John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky investment. One year later, Bill’s investment is worth $1,030. Which of the following statements is MOST correct? A) John’s investment must be worth more than $1,030 because of the risk-return trade-off, given that John’s investment was more risky. B) If […]
Two companies have identical assets and operating activities. Which of the follow statements is true? A) The company with more debt will have lower operating income due to interest expense. B) Both companies have the same net income. C) The company with more debt will have higher operating income due to leverage. D) The company […]
Capital market instruments include A) negotiable certificates of deposit. B) Treasury bills. C) corporate equities. D) commercial paper. ANSWER C
Project A is expected to generate positive cash flow of $1 million in 10 years while Project B is expected to generate $500,000 in 5 years. Therefore A) Project B may be preferred to Project A if the opportunity cost of money is high enough. B) Both projects have equal value because they average $100,000 […]
All of the following statements about agency problems are true EXCEPT A) Agency problems result from the separation of management and the ownership of a firm. B) Agency problems interfere with the goal of maximizing shareholder value. C) Agency costs are paid by the managers who do not act in the shareholders’ best interest. D) […]
An income statement may be represented as follows: A) Revenues – Liabilities = Net Income. B) Sales – Expenses = Profits. C) Sales – Liabilities = Profits. D) Sales – Expenses = Retained Earnings. ANSWER B
Borrowing more money will always increase a company’s return on equity because the company is using financial leverage, but it also adds to the riskiness of the company. Indicate whether the statement is true or false ANSWER FALSE
When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money “leaving your hands.” Indicate whether the statement is true or false ANSWER TRUE
An example of a primary market transaction is A) AT&T repurchasing its own stock from a stockholder. B) a sale of some outstanding common stock of AT&T by an investor. C) a new issue of common stock by AT&T. D) all of the above ANSWER C
How does a firm use financial ratios? Who else might use financial ratios and why? What will be an ideal response? ANSWER Financial analysis is not just a tool for financial managers but also can be used effectively by investors, lenders, suppliers, employees, and customers. Within the firm, managers use financial ratios to: […]
