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1. Issuing new stock or borrowing from a bank is a cash inflow. ( )2. Since inve

1. Issuing new stock or borrowing from a bank is a cash inflow. ( )2. Since inventory may be held for more than a year, it is not a current asset. ( )3. Retained earnings represent cash. ( )4. An increase in accounts payable is cash outflow. ( )5. Assets + Equity = Liabilities. ( )6. LT debt that matures in this fiscal year is classified as a current liability. ( )7. Interest & dividends are paid before income taxes. ( )8. BV may not represent what the firm is worth. ( )9. Inventory consists of raw materials, work-in-process, and finished goods. ( )10. An increase in retained earnings is a cash inflow. ( )11. Quick ratio cannot > current ratio. ( )12. If the ´-interest-earned were 1.5, interest payments will not be made. ( )13. If inventory is sold for cash, the quick ratio rises. ( )14. If a firm issues LT debt and uses the proceeds to retire ST debt, the current ratio is unaffected. ( )15. A rapid inventory turnover may imply lost sales due to the firm being out of the item. ( )16. The more rapidly the inventory turns over, the more finance the firm needs.( )17. Leverage ratios indicate the extent to which the firm owns plant & equipment financed by debt. ( )18. If the firm has a large amount of debt financing, it is highly leveraged. ( )19. If the D/TA ratio is 50%, then the D/E ratio is 1:1. ( )20. If a firm has a high usage of operating leverage, it has few fixed expenses. ( )21. Railroads have a greater usage of operating leverage than banks. ( )22. An increase in fixed costs will tend to reduce risk since more of the firm’s cost are known and cannot be changed. ( )23. BE analysis does not indicate the output that maximizes the value of the firm.( )24. TR = P´Q. ( )25. If a firm has FC of $3K, the P=$4, and AVC=$1, the QBE=1,000 units. ( )26. TR = .5Q implies that the P is constant. ( )27. An increase in the debt ratio may be associated with an increase in risk. ( )28. A firm would prefer to issue preferred stock instead of debt since it increases the usage of financial leverage. ( )29. Since high use of financial leverage is associated with less risk, higher financial leverage may also result in higher stock prices. ( )30. The effect on EPS will be the same if a firm issues bonds with a 9% int or preferred stock with a 9% div yield. ( )31. A recession will cause earnings to fall more rapidly for less financially leveraged firms. ( )32. The lower a firm’s tax rate, the smaller is the incentive to use preferred stock instead of debt financing. ( )33. Because interest is tax-deductible, the effective cost of debt is 234. Business risk refers toa. use of accelerated depreciationb. the risk inherent in the nature of the businessc. profitabilityd. the sources of the firm’s finances35. Successful use of financial leverage maya. increase the firm’s EPSb. decrease the firm’s EPSc. decrease the investor’s ROId. none of the above36. The effective cost of debt is reduced becausea. interest is a tax-deductible expenseb. interest is not a tax-deductible expensec. interest is paid before preferred dividendsd. interest is paid after common stock dividends37. Debt financing is more risky for firms than preferred stock financing becausea. preferred dividend payments are legal obligationsb. interest payments are legal obligationsc. preferred stock must be retiredd. debt need not be refinanced38. The use of financial leveragea. alters operating leverageb. magnifies the impact of changes in sales on operationsc. magnifies changes in operating income relative to changes in revenued. implies the volatility of net income is increased39. The cost of K isa. > the cost of debt and equityb. > the cost of debt but c. d. the cost of equity40. Flotation costs of issuing new securitiesa. decreases the cost of Kb. encourage the retention of earningsc. encourage external financingd. do not affect the cost of Ke. the firm’s inventory cost

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