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Fundamentals of Financial Management 14th Edition by Eugene F. Brigham – Test Bank
Sample Questions
Instant Download With Answers
| CHAPTER_02_FINANCIAL_MARKETS_AND_INSTITUTIONS
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions.
Multiple Choice: True/False
|
| 1. A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-1 The Capital Allocation Process |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.01 – The Capital Allocation Process |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial intermediaries |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 2. The NYSE is defined as a “spot” market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 3. The NYSE is defined as a “primary” market because it is one of the largest and most important stock markets in the world.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 4. Primary markets are large and important, while secondary markets are smaller and less important.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 5. Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 6. A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 7. Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-3 Financial Institutions |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.03 – Financial Institutions |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial institutions |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 8. Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-3 Financial Institutions |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.03 – Financial Institutions |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial institutions |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 9. Trades on the NYSE are generally completed by having a brokerage firm acting as a “dealer” buy securities and adding them to its inventory or selling from its inventory. The NASDAQ, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-4 The Stock Market |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.04 – The Stock Market |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 10. The “over-the-counter” market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-4 The Stock Market |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.04 – The Stock Market |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 11. If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market transactions |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 12. The term IPO stands for “individual purchase order,” as when an individual (as opposed to an institution) places an order to buy a stock.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market transactions |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 13. In a “Dutch auction” for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the “market clearing price.” All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market transactions |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 14. When a corporation’s shares are owned by a few individuals who are associated with the firm’s management, we say that the stock is closely held.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Closely held stock |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 15. A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Public company |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 16. If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-6 Stock Markets and Returns |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.06 – Stock Markets and Returns |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market returns |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 17. The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-6 Stock Markets and Returns |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.06 – Stock Markets and Returns |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market returns |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 18. The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-6 Stock Markets and Returns |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.06 – Stock Markets and Returns |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market returns |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 19. Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock’s total market value, is then calculated, and that average return is often used as an indicator of the “return on the market.”
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-6 Stock Markets and Returns |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.06 – Stock Markets and Returns |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market returns |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 20. Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called “the return on the S&P Index,” and it is often used as an indicator of the “return on the market.”
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-6 Stock Markets and Returns |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.06 – Stock Markets and Returns |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Stock market returns |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| Multiple Choice: Conceptual
|
21. You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?
| |
a. |
This is an example of a direct transfer of capital. |
| |
b. |
This is an example of a primary market transaction. |
| |
c. |
This is an example of an exchange of physical assets. |
| |
d. |
This is an example of a money market transaction. |
| |
e. |
This is an example of a derivative market transaction. |
| ANSWER: |
a |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-1 The Capital Allocation Process |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.01 – The Capital Allocation Process |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Capital allocation |
| KEYWORDS: |
Bloom’s: Comprehension |
| OTHER: |
Multiple Choice: Conceptual |
|
22. Which of the following statements is CORRECT?
| |
a. |
The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. |
| |
b. |
An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. |
| |
c. |
Capital market instruments include both long-term debt and common stocks. |
| |
d. |
If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. |
| |
e. |
While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. |
| ANSWER: |
c |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
23. Which of the following is a primary market transaction?
| |
a. |
You sell 200 shares of IBM stock on the NYSE through your broker. |
| |
b. |
You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. |
| |
c. |
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. |
| |
d. |
One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. |
| |
e. |
IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years. |
| ANSWER: |
c |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
24. Which of the following is an example of a capital market instrument?
| |
a. |
Commercial paper. |
| |
b. |
Preferred stock. |
| |
c. |
U.S. Treasury bills. |
| |
d. |
Banker’s acceptances. |
| |
e. |
Money market mutual funds. |
| ANSWER: |
b |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Capital market instruments |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
25. Money markets are markets for
| |
a. |
Foreign currencies. |
| |
b. |
Consumer automobile loans. |
| |
c. |
Common stocks. |
| |
d. |
Long-term bonds. |
| |
e. |
Short-term debt securities such as Treasury bills and commercial paper. |
| ANSWER: |
e |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Money markets |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
26. Which of the following statements is CORRECT?
| |
a. |
If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. |
| |
b. |
If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. |
| |
c. |
The NYSE is an example of an over-the-counter market. |
| |
d. |
Only institutions, and not individuals, can engage in derivative market transactions. |
| |
e. |
As they are generally defined, money market transactions involve debt securities with maturities of less than one year. |
| ANSWER: |
e |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial market transactions |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
27. You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
| |
a. |
A money market transaction. |
| |
b. |
A primary market transaction. |
| |
c. |
A secondary market transaction. |
| |
d. |
A futures market transaction. |
| |
e. |
An over-the-counter market transaction. |
| ANSWER: |
c |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-2 Financial Markets |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.02 – Financial Markets |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial market transactions |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
