2. The annual interest rate specified within a bond indenture is called which of the following?

Multiple Choice

• The coupon rate of interest.
• The market rate of interest.
• The effective rate of interest.
• The actual rate of interest.

4. Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds, the market rate of interest was 10%. Which of the following statements is incorrect?

Multiple Choice

• The bonds were issued at par.
• Annual interest expense will equal the company's annual cash payments for interest.
• The book value of the bonds will decrease as cash interest payments are made.
• Annual interest expense is the same regardless of whether the effective-interest or straight-line method of amortization is used.

6. Common stockholders have voting rights and can declare cash dividends.

True or False

7. The payment of a previously declared cash dividend has an overall effect of:

Multiple Choice

• Reducing retained earnings and reducing liabilities by the amount of the dividend.
• Reducing retained earnings and increasing contributed capital by the same amount.
• Reducing assets and reducing liabilities by the amount of the dividend.
• Reducing assets and reducing retained earnings by the amount of the dividend.

12. The quality of income ratio increases when depreciation expense is recorded.

True or False

13. Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?

Multiple Choice

• A decrease in accounts payable.
• Patent amortization expense.
• An increase in prepaid insurance.
• A gain on the sale of a depreciable asset.

15. Return on equity (ROE) by the DuPont model is a function of three ratios: net profit margin, return on assets, and financial leverage.

True or False

16. Home Depot's operating strategy is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable service-oriented personnel and aggressive advertising. Which of the following is not as critical to achieving Home Depot's strategy?

Multiple Choice

• Cost control
• Product differentiation
• High level of customer service
• High sales volume