1. The main function of the investment dealer is to serve as:
a) the middleperson between the firm in need of funds and investors
b) underwriter
c) an advisor to the firm
d) a market maker
2. All of the following are characteristics of private placements except:
a) there are no securities commission filing requirements
b) there is less flexibility for the firm
c) initial costs may be lower than with a public issue
d) the interest rate is usually higher due to lower liquidity
3. The coupon rate on a bond is:
a) the initial or face value of the bond
b) the yield to maturity
c) the rate at which the principal of the bond accrues
d) the stated interest rate of the bond
4. Bonds are rated based on all of the following criteria except:
a) ability to make interest payments
b) consistency of performance
c) debt-equity ratio
d) nominal yield
5. As the owners of the firm, common shareholders:
a) have a primary claim on earnings
b) have the right to vote on all important corporate issues
c) have a legally enforceable right to dividends
d) play a secondary role in financing the firm
6. Dividends may be considered relevant because:
a) they increase the investor's overall return
b) a higher return will be earned than with retained earnings
c) they are preferred by investors in higher tax brackets
d) they resolve uncertainty in the minds of investors
7. All of the following are characteristics of the expansion stage of corporate growth except
a) sales expansion continues, but at a decreasing rate
b) returns on investment decline
c) the asset expansion rate increases
d) the firm is better able to pay higher cash dividends
8. The purchaser or holder of a call option has:
a) the obligation to sell the underlying security
b) the obligation to buy the underlying security
c) the right but not the obligation to sell the underlying security
d) the right but not the obligation to buy the underlying security
9. If a bond with a face value of $1,000, coupon rate and yield to maturity of 8%, and conversion ratio
of 20, sees a drop in the common price to 25, the value of the security will be:
