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decrease in common stock D. increase in accounts payable E. increase in inventory 2. Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value 3. Over the past year, the quick ratio for a firm increased while the current ratio remained constant. Given this information, which one of the following must have occurred? Assume all ratios have positive values. A. current assets increased B. current assets decreased C. inventory increased D. inventory decreased E. accounts payable increased 4. Wise's Corner Grocer had the following current account values. What effect did the change in net working capital have on the firm's cash flows for 2009?

A. net use of cash of $37 B. net use of cash of $83 C. net source of cash of $83 D. net source of cash of $111 E. net source of cash of $135

Chapter 12

5. Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return? A. risk premium B. geometric return C. arithmetic D. standard deviation E. variance 6. Which one of the following best defines the variance of an investment's annual returns over a number of years? A. The average squared difference between the arithmetic and the geometric average annual returns. B. The squared summation of the differences between the actual returns and the average geometric return. C. The average difference between the annual returns and the average return for the period. D. The difference between the arithmetic average and the geometric average return for the period. E. The average squared difference between the actual returns and the arithmetic average return. 7. The average compound return earned per year over a multi-year period is called the _____ average return. A. arithmetic B. standard C. variant D. geometric E. real 8. Stacy purchased a stock last year and sold it today for $3 a share more than her purchase price. She received a total of $0.75 in dividends. Which one of the following statements is correct in relation to this investment? A. The dividend yield is expressed as a percentage of the selling price. B. The capital gain would have been less had Stacy not received the dividends. C. The total dollar return per share is $3. D. The capital gains yield is positive. E. The dividend yield is greater than the capital gains yield.

9. Which one of the following categories of securities has had the most volatile returns over the period 1926-2007? A. long-term corporate bonds B. large-company stocks C. intermediate-term government bonds D. U.S. Treasury bills E. small-company stocks 10. Inside information has the least value when financial markets are: A. weak form efficient. B. semiweak form efficient. C. semistrong form efficient. D. strong form efficient. E. inefficient. 11. According to theory, studying historical stock price movements to identify mispriced stocks: A. is effective as long as the market is only semistrong form efficient. B. is effective provided the market is only weak form efficient. C. is ineffective even when the market is only weak form efficient. D. becomes ineffective as soon as the market gains semistrong form efficiency. E. is ineffective only in strong form efficient markets. 12. A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment? A. -$382 B. -$372 C. -$1,528 D. -$1,488 E. -$1,360 Total dollar return = ($4.80 - $8.62 + $0.10) 400 = -$1,488 13. Last year, you purchased a stock at a price of $47.10 a share. Over the course of the year, you received $2.40 per share in dividends while inflation averaged 3.4 percent. Today, you sold your shares for $49.50 a share. What is your approximate real rate of return on this investment? A. 6.30 percent B. 6.79 percent C. 7.18 percent D. 9.69 percent E. 10.19 percent Nominal return = ($49.50 - $47.10 + $2.40)/$47.10 = 10.19 percent Approximate real return = 0.1019 - 0.034 = 6.79 percent

14. One year ago, you purchased 200 shares of a stock at a price of $54.18 a share. Today, you sold those shares for $40.25 a share. During the past year, you received total dividends of $164 while inflation averaged 4.2 percent. What is your approximate real rate of return on this investment? A. -24.20 percent B. -28.40 percent C. -20.00 percent D. 20.00 percent E. 24.20 percent Nominal return = [$40.25 - $54.18 + ($164/200)]/$54.18 = -0.2420 Approximate real return = -0.2420 - 0.042 = -28.40 percent. 15. A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past four years. Based on this information, what is the 95 percent probability range of returns for any one given year? A. -13.56 to 20.56 percent B. -24.60 to 31.80 percent C. -30.62 to 37.62 percent D. -47.68 to 54.68 percent E. -71.73 to 71.73 percent Average return = (0.18 + 0.11 - 0.21 + 0.06)/4 = 0.035 = (0.18 - 0.035)2 + (0.11 - 0.035)2 + (-0.21 - 0.035)2 + (0.06 - 0.035)2] = .170587 95% probability range = 0.035 (2 0.170587) percent = -30.62 to 37.62 percent 16. Your friend is the owner of a stock which had returns of 25 percent, -36 percent, 1 percent, and 16 percent for the past three years. Your friend thinks the stock may be able to achieve a return of 50 percent or more in a single year. Based on these returns, what is the probability that your friend is correct? A. less than 0.5 percent B. greater than 0.5 percent but less than 1.0 percent C. greater than 1.0 percent but less than 2.5 percent D. greater than 2.5 percent but less than 16 percent E. greater than 16.0 percent Average return = (0.25 - 0.36 + 0.01 + 0.16)/4 = 0.015 = [1/(4 - 1)] [(0.25 - 0.015)2 + (-0.36 - 0.015)2 + (0.01 - 0.015)2 + (0.16 - 0.015)2] = 0.2689 Upper end of 68 percent range = 0.015 + (1 0.2689) = 28.39 percent Upper end of 95 percent range = 0.015 + (2 0.2689) = 55.28 percent The probability of earning at least 50 percent in any one year is greater than 2.5 percent but less than 16 percent.

