paid in the future, but they move in the same direction as changes in rates of return
FALSE
Gale Corporation leases the printing equipment it uses. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due
TRUE
Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt
TRUE
Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States
FALSE
If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan
TRUE
Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated
FALSE
Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not
TRUE
Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest rates. They affect the actual maturity of the bond but not its price
FALSE
A bond’s value will increase when interest rates increase.
FALSE
If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to “call” the old bonds in and effectively refinance its debt at a lower rate
TRUE
Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10 percent currently have a yield to maturity (YTM) equal to 8 percent. Based on this information, it is understood that BB&C’s bonds must currently be selling at a premium in the financial markets
TRUE
A call provision gives the issuing corporation the right to call in the preferred stock for redemption
TRUE
The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
TRUE
A call provision gives bondholders the right to demand, or “call for,” the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates
TRUE
The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest rates
TRUE
Changes in stock prices occur because investors change the rates of return they require to invest in stocks and/or the expectations about the cash flows associated with stocks change.
TRUE
Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm’s managers. Such covenants are contained in the bond’s indenture
TRUE
Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise
TRUE
A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.
TRUE
If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield
TRUE
Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock
TRUE
If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.
TRUE