Test Bank for Corporate Finance –
Complete Chapters with Actual And
Complete Solutions by Stephen A. Ross,
Randolph W. Westerfield & Jeffrey F.
Jaffe A Value of Approach 2026|A+
Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) -
ANSWER-False
Stocks and bonds are two types of financial instruments (T/F) - ANSWER-True
The matching principle in accrual accounting requires that: - ANSWER-Revenues be
recognized when the earnings process is complete and matches expenses to revenues
recognized.
A basic equation for the balance sheet is: - ANSWER-Equity = Assets - Liabilities
Why is the Balance Sheet known as a permanent statement? - ANSWER-Because the
other statements are reset at the end of the fiscal year
How do you calculate the change in Retained Earnings? - ANSWER-Net Income -
Dividends
Which of the following is generally true? - ANSWER-Operating Income and EBIT are
the same
Which components are part of total assets? - ANSWER-Cash Accounts Receivable,
Inventory, Long Term Assets
Which components are part of current assets? - ANSWER-Inventory, Cash, Accounts
Receivable, Short Term Investments
Which components are part of Total Liabilities? - ANSWER-Bonds, Accounts Payable,
Mortgage
When Fixed Assets increase what happens to Cash? - ANSWER-Cash decreases
Which is the purpose of the statement of cash flows? - ANSWER-explains the change in
cash balance for one period of time
,The OIROI (Operating Income Return on Investment) uses what elements on the
income statement? - ANSWER-EBIT, Total Assets
Why would a company be interested in the TAT-Total Asset Turnover-ratio?
a - ANSWER-How efficient assets are at producing sales
Which of the following gives the largest effective rate (APY) - ANSWER-18.6%
compounded daily
What does the beta coefficient represent? - ANSWER-It is a statistically-derived
measure of volatility
Why is depreciation expense taken out of the net income calculation, yet added back at
the end? - ANSWER-Because depreciation expense is tax deductible
Why is the NPV preferred over the IRR? Pick Two - ANSWER-1-It measures the dollar
value 2- It is harder to calculate
What does the Degree of Financial Leverage indicate? - ANSWER-The reliance on debt
If a company has a high degree of financial leverage, what does that tell us about the
firm's risk profile? - ANSWER-Higher profits to shareholders
What is the cash cycle? - ANSWER-The amount of time to regenerate cash
Why is float important to understand? - ANSWER-To time cash expenditures
What should a company do to manage its working capital? - ANSWER-Collect quickly
and pay slowly
What would be a source of information to determine Replacement Cost? - ANSWER-
Building Appraisal
What does the Sarbanes-Oxley Act require companies to do? - ANSWER-Have internal
control audits
FINRA (Financial Industry Regulatory Authority) does the following: (pick one) -
ANSWER-Prosecutes naughty stock brokers
If a product is made 100% domestically, what can affect its domestic market? -
ANSWER-International competition
If a company makes its product in a foreign country where labor costs are much lower,
what happens? - ANSWER-Profits go up and domestic employment decreases.
,If the value of a dollar increases, the price of imports: - ANSWER-Decreases
Why would a farmer buy a hedge when he signs a contract to sell produce overseas? -
ANSWER-To reduce currency risk
A basic equation for the balance sheet is: - ANSWER-Equity = Assets - Liabilities
Why is the Balance Sheet known as a permanent statement? - ANSWER-Because the
other statements are reset at the end of the fiscal year
How do you calculate the change in Retained Earnings? - ANSWER-Net Income -
Dividends
Which of the following is generally true? - ANSWER-Operating Income and EBIT are
the same
Which components are part of total assets? - ANSWER-Cash Accounts Receivable,
Inventory, Long Term Assets
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 - ANSWER-
Inventory, Cash, Accounts Receivable, Short Term Investments
Suppose the inventory turnover of a company is higher than the industry. Based on this
observation, which of the following is most likely? - ANSWER-The firm has too little
inventory resulting in lost sales or stock-outs.
If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a
lower current ratio? - ANSWER-higher
If an investor knows the idiosyncratic risk, the investor knows the: - ANSWER-Beta
Coefficient
Why would we reject a project based on the NPV? - ANSWER-the NPV is a negative
number
Why would we reject a project based on the IRR? - ANSWER-the discount rate is higher
than the IRR
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? - ANSWER-company
B invest in more working current assets
, 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? - ANSWER-
company A can attract more customers
Which of the following characterizes collection float - ANSWER-increased float indicates
slower processing time
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? - ANSWER-company B might have higher inventory turnover
In regards to Accounts Payable balances, which of the following is true: - ANSWER-
paying off Accounts Payable on the last day due is good policy
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? - ANSWER-the value of company Z id higher
Dodd-Frank regulates which segment of the U.S. Economy? - ANSWER-banking
industry
The SEC Securities & Exchange Commission requires companies to do the following:
(pick two) - ANSWER-1-register all public offering 2-regulates stock sales
false. Economics is a subfield of Finance (T/F) - ANSWER-False
Capital is defined as a financial asset. (T/F) - ANSWER-True
Stocks and bonds are two types of financial instruments (T/F) - ANSWER-True
Primary financial markets are markets where issuers place new securities with
investors. (T/F) - ANSWER-True
An IPO occurs on the primary market (T/F) - ANSWER-True
false. An IPO is a seasoned equity offering (T/F) - ANSWER-False
Syndicates are generally made up of investment banks and other institutional investors
(T/F) - ANSWER-True
false. While competitive sales allow underwriters to submit bids to purchase bonds,
negotiated sales do not. (T/F) - ANSWER-False
faslse. NASDAQ is the world's largest secondary financial market. (T/F) - ANSWER-
False
Complete Chapters with Actual And
Complete Solutions by Stephen A. Ross,
Randolph W. Westerfield & Jeffrey F.