17. A stock has annual returns of 13 percent, 21 percent, -12 percent, 7 percent, and -6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. A. 3.89; 3.62 B. 3.89; 4.60 C. 3.62; 3.89 D. 4.60; 3.62 E. 4.60; 3.89 Arithmetic average = (0.13 + 0.21- 0.12 + 0.07 - 0.06)/5 = 4.60 percent Geometric return = (1.13 1.21 0.88 1.07 0.94).20 - 1 = 3.89 percent 18. A stock has a geometric average return of 14.6 percent and an arithmetic average return of 15.5 percent based on the last 33 years. What is the estimated average rate of return for the next 6 years based on Blume's formula? A. 14.79 percent B. 14.96 percent C. 15.28 percent D. 15.36 percent E. 15.42 percent

Chapter 18 19. The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle. 20. The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle. 21. The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.

22. Which one of the following statements is correct concerning the cash cycle? A. The longer the cash cycle, the more likely a firm will need external financing. B. Increasing the accounts payable period increases the cash cycle. C. A positive cash cycle is preferable to a negative cash cycle. D. The cash cycle can exceed the operating cycle if the payables period is equal to zero. E. Offering early payment discounts to customers will tend to increase the cash cycle. 23. Which of the following actions will tend to decrease the inventory period? I. discontinuing all slow-selling merchandise II. selling obsolete inventory below cost just to get rid of it III. buying raw materials only as needed for the manufacturing process IV. producing goods on demand versus for inventory A. I and III only B. II and IV only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV 24. Which one of the following is indicative of a short-term restrictive financial policy? A. purchasing inventory on an as-needed basis B. granting credit to all customers C. investing heavily in marketable securities D. maintaining a large accounts receivable balance E. keeping inventory levels high 25. Which of the following are associated with a restrictive short-term financial policy? I. little, if any, investment in marketable securities II. liberal credit terms for customers III. low cash balances IV. increasing inventory levels A. I and III only B. II and IV only C. I and IV only D. III and IV only E. I, II, and III only

The Lumber Mart recently replaced its management team. As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating. Which of the following should the employees expect as a result of this policy change? I. reduction in sales due to stock outs II. greater inventory selection III. decreased sales due to the new accounts receivable credit policy IV. decreased investment in marketable securities A. I and II only B. II and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV A flexible short-term financial policy: I. increases shortage costs due to frequent cash-outs. II. tends to increase sales as compared to a restrictive policy. III. requires a sizeable investment in current assets. IV. incurs more carrying costs than a restrictive policy. A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, III, and IV only 42. Shortage costs include which of the following? I. disruption of production schedules II. inventory ordering costs III. lost customer goodwill IV. brokerage costs A. I and II only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV The optimal investment in current assets for an operating firm occurs at the point where: A. both shortage costs and carrying costs equal zero. B. shortage costs are equal to zero. C. carrying costs are equal to zero. D. carrying costs exceed shortage costs. E. the total costs of holding current assets is minimized.

Metal Products Co. has an inventory period of 53 days, an accounts payable period of 68 days, and an accounts receivable turnover rate of 18. What is the length of the cash cycle? A. 3.00 days B. 5.28 days C. 26.28 days D. 71.00 days E. 73.28 days Cash cycle = (365/18) + 53 - 68 = 5.28 days

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