ECON 102 QUIZ 2 QUESTIONS AND ANSWERS

ECON 102 QUIZ 2 QUESTIONS AND ANSWERS 25. When using the economic order quantity model A) ordering costs increase as the level of inventory increases. B) carrying costs decrease as the level of inventory increases. C) costs are minimized when total carrying costs and total ordering costs are equal. D) none of the above Difficulty: Medium Type: Conceptual 26. Hedging A) is a way to protect your accounts receivable position. B) increases risk. C) is a legal agreement to buy or sell a financial futures contract. D) can be carried out with a futures contract. Difficulty: Medium Type: Conceptual 27. Which of the following is not a true statement about commercial paper? A) Finance paper is sold directly to the lender by the finance company. B) Finance paper is also referred to as direct paper. C) Dealer paper is sold directly to the lender by a finance company. D) Industrial companies, utility firms or finance companies too small to selldirect paper sell dealer paper. Difficulty: Medium Type: Memorization 28. Which of the following best describes the benefits to the borrower of selling asset backed securities? A) Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price. B) The borrower trades future cash flows for current cash flows. C) The asset-backed security is likely to carry a high credit rating of AA or better. D) b and c are correct. Difficulty: Easy Type: Conceptual 29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A) $5,554.50 B) $9,660.00 C) $7,245.00 D) none of the above. Difficulty: Hard Type: Application Chapter 8 Sources of Short-Term Financing 30. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest? A) 9.3% B) 7.0% C) 11.7% D) None of the above Difficulty: Medium Type: Application 31. The prime rate A) is the effective rate of interest for banks' best customers. B) has been quite volatile during the past two decades, moving as much as 8 percentage points in a 12-month period. C) is usually lower than treasury bill rates. D) none of the above Difficulty: Medium Type: Memorization 32. Accounts receivable may be used as a source of financing by A) pledging the receivables as loan collateral. B) factoring the receivables to a finance company. C) selling securities backed by the receivables. D) all of the above Difficulty: Medium Type: Conceptual 33. The required compensating balance is usually computed as a A) percentage of customer loans outstanding. B) factor of accounts receivable. C) percentage of the bank's commitments toward future loans. D) a and c are correct Difficulty: Medium Type: Conceptual Chapter 9 The Time Value of Money 34. The concept of time value of money is important to financial decision making because A) it emphasizes earning a return on invested capital. B) it recognizes that earning a return makes $1 worth more today than $1 received in the future. C) it can be applied to future cash flows in order to compare different streams of income. D) all of the above Difficulty: Medium Type: Conceptual 35. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period? A) $2,915 B) $3,570 C) $6,254 D) $8,570 Difficulty: Medium Type: Application 36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed? A) Between 11% and 12% B) Between 8% and 9% C) 17% D) None of the above Difficulty: Medium Type: Application Chapter 10 Valuation and Rates of Return 37. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the market value of the bond? Use annual analysis. A) over $1,000 B) under $1,000 C) over $1,200 D) not enough information given to tell Difficulty: Easy Type: Application 38. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is 14%. What is the preferred stock price if the required rate of return is 11%? A) $45.45 B) $41.67 C) $35.71 D) none of the above Difficulty: Easy Type: Application 39. Which of the following does not influence the yield to maturity for a security? A) required real rate of return B) risk free rate C) business risk D) yields of similar securities Difficulty: Medium Type: Conceptual 40. The cost of common stock is usually greater than the simple dividend yield because A) investors perceive risk in common stock. B) investors expect both a current dividend and future growth. C) dividends are not tax-deductible. D) the company must make profits before it can pay dividends. Difficulty: Easy Type: Memorization 41. 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. Difficulty: Easy Type: Memorization Chapter 11 Cost of Capital 42. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because A) interest rates may change. B) the firm's stock price will increase and raise the cost of equity financing. C) the financial risk of the firm may increase and thus drive up the cost of all sources of financing. D) underwriting costs may change. Difficulty: Medium Type: Conceptual 43. Each project should be judged against A) the specific means of financing used to support its implementation. B) the going interest rate at that point in time. C) the cost of new common stock equity. D) none of the above. Difficulty: Medium Type: Conceptual 44. The cost of debt is determined by taking the A) present value of the interest payments and principal times one minus the tax rate. B) historical yield on bonds times one minus the tax rate C) estimated yield on new bond issues of the same risk times one minus the shareholder marginal tax rate. D) none of the above Difficulty: Medium Type: Conceptual 45. The pre-tax cost of debt for a new issue of debt is determined by A) the investor's required rate of return on issued stock. B) the coupon rate of existing debt. C) the yield to maturity of outstanding bonds. D) all of the above. Difficulty: Medium Type: Conceptual Chapter 14 Capital Markets46. During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from A) Russia's difficulty in transforming its economy into a capitalistic one. B) Japan's prolonged recession and banking crisis. C) The Euro-zone countries comprising the European Monetary Union and a single currency. D) The huge Chinese economy and its billion plus people. Difficulty: Medium Type: Conceptual 47. With respect to the United States and its relationship with the rest of the world, it can be said that A) the U.S. has invested more dollars in the rest of the world than foreign countries have invested in the U.S. B) the U.S. has actively helped foreign countries finance the government deficits. C) foreign investors hold large positions in U.S. government securities. D) All of the above. Difficulty: Medium Type: Memorization 48. Financial instruments in the capital markets generally fall under what category in the Balance Sheet? A) Short-term liabilities and equities. B) Long-term liabilities and equities. C) Near cash assets. D) None of the above. Difficulty: Easy Type: Conceptual Chapter 16 Long-Term Debt and Lease Financing 49. With regard to interest rates and bond prices it can be said that A) a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices. B) a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices. C) long-term rates are more volatile than short-term rates. D) a decrease in interest rates will cause bond prices to fall. Difficulty: Medium Type: Conceptual 50. Which one of these conditions must be met for a lease to qualify as a capital lease? A) The lease contains a bargain purchase price at the end of the lease. B) The lease must have a value of at least $10 million. C) The lease must have a life of 10 years. D) All of the above. Difficulty: Medium Type: Memorization Chapter 17 Common and Preferred Stock Financing 51. Which of the following is not a true statement? A) Common stockholders have a residual claim to income. B) Bondholders may force a corporation into bankruptcy for failure to make interest payments. C) Common stockholders are legally entitled to some dividend. D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock. Difficulty: Medium Type: Memorization 52. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns earned $3 million this year, what could be the maximum payment to the preferred stockholders on a per share basis? A) $19.50 per share B) $15.00 per share C) $13.00 per share D) $6.50 per share Difficulty: Easy Type: Application 53. When comparing common stock of the same company it is fair to say that A) all shares, no matter how many classes, are all created with the same equal rights. B) companies sometimes have two different classes of shares with unequal rights to dividends and votes. C) the Securities and Exchange Commission allows only one class of common stock. D) investors are indifferent between class A and class B shares. Difficulty: Easy Type: Memorization 54. Dr. J. wants to buy an IBM personal computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside? A) $697.00 B) $627.93 C) $823.15 D) $531.81 Difficulty: Medium Type: Application