Finc 341

Individuals' capital losses are allowed to be carried forward indefinitely

True

If a wealthy corporation owns real estate for 3 years and then sells it, the tax on the profit would be capped at 15%, and most likely the corporation would have to pay an additional 3.8% on the profit for the healthcare tax

false

If an individual has $4,000 of capital gains and $17,000 of capital losses this year, that person will pay no tax on the capital gains and will be able to keep $3,000 of his salary from being taxed this year and then carry $8,000 of capital loss forward to the next tax year.

false

A man buys a house for $400,000. He passes away 15 years later when his house is worth$900,000. His heir sells the house and owes tax on 15% of the $500,000 capital gain

false

All of an S corporation's income is reported as dividend income to its stockholders, and thus hascaps on the tax rates applied

False

Management's goal should be to take actions designed to maximize a firm's value

True

An S corporation must have no more than 100 stockholders

True

An S corporation must have no more than 100 stockholders

True

The value of any business other than a relatively small one will probably be maximized if it is organized as a corporation - it has less risk, can raise more capital, and the investment is liquid

True

A benefit of focusing on ROE is that it ensures that all profitable projects will be accepted so thatthe average ROE of the firm will be boosted

False

Since ROE is an important measure of performance, financial managers should try to maximizethe company's ROE

False

EVA is different from Net Income because EVA reflects the cost of equity as well as the cost ofdebt

True

When two mutually exclusive projects are being considered, the one with the higher ROE shouldbe chosen, regardless of project size

False

A firm's EPS is highly correlated with its stock price.

false

S&Ps 500 historical average is?

15.50

Would this firm's ROA increase if it used less leverage (debt)? (The size of the firm does not change.)

a. ROA would increase.

b. ROA would decrease.

c. ROA would stay exactly the same.

d. Both ROA and ROE would increase.

e. Both ROA and ROE would decrease

A

The higher the interest rate on a firm's debt, the lower its basic earning power (BEP) ratio, otherthings held constant.

False

The higher a firm's tax rate, the lower its basic earning power (BEP) ratio, other things heldconstant

False

The higher a firm's debt ratio, the lower its basic earning power (BEP) ratio, other things heldconstant

False

If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds theinterest rate on its debt, adding assets and financing them with debt will raise the firm's expectedROE

True

The higher the dividend payout ratio, the lower the basic earning power (BEP).

False

The dollar has increased in value since the Fed raised rates over the past few years.

True

The U.S. dollar exchange rates would have been greatly affected by the vast increase in currencyif the other major countries had not been increasing their amount of currency as well

True

An increase in the value of the dollar helps U.S. companies who import goods.

True

A good time to invest in long-term bonds is when the rates are low so that when rates go up, theprice on those bonds will go up

False

Between 1913 and 2019, inflation has averaged 2.96 percent, but between 1990 and 2017 the average inflation was 2.31 percent

True

Since the 2008 Financial Crisis, the Fed used 3 rounds of quantitative easing to increase the moneysupply

True

When inflation is high, the Federal Reserve tends to tighten the money supply, which will in turnpush down short-term interest rates

False

When the Fed raises the reserve requirement, interest rates are pushed upward

True

If expected inflation increases less within some foreign country than in the United States, the valueof that country's currency is likely to increase compared to U.S. currency

True

If a yield curve is inverted, inflation is definitely expected to decrease since the MRP is always trying to lift the L-T end of the yield curve

True

The NASDAQ index uses value-weighted market weights

True

Collateralized debt obligations (CDOs) backed by pools of higher risk (subprime) mortgages playeda major role in the 2007-2008 financial crisis.

True

Firms with higher overall market values in the DJIA (the Dow) index move the index more thansmaller companies in the DJIA since value-weighted market weights are used

False

Lower fees motivate investors to move toward index funds

True

According to the figure in the text, since 1995 the NASDAQ Index has outperformed the Dow and the S&P 500 indices

True

The spread between yield curves of corporate bonds and Treasury bonds is larger the longer thematurity because the corporate bonds are considered riskier if they have a long time to maturity,and because of this extra risk, they are less liquid

True

According to the text, inflation peaked at about 13% in 1980

True

If the Fed lowers rates, it could cause foreigners to sell their U. S. bonds. They would be paid in dollars, which they would then sell, lowering the value of the dollar and helping U.S. manufacturers export goods

True

When the Fed fights a recession by reducing the interest rate, that is known as "loading the gun" toprotect the economy

False

During the Financial Crisis, the Fed Funds rate went down to the range of 0% to 0.25%, and stayed at that rate until December of 2015 when the Fed decided to start increasing the Fed Funds rate.

True

Robo-Advisors utilize algorithmic technology to create relatively low-cost optimal investment portfolios for investors.

True

Technology has allowed crowdfunding where some firms raise money directly from investors

True

The Glass Steagall Act helped the U.S. economy recover after the 2008 financial recession.

False

Google used a Dutch auction method to allocate its IPO shares.

True

The rise of ECNs accelerated the move toward 24-hour trading.

True

When managers do not work hard, the firm's stock price will probably fall, making the firm a prospect for a takeover by a corporate raider.

True

In recent years, major shareholders have felt empowered to push on companies to act in the best interest of the shareholders.

True

Managers have the duty to protect existing creditors from detrimental changes in the amount of debt used by the company.