a) $500
b) greater than $1,000
c) less than $1,000
d) $1,000
10. All of the following are characteristics of the 1990s mergers and divestitures except:
a) mergers between entertainment firms was popular
b) mergers between financial services firms was also common
c) the federal government was active in divesting crown corporations
d) high interest rates made mergers more costly than in the 1970s and 1980s
11. The main focus of a stock-for-stock exchange is on:
a) the earnings per share impact of the exchange
b) the capital budgeting implications
c) the shareholders of the acquired firms
d) the growth opportunities
12. On the books of the acquiring firm, a merger may be treated as:
a) a cash purchase or a pooling of interests
b) a stock-for-stock exchange
c) a purchase of assets
d) a pooling of interests or a purchase of assets
13. Fundamental factors influencing exchange rates include:
a) inflation, government policies, translation exposure
b) interest rates, government policies, and expropriation
c) balance of payments, spot rates, and expropriation
d) government policies, balance of payments, inflation
14. Foreign exchange risk may be best defined as:
a) the chance of value change in foreign exchange rates
b) the chance that the demand for your currency will drop
c) the chance that exchange rates will be fixed
d) the political risk posed by foreign governments
15. Which of the following are not among the daily activities of financial management?
a) sale of stocks and bonds
b) credit management
c) inventory control
d) the receipt and disbursement of funds
16. The mix of debt and equity in a firm is referred to as the firm's:
a) primary capital
b) capital composition
c) cost of capital
d) capital structure
17. All of the following are decisions heavily impacted by federal income tax considerations except:
a) lease versus purchase decisions
b) the issuance of common shares versus debt
c) cash budgeting and dividend policy decisions
d) the decision to replace on asset
18. Debt utilization ratios measure:
a) the speed at which the firm is turning over its assets
b) the ability of the firm to earn an adequate return on sales, total assets, and invested capital
c) the firm's ability to pay off short term obligations as they are due
d) the debt position of the firm in light of its assets and earning power
19. Analyzing the performance of the firm through ratios over a number of years is referred to as:
a) financial analysis
b) ratio analysis
c) trend analysis
d) operations analysis
20. In order to determine cash receipts, the financial manager must know:
a) projected sales and the collection pattern
b) projected sales and the profit margin
c) gross profit and the collection pattern
d) gross profit and taxes
21. In determining the appropriate capital mix, the starting point for the firm is
a) the cost of common equity
b) the optimum capital structure
c) the present capital structure
d) the after-tax cost of debt
22. In most capital budgeting decisions, the emphasis is on:
a) reported income
b) cash flows
c) short-term profits
d) maximization of shareholder wealth
23. The basic discount rate used in net present value analysis is:
a) the internal rate of return
b) the cost of common equity
c) the net discount rate
d) the cost of capital to the firm
24. In a replacement decision, all of the following should be considered except:
a) the cost of the new equipment
b) interest costs
c) the capital loss or gain on the sale of the old equipment
d) the difference in capital cost allowance tax shields between the old and new equipment
25. All of the following are true regarding beta except:
a) it is widely used with portfolios of common stock
b) it measures the volatility of returns relative to the expected value
c) it is an important component of the Capital Asset Pricing Model (CAPM)
d) the higher the beta, the greater the risk level
26. A decision tree analysis:
a) lays out the sequence of decisions and presents a graphical comparison
b) is a form of simulation analysis
c) tends to be more accurate than simulation techniques
d) should be utilized as the sole input for the decision making process
27. Markets comprised of securities with maturities greater than one year are generally referred to as:
a) money markets
b) capital markets
c) stock markets
d) bond market
28. Markets may be said to be efficient when:
a) prices adjust rapidly to new information
b) there is a continuous market with successive trade at widely varying prices
c) the market absorbs only small dollar amounts without destabilizing prices
d) all of the above are correct
29. The main organization used in distributing securities is:
a) the stock market
b) the underwriting syndicate
c) the primary market
d) the secondary market
30. The major problem when a public firm issues new stock is:
a) pricing the security
b) underwriting the issue
c) determining the spread
d) the dilution of existing stock
31. Under the percent of sales method, the relationship between sales and what type accounts are
assumed to maintain or constant relationship:
a) income statement
b) cash budget
c) balance sheet
d) cash flows.
32. A higher degree of financial leverage may be desirable for:
a) a stable firm, with positive growth, under favorable economic conditions
b) an unstable firm operating in an uncertain environment
