Download Questions from Chapter 3 - Purdue Agricultural Economics

Lab 4: Questions from Chapters 3 and 5
1. ________ indicate the firm’s capacity to meet its debt obligations, both short term and long term.
a. Liquidity ratios
c. Debt management ratios
b. Asset management ratios
d. Profitability ratios
2. The fixed asset turnover ratio is influenced by:
a. the age of the assets employed
b. the depreciation method used by the firm
c. the firm’s choice of a production technology
d. all of the above
3. The ratio group most likely to be used to indicate a firm’s ability to meet short-term financial
obligations would be:
a. liquidity ratios
c. activity ratios
b. financial leverage ratios
d. profitability ratios
4. Which of the following ratios would probably not be used to assess the profitability of a firm?
a. Return on stockholders’ equity
c. Times interest earned
b. Return on total assets
d. A and c only
5. Under the DuPont system, the return on assets is equal to:
a. the product of the gross profit margin and inventory turnover
b. the sum of the debt-equity ratio and the return on sales
c. the product of the return on sales and total asset turnover
d. the product of the return on sales, total asset turnover, and equity multiplier
e. none of the above
6. Which of the following is not affected by a change in interest expense?
a. Gross margin
d. A and b
b. EBIT
e. All of the above
c. ROE
7. Find the debt ratio of a firm with total liabilities equal to $800,000 and net worth equal to
$2,400,000.
a. .33
d. .25
b. .50
e. .67
c. .75
8. Williamson Trucking has current sales of $10,000 and a cost of goods sold of $4,300. Williamson
has projected sales to increase 50% and expects the new cost ratio to decrease by 2% due to
increased efficiency. Assuming that Williamson wants to maintain an inventory turnover of 5.0,
calculate their projected level of inventory. (round to the nearest $)
a. $1,230
b. $1,920
c. $2,180
d. $2,340
9. CVD, Inc. has an equity multiplier of 2. What is CVD’s stockholders’ equity if total liabilities are
$100,000?
a. $100,000
b. $150,000
c. $200,000
d. $50,000
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10. How much cash does Gray Computer Co. have if the firm has a current ratio of 2.5, a quick ratio of
1.2, and current liabilities of $12,000? Gray’s credit sales are $98,000 and its average collection
period is 40 days. (Assume 365 days per year.)
a. $3,660
b. $14,440
c. $10,740
d. None of the above
11. What is the market price per share of Whopie, Inc. if the firm had net income of $200,000, earnings
per share of $2.70, total equity of $800,000, and a market to book value ratio of 1.5?
a. $16.20
b. $10.80
c. $7.20
d. None of the above
12. Which of the following is not a short-term debt instrument?
a. Commercial paper
b. Common stock
c. Money market securities
d. Treasury bills
13. Which of the following is a characteristic(s) of initial public offerings (IPOs)?
a. Very stable
b. General public can get involved right away
c. Institutions are the largest investors in IPOs
d. Secondary market transaction
14. The term “red herring” relates to the:
a. SEC’s approval of a stock offering from a company whose future is questionable.
b. circulation of the company’s prospectus prior to approval by the SEC.
c. document distributed to potential investors that is stamped “incomplete information.”
d. SEC’s conditional approval of the prospectus.
15. The initial public offerings, or IPOs:
a. do not require the SEC’s final approval of the prospectus.
b. always result in immediate wealth for the executives of the company who have divested
most of their ownership through the offering.
c. represent a very risky subdivision of the general stock market.
d. all of the above
16. Which organization typically helps a company market new securities?
a. Commercial bank
b. Insurance company
c. Investment bank
d. Mutual fund
17. The ________ has traditionally been called the “over-the-counter” market.
a. American Stock Exchange
b. NASDAQ
c. New York Stock Exchange
d. money
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18. Interest is defined as the:
a. return on all investments.
b. return on debt investments.
c. return on equity investments.
d. the one year return on investments in stocks or bonds.
19. Interest rates and stock prices move:
a. randomly exhibiting no causal relationship.
b. in opposite directions.
c. up and down together.
d. none of the above
20. Interest rates are set by:
a. the forces of supply and demand in the market for debt.
b. the Federal Reserve, the nation’s central bank which regulates the banking industry.
c. senior banking executives on the basis of the funds banks have available to lend.
d. the president and his council of economic advisors.
21. The increased volatility of longer term bonds in response to interest rate movements is reflected in
the:
a. pure interest rate.
b. default risk premium.
c. liquidity risk premium.
d. maturity risk premium.
22. The interest rates we observe on financial instruments are based on the following components:
a. the real risk-free rate
b. inflationary expectations
c. risk premiums
d. all the above
e. none of the above
23. A 30-year corporate bond pays a higher interest rate than a 30-year federal government bond. This is
due to a higher __________ premium on the corporate bond.
a. inflation
b. default Risk
c. maturity Risk
d. both a & b
e. all of the above
24. Which of the following is not associated with federal government debt?
a. Liquidity risk
b. Default risk
c. Maturity Risk
d. Both a & b
e. All of the above
25. The yield curve is:
a. inverted when short-term rates are higher than long-term rates.
b. normal when it slopes upward to the right
c. a plot of interest rates versus term, also called the term structure of interest rates.
d. all of the above
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26. Match the following:
1.
2.
3.
4.
Pure interest rate
Inflation
Maturity risk
Risk-free rate
a. The rate of interest exclusive of any risk
premiums
b. Short-term investments present less risk
than long-term investments
c. The earning power of money
d. A sustained increase in the general level
of prices
27. You have been assigned to estimate the interest rates that your company may have to pay when
borrowing money in the near future. The following information is available.
kPR = 2%
MR = .1% for a 1 year loan increasing by .1% for each additional year
LR = .05% for a 1 year loan increasing by .05% for each additional year
DR = 0 for a 1 year loan, .2% for a 2-year loan, increasing.1% for each additional year
Expected Inflation Rates
Year 1 = 7%
Year 2 = 5%
Year 3 and thereafter = 3%
a.
b.
Calculate the inflation adjustment (INFL) for a 5-year loan.
Calculate the appropriate interest rate for a 5-year loan.
28. Assume that the pure interest rate is expected to be 3% for the foreseeable future, and inflation is
expected to be 3%, 4% and 5% respectively for each of the next three years, and 6% thereafter. What
is the base rate component for a 10-year bond?
a. 6.00%
c. 8.00%
e. 9.00%
b. 7.40%
d. 8.40%
29. Use the following information to calculate the interest rate on an eight-year bond just issued by
Becher Inc.
Inflation: next two years = 2.5%
year 3 and beyond = 4.5%
Pure Rate = 2.0%
Maturity Risk Premium = zero for a 1-year maturity, increasing by .1% each year thereafter
Default Risk Premium = 1.5%
Liquidity Risk Premium = 0.0% for treasuries; 0.5% for Corporate bonds
a. 7.7%
c. 8.7%
e. 9.4%
b. 8.2%
d. 9.2%
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