28. Which of the following statements is CORRECT?
| |
a. |
Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. |
| |
b. |
Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. |
| |
c. |
Hedge funds have more in common with investment banks than with any other type of financial institution. |
| |
d. |
Hedge funds have more in common with commercial banks than with any other type of financial institution. |
| |
e. |
Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only “sophisticated investors” (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary “due diligence” on their own rather than have it done by the SEC or some other regulator. |
| ANSWER: |
e |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-3 Financial Institutions |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.03 – Financial Institutions |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Hedge funds |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
29. Which of the following statements is CORRECT?
| |
a. |
While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. |
| |
b. |
The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. |
| |
c. |
Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. |
| |
d. |
Money markets are markets for long-term debt and common stocks. |
| |
e. |
A liquid security is a security whose value is derived from the price of some other “underlying” asset. |
| ANSWER: |
b |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-4 The Stock Market |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.04 – The Stock Market |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets and institutions |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
30. Which of the following statements is CORRECT?
| |
a. |
The New York Stock Exchange is an auction market, and it has a physical location. |
| |
b. |
Home mortgage loans are traded in the money market. |
| |
c. |
If an investor sells shares of stock through a broker, then it would be a primary market transaction. |
| |
d. |
Capital markets deal only with common stocks and other equity securities. |
| |
e. |
While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. |
| ANSWER: |
a |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-4 The Stock Market |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.04 – The Stock Market |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
31. Which of the following statements is CORRECT?
| |
a. |
The term “IPO” stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public. |
| |
b. |
IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. |
| |
c. |
In a “Dutch auction,” investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. |
| |
d. |
It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed. |
| |
e. |
It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell. |
| ANSWER: |
c |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
IPOs |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
32. Which of the following statements is CORRECT?
| |
a. |
The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. |
| |
b. |
Capital market transactions involve only preferred stock or common stock. |
| |
c. |
If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding. |
| |
d. |
Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks. |
| |
e. |
Money market transactions do not involve securities denominated in currencies other than the U.S. dollar. |
| ANSWER: |
d |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
2-4 The Stock Market |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.04 – The Stock Market |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| TOPICS: |
Financial markets |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
33. Which of the following statements is NOT CORRECT?
| |
a. |
When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.” |
| |
b. |
“Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares. |
| |
c. |
The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. |
| |
d. |
When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market. |
| |
e. |
It is possible for a firm to go public and yet not raise any additional new capital for the firm itself. |
| ANSWER: |
b |
| POINTS: |
1 |
| DIFFICULTY: |
CHALLENGING |
| REFERENCES: |
2-5 The Market for Common Stock |
| HAS VARIABLES: |
False |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.02.05 – The Market for Common Stock |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.02 – Financial markets and interest rates |
| TOPICS: |
Ownership and going public |
| KEYWORDS: |
Bloom’s: Knowledge |
| OTHER: |
Multiple Choice: Conceptual |
|
| CHAPTER_04_ANALYSIS_OF_FINANCIAL_STATEMENTS
To keep this chapter from involving too much memorization, we provide our students with a formula sheet for use on exams. That makes a few of the questions trivially easy, but most require some thought, and some are downright challenging. Even the very easy ones make students think about the ratios. The challenging questions are labeled CHALLENGING, and most students will agree with that designation.
Some of these questions are just definitions, but others require real thought about the make-up of the ratios and relationships among the ratios. We tell our students that to answer some of these questions it is useful (1) to write out the relevant ratio or ratios, (2) then to think about how the ratios would change if the accounting data changed, and (3) occasionally to make up illustrative data to test their conclusions.