c) a stable firm operating in an uncertain environment
d) neither the stable nor unstable firm under any circumstances
33. In designing working capital policy, the financial manager is concerned with yield curve and:
a) dividend policy
b) balance of trade figures
c) the relative volatility of short and long term rates
d) the term structure of interest rates
34. Treasury bills are:
a) government obligations with a maturity of 3-5 years
b) sold at a discount to face value
c) the only government security that pays cash dividends
d) extremely illiquid, although extremely safe
35. As the least liquid of the current assets, inventory:
a) could technically be classified as a capital asset and amortized
b) should be managed using level production
c) should be managed using seasonal production
d) should provide the highest yield to justify investment
36. All of the following are characteristics of the term loan, except:
a) credit is extended for one to seven years
b) the loan is repaid in one lump sum at maturity
c) only superior credit applicants qualify
d) interest rates may commonly change with market conditions
37. Future value of an amount allowed to grow at a given interest rate over a period of time is known as
the:
a) future value-single amount
b) present value-single amount
c) future value-annuity
d) present value-annuity
38. Canadian mortgages have interest compounded:
a) annually
b) semiannually
c) monthly
d) it depends on the payment period
39. Business risk relates to:
a) the ability of the firm to hold its competitive position
b) the ability of the firm to maintain growth in its earnings
c) the ability of the firm to maintain stability in the earnings
d) all of the above are correct
40. The required rate of return on an equity investment can be determined by:
a) the P/E yield plus the growth rate
b) the dividend yield plus the growth rate
c) the earnings yield
d) the revenue growth rate
41. The main pressure on Canadian corporations to raise capital has come from:
a) shareholder pressure
b) securities analysts
c) the expansion of the economy
d) institutional pressure
42. A call provision allows the firm to:
a) call the bond and common stock
b) redeem bonds prior to the call date
c) pay a discount 5-10% below par
d) redeem the bond prior to maturity
43. Preferred shareholders:
a) play a primary role in the financing of the firm
b) have a subordinated claim to dividends
c) possess an ownership interest in the firm
d) normally have no vote on corporate issues
44. When a rights offering is announced:
a) common shareholders may purchase one new share for each share owned
b) a stock will initially trade rights-on
c) the share price increases when the stock goes ex-rights
d) the shareholder increases the value of his holdings by exercising the rights
45. To institutional investors, preferred stock may be very attractive because:
a) dividend payments are assured
b) dividends from another corporation are usually tax-exempt
c) the preferred yield is normally higher than that of debt
d) it provides balance to the issuing firm's capital structure
46. By maintaining a relatively stable dividend level, the firm:
a) hopes to increase holdings of its common shares
b) hopes to decrease holdings of its common shares
c) hopes to increase the discount rate applied to future dividends
d) hopes to decrease the discount rate applied to future dividends
47. If investors are optimistic about expectations for the future performance of the underlying stock of
a convertible security:
a) the conversion premium will be large
b) the conversion premium will be small
c) the bond is overpriced
d) the bond is underpriced
48. Convertible securities are subject to all of the following disadvantages except:
a) interest rates are normally below market rates
b) the convertible is purchased at a premium
c) the holder has no downside protection
d) the convertible may be subject to a call provision
49. All of the following are financial motives for mergers except:
a) the portfolio effect
b) the dividend effect
c) improved financing posture
d) tax loss carry-forwards
50. If the acquiring firm has a higher P/E ratio than the acquired firm, the resulting earnings per share
will be:
a) the same as pre-merger
b) lower
c) higher
d) cannot be determined
51. Canadian exporters accounted for what percentage of Canada's total production of goods and
services in 1997:
a) 15%
b) 25%
c) 35%
d) 50%
52. The forward rate is:
a) unrelated to the foreign exchange rate
b) the rate of exchange for future delivery
c) the rate of exchange for immediate delivery
d) the "black market" exchange rate
53. Political risk exposure may be minimized through all of the following except:
a) joint ventures with local entrepreneurs
b) joint ventures with firms from the countries
c) fully owned foreign subsidiaries
d) obtaining insurance in advance
54. A main benefit to the corporate form of organization is:
a) double taxation of corporate income
b) simplicity of decision making and low organizational complexity
c) limited liability for the corporate shareholders
d) a major management role exists for the firm's owners
55. The statement of cash flows:
a) measures changes in net income over time
b) the receipt and disbursement of funds of the firm
c) the assets of the firm and the means by which they are financed
d) emphasizes the critical nature of the firm's cash flows
