MID-TERM EXAM FINC 330 SPRING 2009 TRUE/FALSE (20 pts.) 1. For the risk-averse financial manager, the more risky a given course of action, the higher the expected return must be. ANSWER: _______ 2. The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return. ANSWER: _______ 3. In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm. ANSWER: _______ 4. There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership. ANSWER: _______ 5. Limited partners may actively manage the business. ANSWER: _______ 6. The agency problem arises due to the separation of ownership and control in a firm. ANSWER: _______ 7. The income statement represents a snapshot of account balances at one point in time-on a given day. ANSWER: _______ 8. A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity. ANSWER: _______ 9. Under current accounting rules, plant and equipment appear on a company’s balance sheet valued at replacement value. ANSWER: _______ 10. The current ratio and the acid test ratio are both measures of financial leverage. ANSWER: _______ 11. Financial ratios that are higher than industry averages may indicate problems which are as detrimental to the firm as ratios that are too low. ANSWER: _______ 12. The projected change in retained earnings equals projected net income less any dividends to be paid. ANSWER: _______
13. Holding all other variables constant, as the plowback ratio increases, the sustainable growth rate increases. ANSWER: _______ 14. Discretionary sources of financing are those sources that vary automatically with a firm’s level of sales. ANSWER: _______ 15. Because accounts payable and accrued expenses increase with sales, they represent sources of spontaneous financing. ANSWER: _______ 16. Budgets provide management a tool for attempting to deal with agency problems because the budget is a tool that can be used to evaluate employee performance. ANSWER: _______ 17. In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investor’s attitude toward risk. ANSWER: _______ 18. The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta. ANSWER: _______ 19. Unsystematic risk can be eliminated through diversification. ANSWER: _______ 20. As market interest rates increase, bond prices decrease. ANSWER: _______ 21. Bonds that sell at a discount have a coupon rate lower than the market interest rate. ANSWER:
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