Jaffe A Value of Approach 2026|A+
Trading on the NYSE is executed without a specialist (i.e. a market maker). (T/F) -
ANSWER-False
Stocks and bonds are two types of financial instruments (T/F) - ANSWER-True
The matching principle in accrual accounting requires that: - ANSWER-Revenues be
recognized when the earnings process is complete and matches expenses to revenues
recognized.
A basic equation for the balance sheet is: - ANSWER-Equity = Assets - Liabilities
Why is the Balance Sheet known as a permanent statement? - ANSWER-Because the
other statements are reset at the end of the fiscal year
How do you calculate the change in Retained Earnings? - ANSWER-Net Income -
Dividends
Which of the following is generally true? - ANSWER-Operating Income and EBIT are
the same
Which components are part of total assets? - ANSWER-Cash Accounts Receivable,
Inventory, Long Term Assets
Which components are part of current assets? - ANSWER-Inventory, Cash, Accounts
Receivable, Short Term Investments
Which components are part of Total Liabilities? - ANSWER-Bonds, Accounts Payable,
Mortgage
When Fixed Assets increase what happens to Cash? - ANSWER-Cash decreases
Which is the purpose of the statement of cash flows? - ANSWER-explains the change in
cash balance for one period of time
,The OIROI (Operating Income Return on Investment) uses what elements on the
income statement? - ANSWER-EBIT, Total Assets
Why would a company be interested in the TAT-Total Asset Turnover-ratio?
a - ANSWER-How efficient assets are at producing sales
Which of the following gives the largest effective rate (APY) - ANSWER-18.6%
compounded daily
What does the beta coefficient represent? - ANSWER-It is a statistically-derived
measure of volatility
Why is depreciation expense taken out of the net income calculation, yet added back at
the end? - ANSWER-Because depreciation expense is tax deductible
Why is the NPV preferred over the IRR? Pick Two - ANSWER-1-It measures the dollar
value 2- It is harder to calculate
What does the Degree of Financial Leverage indicate? - ANSWER-The reliance on debt
If a company has a high degree of financial leverage, what does that tell us about the
firm's risk profile? - ANSWER-Higher profits to shareholders
What is the cash cycle? - ANSWER-The amount of time to regenerate cash
Why is float important to understand? - ANSWER-To time cash expenditures
What should a company do to manage its working capital? - ANSWER-Collect quickly
and pay slowly
What would be a source of information to determine Replacement Cost? - ANSWER-
Building Appraisal
What does the Sarbanes-Oxley Act require companies to do? - ANSWER-Have internal
control audits
FINRA (Financial Industry Regulatory Authority) does the following: (pick one) -
ANSWER-Prosecutes naughty stock brokers
If a product is made 100% domestically, what can affect its domestic market? -
ANSWER-International competition
If a company makes its product in a foreign country where labor costs are much lower,
what happens? - ANSWER-Profits go up and domestic employment decreases.
,If the value of a dollar increases, the price of imports: - ANSWER-Decreases
Why would a farmer buy a hedge when he signs a contract to sell produce overseas? -
ANSWER-To reduce currency risk
A basic equation for the balance sheet is: - ANSWER-Equity = Assets - Liabilities
Why is the Balance Sheet known as a permanent statement? - ANSWER-Because the
other statements are reset at the end of the fiscal year
How do you calculate the change in Retained Earnings? - ANSWER-Net Income -
Dividends
Which of the following is generally true? - ANSWER-Operating Income and EBIT are
the same
Which components are part of total assets? - ANSWER-Cash Accounts Receivable,
Inventory, Long Term Assets
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 - ANSWER-
Inventory, Cash, Accounts Receivable, Short Term Investments
Suppose the inventory turnover of a company is higher than the industry. Based on this
observation, which of the following is most likely? - ANSWER-The firm has too little
inventory resulting in lost sales or stock-outs.
If a company wishes to obtain a bank loan, will it want to have a higher current ratio or a
lower current ratio? - ANSWER-higher
If an investor knows the idiosyncratic risk, the investor knows the: - ANSWER-Beta
Coefficient
Why would we reject a project based on the NPV? - ANSWER-the NPV is a negative
number
Why would we reject a project based on the IRR? - ANSWER-the discount rate is higher
than the IRR
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? - ANSWER-company
B invest in more working current assets
, 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? - ANSWER-
company A can attract more customers
Which of the following characterizes collection float - ANSWER-increased float indicates
slower processing time
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? - ANSWER-company B might have higher inventory turnover
In regards to Accounts Payable balances, which of the following is true: - ANSWER-
paying off Accounts Payable on the last day due is good policy
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? - ANSWER-the value of company Z id higher
Dodd-Frank regulates which segment of the U.S. Economy? - ANSWER-banking
industry
The SEC Securities & Exchange Commission requires companies to do the following:
(pick two) - ANSWER-1-register all public offering 2-regulates stock sales
false. Economics is a subfield of Finance (T/F) - ANSWER-False
Capital is defined as a financial asset. (T/F) - ANSWER-True
Stocks and bonds are two types of financial instruments (T/F) - ANSWER-True
Primary financial markets are markets where issuers place new securities with
investors. (T/F) - ANSWER-True
An IPO occurs on the primary market (T/F) - ANSWER-True
false. An IPO is a seasoned equity offering (T/F) - ANSWER-False
Syndicates are generally made up of investment banks and other institutional investors
(T/F) - ANSWER-True
false. While competitive sales allow underwriters to submit bids to purchase bonds,
negotiated sales do not. (T/F) - ANSWER-False
faslse. NASDAQ is the world's largest secondary financial market. (T/F) - ANSWER-
False