56. The current cost method of financial reporting takes inflation into account and has the greatest
impact on:
a) the valuation of accounts receivable and marketable securities
b) inventory and plant and equipment
c) current assets
d) the determination of dividend policy
57. To the banker/creditor, the most important ratio group is:
a) asset utilization
b) profitability
c) liquidity
d) debt utilization
58. All of the following are primary considerations for cash payments except:
a) material costs
b) labour and overhead costs
c) receivable receipts
d) disbursements for general & administrative expenses
59. If management of an aggressive firm is apprehensive about economic conditions:
a) a highly leveraged approach should be maintained
b) a conservative approach should be implemented
c) the use of leverage should be tailored to the desired level of risk
d) the attitude of the firm has no impact
60. A high degree of financial leverage:
a) is a sign of astute financial management
b) will always decrease the cost of financing for the firm
c) will result in an increase of the firm's overall value in all cases
d) may increase the firm's risk and drive the price of the shares down
61. In most firms:
a) capital assets grow at a constant rate
b) the rate of growth for fixed and current assets remains constant
c) there is no relationship between the growth rates for fixed and current assets
d) capital assets grow slowly, while current assets fluctuate
62. The term structure of interest rates:
a) shows the interest rate pattern for securities of different risks but equal maturities
b) shows the interest rate patterns for securities of equal risk with different maturities
c) is normally based on corporate securities
d) remains constant over time
63. A firm with heavy risk exposure due to short term borrowing should:
a) carry a large amount of fixed assets
b) carry more highly liquid assets
c) increase production to avoid inventory
d) prosper in the event of a credit crunch
64. Internationally, a company may primarily prefer to hold cash balances in one currency over another
for which of the following reasons:
a) higher interest rates and a stronger currency relative to others
b) the firm is headquartered in a particular country
c) twenty-four hour a day access may be available
d) there is no real reason to favor one currency over another
65. The conditions of the terms of credit will have the greatest impact in which area:
a) the balance sheet
b) financing costs
c) accounts receivable
d) profit margin
66. Prime rate may best be defined as:
a) the rate the bank charges its most credit-worthy customers
b) the rate charged by the Bank of Canada to chartered banks
c) the rate paid by Canadian firms for eurodollar funds
d) the rate paid by firms on long term debt
67. A secured credit arrangement:
a) is never used with short-term funds
b) is always used with short-term funds
c) may help a borrower obtain otherwise unavailable funds
d) is a primary factor in the lender's decision
68. The value today of a stream of payments received over the five year period is known as:
a) future value-annuity
b) present value-annuity
c) compound sum-single amount
d) present value-single amount
69. All of the following factors influence the investor's required rate of return except:
a) the real required rate of return
b) the inflation premium
c) the risk premium
d) the risk aversion factor
70. In the "real world," corporate bonds usually pay interest:
a) continuously
b) quarterly
c) semiannually
d) annually
71. Long term lease obligations are treated as:
a) items in the footnotes of the financial statements
b) solely as an expense items on the income statement
c) in a manner similar to debt on the balance sheet
d) as an asset to the firm
72. All of the following are advantages of rights offerings except:
a) the position of current shareholders is protected
b) a rights offering provides the firm with a built-in securities market
c) more interest may be generated in the market
d) the dollar value of rights traded on exchanges is very high
73. In terms of increasing risk to the investor, the proper ranking would be:
a) common stock, preferred stock, secured debt
b) long-term government debt, subordinated debt, common stock
c) long-term government debt, secured debt, preferred stock
d) secured debt, common stock, preferred stock
74. The directors of a small, closely held corporation may be reluctant to pay dividends at all because:
a) the dividends will be taxed at a higher rate
b) they fear diluting the cash position of the firms
c) they haven't the means to do a complete funds flow analysis
d) they fear a shareholder proxy battle
75. A corporation will typically pay the highest dividends in:
a) Development-Stage I
b) Growth-Stage II
c) Expansion-Stage III
d) Maturity-Stage IV
76. Derivatives are contracts that:
a) allow the holder to buy/sell a given commodity
b) are sold only in established financial markets
c) usually expose the holder to increased risk
d) completely remove risk in financial and economic transactions
77. A convertible security has:
a) an upside limitation, but no floor value
b) no upside limitation, but a floor value
c) more sensitivity to interest rate movements than regular bonds of equal maturity
d) a single, fixed yield under all scenario
78. The minimum value of a warrant is equal to