Note that there is some overlap between the True/False and the multiple choice questions, as some T/F statements are used in the MC questions.
|
| 1. Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-1 Ratio Analysis |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.01 – Ratio Analysis |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Ratio analysis |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 2. The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Liquidity ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 3. Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Liquidity ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 4. High current and quick ratios always indicate that the firm is managing its liquidity position well.
| ANSWER: |
False |
| RATIONALE: |
It might have too much liquidity. Liquid assets generally provide low returns. |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Current ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 5. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Current and quick ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 6. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Current and quick ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 7. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change.
| ANSWER: |
False |
| RATIONALE: |
The quick ratio would increase as receivables replaced inventory. |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Current and quick ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 8. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Asset management ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 9. A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Inventory turnover ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 10. In general, it’s better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Inventory turnover ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 11. The days sales outstanding tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Days sales outstanding |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 12. If a firm’s fixed assets turnover ratio is significantly higher than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Fixed assets turnover ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 13. Debt management ratios show the extent to which a firm’s managers are attempting to magnify returns on owners’ capital through the use of financial leverage.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-4 Debt Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.04 – Debt Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Debt management ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 14. The more conservative a firm’s management is, the higher its total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is likely to be.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-4 Debt Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.04 – Debt Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Debt management ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 15. Other things held constant, the higher a firm’s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + common equity)], the higher its TIE ratio will be.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-4 Debt Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.04 – Debt Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Debt management ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 16. The times-interest-earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-4 Debt Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.04 – Debt Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
TIE ratio |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 17. Profitability ratios show the combined effects of liquidity, asset management, and debt management on a firm’s operating results.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Profitability ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 18. The basic earning power ratio (BEP) reflects the earning power of a firm’s assets after giving consideration to financial leverage and tax effects.
| ANSWER: |
False |
| RATIONALE: |
BEP = EBIT/Assets. EBIT reflects earnings before the effects of leverage (interest) and taxes, so the statement is false. |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
BEP ratio |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 19. The operating margin measures operating income per dollar of assets.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Operating margin |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 20. The profit margin measures net income per dollar of sales.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Profit margin |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 21. The return on invested capital measures the total return that a company has provided for its investors.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
ROIC ratio |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 22. The “apparent,” but not necessarily the “true,” financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
| ANSWER: |
True |
| RATIONALE: |
Many of the ratios show sales over some past period such as the last 12 months divided by an asset such as inventories as of a specific date. Assets like inventories vary at different times of the year for a seasonal business, thus leading to big changes in the ratio. |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-10 Uses and Limitations of Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.10 – Uses and Limitations of Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Balance sheet changes |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 23. Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used the same or similar accounting methods.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
EASY |
| REFERENCES: |
4-10 Uses and Limitations of Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.10 – Uses and Limitations of Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Ratio limitations |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 24. The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
| ANSWER: |
True |
| RATIONALE: |
A high current ratio is consistent with a lot of inventory. A low inventory turnover is also consistent with a lot of inventory. If the CR exceeds industry norms and the turnover is below the norms, then the firm has more inventory than most other firms, given its sales. It could just be carrying a lot of good inventory, but it might also have a normal amount of “good” inventory plus some “bad” inventory that has not been written off. So the statement is true. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Inventory turnover ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 25. It is appropriate to use the fixed assets turnover ratio to appraise firms’ effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
| ANSWER: |
False |
| RATIONALE: |
The FA turnover is Sales/FA, and it gives an indication of how effectively the firm utilizes its FA. The proportion of FA to TA is not relevant to this usage. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-3 Asset Management Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.03 – Asset Management Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Fixed assets turnover |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 26. Other things held constant, the more debt a firm uses, the lower its profit margin will be.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Profit margin |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 27. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin of 8% for Firm B. Firm A’s total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A’s higher profit margin.
| ANSWER: |
False |
| RATIONALE: |
A’s higher total debt to total capital ratio would tend to lower its profit margin. Since its margin is already higher, this indicates that A is the better managed company. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Profit margin |
| KEYWORDS: |
Bloom’s: Analysis |
|
| 28. Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
| ANSWER: |
False |
| RATIONALE: |
PM = NI/Sales. A decline in sales would, other things held constant, increase the PM. An increase in financial leverage would lead to higher interest charges, which would decrease net income, which would decrease the PM. So, the net effect could be an increase or a decrease in the PM, or no change. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Profit margin |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 29. Other things held constant, the more debt a firm uses, the lower its operating margin will be.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Operating margin |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 30. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
BEP ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 31. Other things held constant, the more debt a firm uses, the lower its return on total assets will be.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
ROA |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 32. Since the ROA measures the firm’s effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA.
| ANSWER: |
False |
| RATIONALE: |
Two firms could have identical EBITs but different amounts of interest, tax rates, and different amounts of assets, and thus different ROAs.
| |
Example: |
A |
B |
| EBIT = Sales revenues − Operating costs = |
EBIT |
$100.0 |
$100.0 |
| Interest differs. B has more debt: |
Interest |
10.0 |
20.0 |
| |
EBT |
$ 90.0 |
$ 80.0 |
| Both have 35% rate: |
Taxes |
31.5 |
28.0 |
| |
AT Inc. |
|
$ 58.5 |
|
$ 52.0 |
| Assets differ: |
Assets |
$200.0 |
$500.0 |
| |
ROA |
29.3% |
10.4% |
|
|
|
|
|
|
|
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
ROA |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 33. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder’s viewpoint, than the return on total assets (ROA).