True

The threat of firing helps to get managers to do their best for the shareholders

True

Studies have shown that tying a manager's compensation to productivity only has minimal effect

False

The numerator for the ratio ROIC is EBIT(1-T). Why isn't it EBT(1-T)?

a. It is because the interest expense is not available to give to the shareholders

.b. It is because the interest expense is a definite part of the "return" to give to investors, and should not have been taken out

.c. It is because only operating cash flow should be considered.

d. Since shareholders invest capital into the equity of the firm, interest expense should not be considered.

e. Because ROIC is part of the cash flow that will be put on a timeline and discounted back to t=0 using the weighted average cost of capital.

B

If a firm's total capital remains the same, but its level of debt increases, the ROA will go up a little,but the ROE will decrease.

False

If a firm's Times Interest Earned is 3.0, the firm has revenue of $3.00 to cover each dollar ofinterest expense.

False

When two mutually exclusive projects have different sizes, the smaller project should be chosen ifit has the higher ROE.

True

The higher the percentage of debt in the capital structure, the lower the ROE for a project.

False

A firm's ROA and ROE are equal if the firm has no debt

False

Higher rates of return are expected on riskier investments.

True

Short-term interest rates have a higher correlation with inflation than long-term rates

True

The Federal Reserve often raises interest rates during recessions to stimulate the economy bygiving bondholders more return on their bonds.

False

During boom times in the economy, inflation typically rises, making it necessary for the Fed to tighten (decrease) the money supply

True

The Fed can increase the money supply by buying bonds from the open markets

True

When the Fed decreases the reserve rate for banks, the money supply is increased.

True

After the Financial Crisis of 2008, the Fed Funds rate went down to the range of 0% to 0.25%,and stayed at that rate until the Fed finally decided to start increasing the rate in 2015.

True

The spread between yield curves of corporate bonds and Treasury bonds is larger the longer thematurity because the corporate bonds are considered to have more risk of default if they have along time to maturity, and because of this extra risk, they are less liquid.

True

When the Fed brings the interest rate up, it is "firing the gun" to have a weapon against inflationin the U.S..

False

If the Fed increases the discount rate on Fed loans to banks, the money supply is decreased

True

For corporations, dividends distributed to shareholders are tax-deductible.

False

An individual's capital gains are taxed at long-term capital gains rates if held for more than oneyear

True

Caps on long-term capital gains tax rates are intended to encourage investment capital into thestock, bond, and real estate markets.

True

Interest expense is tax-deductible for corporations.

True

There are no caps on tax rates for long-term capital gains made by corporations.

True

In 2017, if a Corporation A owned 80 percent or more of another corporation's stock, CorporationA will not have to pay any tax on the dividends received from the other corporation

True

A traditional IRA is funded with before-tax dollars so the owner has to pay tax on the funds whentaken out upon retirement

True

In order for a 26 percent federal-plus-state tax bracket corporation to be able to pay $1.00 individends, it must earn approximately $1.35 in pre-tax income

True

.In 2017, individuals in the 15% bracket only paid 10% tax on long-term capital gains

False

If an individual has $4,000 in capital gains and $9,000 in capital losses this year, the $4,000 in capital gains would not be taxed, $3,000 of the loss would be used to keep ordinary income from being taxed, and the remaining $2,000 of loss would be carried forward to the next year

True

It took the highest average tax paid by corporations from 38% to a flat tax of 21%.

False

It hurt corporations handle large losses since they can no longer carry those losses back in time

True

It made dividend income received by corporations be taxed more.

True

It allows the stepped-up basis on inherited assets

True

It cancelled the Alternative Minimum Tax rule for corporations but not for individuals.

True

Because the Dow Jones Industrial Average (DJIA) is market-value weighted, changes in thevalue of the largest five companies in the index can easily move the entire index.

False

Index funds and ETFs have lower fees than regular mutual funds

True

AMEX merged with NYSE Euronext in 2008, and was integrated into NYSE in 2009.

True

Wealthy investors are more attracted to municipal bonds

True

When determining annual managerial compensation, EVA is better than MVA

True

An advantage of incorporating is that ownership is easily transferred.

True

An S corporation's owners are taxed on their % of the taxable income each year even if those earnings are not distributed to the owners.

True

A partnership is dangerous to the owners since each owner is liable for anything the other ownersdo, and the owners' personal assets (up to a point) can be lost in a lawsuit.

True

The U.S. has just hit 3.4% unemployment for the first time since 1981.

False

The S&P500 Index now is approximately equal to what it was 9 months ago even though the Fed has taken the funds rate up 400 basis points (4%) and reduced the federal balance sheet by 0.5trillion dollars (i.e. tightened the money supply by selling bonds)

True

Corporations have unlimited liability

false

because pf their size, large corporations face fewer regulations than smaller corporations and sole proprietorships

false

Bond covenants are designed to reduce potential conflicts between stockholders/managers and bondholders

True

Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders interest

False

In a partnership, liability for other partners misdeeds is limited to the amount a particular partner has invested in the business

false

The primary goal of a publicly owned firm interested in serving its stockholders should be to:

Maximize the stock price per share

When several large firms join together to finance a large project, this is known as crowdfunding

False

Proponents of high frequency trading (HFT) firms argue that HFT firms generate liquidity in the market

True