a) warrant price-intrinsic value
b) intrinsic value-warrant price
c) (market value of common stock-warrant exercise price) X number of shares per warrant
d) the speculative premium
79. Perhaps the greatest management motive for a merger is:
a) the synergistic effect
b) new product acquisition
c) the portfolio effect
d) tax loss carry-forwards
80. The market for corporate control:
a) effectively forces managers to strive to maximize shareholder wealth
b) is best run through a holding company
c) is a separate market for arbitrageurs
d) emphasizes the portfolio effect
81. In general, the cost of producing a product is based on material, labor, and:
a) profit margin
b) cost of goods sold
c) overhead costs
d) shipping costs
82. On the pro forma balance sheet, changes in the level of accounts payable will be determined from:
a) the prior balance sheet
b) the cash budget
c) the pro forma income statement
d) the monthly cash payments schedule
83. The more aggressive firm:
a) substitutes higher fixed costs for variable costs
b) substitutes lower fixed costs for variable costs
c) has lower potential profit above the break-even point
d) is normally more effectively managed
84. The highly financially leverage firm will typically:
a) has a higher EPS figure than the conservative firm
b) has a lower EPS figure than the conservative firm
c) uses less debt than the conservative firm
d) will produce the same EPS figure as the conservative firm
85. Degree of combined leverage:
a) should be minimized by the financial manager
b) affects only balance sheet items
c) decreases the firm's operating profit
d) shows the impact of sales or volume changes on bottom line EPS
86. The cash conversion cycle equals:
a) inventory period + collection period-payables period
b) payables period-inventory period-collection period
c) payables period + inventory period-collection period
d) inventory period-collection period + payables period
87. Under normal conditions:
a) long term rates are lower than short term rates
b) the yield curve is downward sloping, or inverted
c) intermediate rates are higher than long or short term rates
d) short term rates are lower than long term rates
88. The concept of float is best defined as:
a) cheques written by the corporation that are still outstanding
b) cheques written to the corporation that are still outstanding
c) the difference between the firm's recorded cash balance and the amount credited to the firm's account
by the bank
d) what a boat does in water
89. Under normal conditions, the longer the maturity of the security:
a) the higher the yield
b) the lower the yield
c) the greater the possibility of the yield curve changing
d) the lower the level of interest rate risk
90. The largest provider of short-term credit to the firm is:
a) banks
b) bondholders
c) manufacturers or sellers of goods or services
d) shareholders
91. Regardless of the type of asset being acquired, the appropriate discount rate is:
a) the aftertax cost of debt
b) the required rate of return
c) the weighted average cost of capital
d) the cost of equity capital
92. The biggest problem facing a manager is:
a) the cost of financing
b) competitive pressures
c) the farther out the time horizon moves, the greater the uncertainty
d) changing economic conditions
93. One of the main advantages of the payback period is:
a) it is easy to use and places a premium on liquidity
b) it ignores the time value of money
c) all inflows related to the decision are considered
d) outflows are equated with inflows using the rate of return
94. The internal rate of return method:
a) does not consider inflows after the cutoff period
b) calculates the interest rate that equates outflows with subsequent inflows
c) determines the time required to recoup the initial investment
d) determines whether future benefits justify current expenditures
95. With mutually exclusive projects:
a) both projects can be accepted
b) the project with the higher NPV is accepted
c) both projects are rejected
d) only one project is accepted
96. All of the following are true of the coefficient of variation except:
a) it eliminates the size difficulty resulting from standard deviation
b) it is computed by dividing the standard deviation by the expected value
c) it measures the volatility of returns relative to the market
d) the larger the coefficient of variation, the greater the risk
97. Projects that increase the overall risk level of the firm:
a) should not be undertaken
b) should be discounted at the firm's cost of capital
c) should be discounted at a rate higher than the cost of capital
d) will have a low standard deviation
98. The extent of correlation among projects is represented by:
a) the coefficient of correlation
b) the coefficient of variation
c) the standard correlation coefficient
d) the variance
99. One of the main purposes of the capital markets is:
a) to provide access to short-term funds
b) to provide access to long term funds
c) to allocate capital to the most efficient user
d) to set various interest rates
100. Which of the following characteristics of financial intermediaries is incorrect:
a) they are the interface between suppliers and demanders of funds
b) they increase the cost of funds to corporation and governments
c) they help make the flow of funds efficient and competitive
d) they include banks, mutual funds, and credit unions