| ANSWER: |
False |
| RATIONALE: |
Stockholders should, and generally do, consider the ROE as being probably the single most important ratio based strictly on the financial statements. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
ROE |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 34. The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-5 Profitability Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.05 – Profitability Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
ROIC and ROA |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 35. Market value ratios provide management with an indication of how investors view the firm’s past performance and especially its future prospects.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-6 Market Value Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.06 – Market Value Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Market value ratios |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 36. In general, if investors regard a company as being relatively risky and/or having relatively poor growth prospects, then it will have relatively high P/E and M/B ratios.
| ANSWER: |
False |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-6 Market Value Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.06 – Market Value Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Market value ratios |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 37. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-6 Market Value Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.06 – Market Value Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
P/E ratio |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 38. The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-6 Market Value Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.06 – Market Value Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
M/B ratio |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 39. Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
| ANSWER: |
False |
| RATIONALE: |
Think about the DuPont equation: ROE = PM × TATO × Equity multiplier. Similar financing policies will lead to similar Equity multipliers. Moreover, competition in the capital markets will cause ROEs to be similar, because otherwise capital would flow to industries with high ROEs and drive returns down toward the average, given similar risks. To have similar ROEs, firms with relatively high PMs must have relatively low TATOs, and vice versa. Therefore, the statement is false. |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-7 Tying the Ratios Together: The DuPont Equation |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.07 – Tying the Ratios Together: The DuPont Equation |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
DuPont equation |
| KEYWORDS: |
Bloom’s: Comprehension |
|
| 40. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably be a good move, as it would increase the ROE from 7.5% to 13.5%.
| ANSWER: |
True |
| RATIONALE: |
DuPont equation: ROE = PM × TATO × Equity multiplier. Given the data, the statement is true.
| PM |
× |
TATO |
× |
Eq. Mult. |
= |
ROE |
| 5.0% |
|
1.5 |
|
1.0 |
|
7.5% |
| 4.5% |
|
1.5 |
|
2.0 |
|
13.5% |
|
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-7 Tying the Ratios Together: The DuPont Equation |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.07 – Tying the Ratios Together: The DuPont Equation |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
DuPont equation |
| KEYWORDS: |
Bloom’s: Application |
|
| 41. Determining whether a firm’s financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of examining changes in a firm’s performance over time.
| ANSWER: |
True |
| POINTS: |
1 |
| DIFFICULTY: |
MODERATE |
| REFERENCES: |
4-9 Using Financial Ratios to Assess Performance |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.09 – Using Financial Ratios to Assess Performance |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Trend analysis |
| KEYWORDS: |
Bloom’s: Knowledge |
|
| 42. Even though Firm A’s current ratio exceeds that of Firm B, Firm B’s quick ratio might exceed that of A. However, if A’s quick ratio exceeds B’s, then we can be certain that A’s current ratio is also larger than B’s.
| ANSWER: |
False |
| RATIONALE: |
This question can be answered by thinking carefully about the ratios: Demonstration that the first sentence is true: QR(B) > QR(A)
| |
|
|
CR: A > B |
|
|
B > A |
| A: |
|
= |
1.67 |
|
= |
0.67 |
| B: |
|
= |
1.50 |
|
= |
1.00 |
Demonstration that the second sentence is false: QR(B) < QR(A)
| |
|
|
CR: A < B |
|
|
B < A |
| A: |
|
= |
1.00 |
|
= |
0.67 |
| B: |
|
= |
1.50 |
|
= |
0.50 |
The key is inventory, which is in the CR but not in the QR. The firm with more inventory can have the higher CR but the lower QR. |
| POINTS: |
1 |
| DIFFICULTY: |
CHALLENGING |
| REFERENCES: |
4-2 Liquidity Ratios |
| LEARNING OBJECTIVES: |
FOFM.BRIG.16.04.02 – Liquidity Ratios |
| NATIONAL STANDARDS: |
United States – BUSPROG.FOFM.BRIG.16.03 – Analytic skills
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking |
| STATE STANDARDS: |
United States – OH – DISC.FOFM.BRIG.16.05 – Financial analysis and cash flows |
| TOPICS: |
Liquidity ratios |
| KEYWORDS: |
Bloom’s: Analysis |
|
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