Question 66 

Which of the following effects is more likely to occur when using equity screens for high dividend paying stocks and low P/E stocks, respectively?

      High dividends                         Low P/Es 

A) Include too many financial services firms    Include too many growth firms 

B) Include too many financial services firms    Exclude too many growth firms 

C) Exclude too many financial services firms    Exclude too many growth firms 

D) Exclude too many financial services firms    Include too many growth firms  

Question 67 

If market interest rates change, the change in market value of a U.S. firm's outstanding debt is reported in its financial statements: 

A) in a footnote.

B) as an adjustment to income. 

C) as an adjustment to retained earnings.

D) only if the debt is refinanced or exchanged.

Question 68  

 Which of the following lease provisions would least likely cause a lease to be classified as a capital lease? The: 

A) collectibility of the lease payments by the lessor is unpredictable.

B) term of the lease is more than 75 percent of the estimated economic life of the leased property.

C) present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.

D) lease contains a bargain purchase option.

Question 69 

During a recent luncheon, Angus Rahamut and Dan Riding became engaged in a discussion of issues related to corporate governance. Neither of these individuals is an expert in the field of corporate governance and either of them may have made an inaccurate statement. Which of the following is most likely to be one of these inaccurate statement? 

A) “Board members must have the experience and qualifications necessary for them to be able to make decisions independently from the firm’s management.”

B) “Corporate governance is the set of internal controls, processes, and procedures that direct the management of a firm.”

C) “In order to avoid conflicts of interest, board members should seek management approval prior to hiring external advisors.”

D) “To be independent, a board member must not have any material relationship with the firm’s executive management or their families.”

Question 70 

Which of the following is the most restrictive measure of liquidity? 

A) Quick ratio.

B) Current ratio.

C) Cash turnover.

D) Cash ratio.

Question 66 

The correct answer was B) 

Include too many financial services firms        Exclude too many growth firms 

A screen for high dividend paying stocks will likely include a disproportionately high number of financial services firms as such firms typically pay higher dividends. A screen to identify firms with low P/E ratios will likely exclude growth firms from the sample as high expected earnings growth leads to high P/Es. 

This question tested from Session 10, Reading 42, LOS d

Question 67 

The correct answer was A) in a footnote. 

Gains or losses from changes in the market value of outstanding debt are not recognized. SFAS 107 requires disclosures about the fair value of outstanding debt based on year-end or quarter-end prices. These disclosures are made in a footnote to the notes to the financial statements. 

This question tested from Session 9, Reading 39, LOS f

Question 68 

The correct answer was A) collectibility of the lease payments by the lessor is unpredictable. 

The other choices are the criteria for a capital lease.

This question tested from Session 9, Reading 40, LOS a

Question 69 

The correct answer was C) “In order to avoid conflicts of interest, board members should seek management approval prior to hiring external advisors.” 

Ideally, independent board members can hire external consultants without management’s approval. This enables the board to obtain advice on specialized issues that is not biased by the interests of management. 

This question tested from Session 11, Reading 48, LOS a

Question 70 

The correct answer was D) Cash ratio. 

The broadest measure of liquidity is the current ratio (current assets / current liabilities). A more restrictive indication of liquidity is the quick ratio [(current assets – inventory) / current liabilities]. The most restrictive measure of liquidity is the cash ratio [(current assets − inventory – receivables) / current liabilities], or simply (cash + short term marketable securities) / current liabilities. 

This question tested from Session 11, Reading 46, LOS a

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