TRUE/FALSE QUESTIONS QUIZ 1-3

Question 1

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.

Answer 1

FALSE

Question 2

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).

Answer 2

FALSE

Question 3

Nations do not have the sovereignty to takeover (expropriate) the assets of a firm without compensation

Answer 3

FALSE

Question 4

Having the manager’s compensation tied to the company’s performance increases the agency problem that corporations face

Answer 4

FALSE

Question 5

A firm’s net income reported on its income statement must equal the operating cash flows on the statement of cash flows

Answer 5

FALSE

Question 6

In 2010, the Securities and Exchange Commission (SEC) announced its support for Generally Accepted Accounting Principles (GAAP)

Answer 6

FALSE

Question 7

Cultural differences do not impact the multinational corporations as they expand into different geographic regions

Answer 7

FALSE

Question 8

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.

Answer 8

FALSE

Question 9

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

Answer 9

FALSE

Question 10

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

Answer 10

FALSE

Question 11

Industrial groups are organizations comprised of companies in different industries with common ownership interests, which include firms necessary to sell and manufacture products

Answer 11

TRUE

Question 12

The balance sheet includes historical values that can impact the validity of a firm’s financial ratios.

Answer 12

TRUE

Question 13

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

Answer 13

TRUE

Question 14

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

Answer 14

TRUE

Question 15

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

Answer 15

TRUE

Question 16

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

Answer 16

TRUE

Question 17

The term multinational corporation is used to describe a firm that operates in two or more countries.

Answer 17

TRUE

Question 18

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Answer 18

FALSE

Question 19

Inflation leads to an increase in the purchasing power of investors.

Answer 19

FALSE

Question 20

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.

Answer 20

FALSE

Question 21

The present value of an uneven cash flow can be determined by using the annuity equations

Answer 21

FALSE

Question 22

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

Answer 22

FALSE

Question 23

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase

Answer 23

FALSE

Question 24

The present value of an investment increases as the opportunity cost rate increases

Answer 24

FALSE

Question 25

Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up

Answer 25

TRUE

Question 25

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.

Answer 25

FALSE

Question 25

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

Answer 25

FALSE

Question 25

In general, when rates in the financial markets increase, the prices (values) of financial assets decrease

Answer 25

TRUE

Question 25

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

Answer 25

TRUE

Question 25

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

Answer 25

FALSE

Question 25

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding

Answer 25

TRUE

Question 25

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.

Answer 25

TRUE

Question 25

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

Answer 25

FALSE

Question 25

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

Answer 25

TRUE

Question 26

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

Answer 26

TRUE

Question 26

Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States

Answer 26

FALSE

Question 26

If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan

Answer 26

TRUE

Question 26

Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated

Answer 26

FALSE

Question 26

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not

Answer 26

TRUE

Question 26

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

Answer 26

FALSE

Question 26

A bond’s value will increase when interest rates increase.

Answer 26

FALSE

Question 26

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

Answer 26

TRUE

Question 26

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

Answer 26

TRUE

Question 26

A call provision gives the issuing corporation the right to call in the preferred stock for redemption

Answer 26

TRUE

Question 26

The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.

Answer 26

TRUE

Question 26

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

Answer 26

TRUE

Question 27

The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest rates

Answer 27

TRUE

Question 27

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.

Answer 27

TRUE

Question 27

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

Answer 27

TRUE

Question 27

Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise

Answer 27

TRUE

Question 28

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%.

Answer 28

TRUE

Question 29

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

Answer 29

TRUE

Question 30

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

Answer 30

TRUE

Question 31

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.

Answer 31

TRUE