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Part 1 Introduction to Managerial Finance Chapters in This Part Chapter 1 The Role of Managerial Finance Chapter 2 The Financial Market Environment Integrative Case 1: Merit Enterprise Corp. © 2015 Pearson Education, Inc. Chapter 1 The Role of Managerial […]

Part 5 Long-Term Investment Decisions Chapters in This Part Chapter 10 Capital Budgeting Techniques Chapter 11 Capital Budgeting Cash Flows Chapter 12 Risk and Refinements in Capital Budgeting Integrative Case 5: Lasting Impressions Company Chapter 10 Capital Budgeting Techniques nInstructor’s […]

P10-10. NPV—mutually exclusive projects LG 3; Intermediate a. and b. Press A c. Ranking—using NPV as criterion Rank Press NPV 1 C $15,043.89 2 B 2,584.34 3 A 4,228.21 d. Profitability Indexes Profitability Index  S Present Value Cash Inflows […]

Project B c. Data for NPV Profiles NPV Discount Rate A B 0% $80,000 $35,000 12% $15,238 $9,161 15% — $ 4,177 16% 0 — 18% — 0 CF0  $85,000; CF1  $40,000; CF2  $35,000; CF3  $30,000 […]

Chapter 11 Capital Budgeting Cash Flows Instructor’s Resources  Overview This chapter expands upon the capital budgeting techniques presented in the last chapter (Chapter 10). Shareholder wealth maximization relies upon selection of projects that have positive net present values. The most […]

P11-15. Depreciation LG 5; Basic Depreciation Schedule Year Depreciation Expense 1 $68,000 0.20 $13,600 P11-16. Incremental operating cash inflows LG 5; Intermediate a. Incremental profits before depreciation and tax $1,200,000  $480,000 $720,000 each year b. Year (1) (2) (3) […]

P11-27. Integrative—determining relevant cash flows LG 3, 4, 5, 6; Challenge a. Initial Investment A B Installed cost of new asset *Book value of old asset: [1  (0.20  0.32  0.19)]  ($32,000)  $9,280 © 2015 Pearson […]

Chapter 12 Risk and Refinements in Capital Budgeting  Instructor’s Resources Overview Chapters 10 and 11 developed the major decision-making aspects of capital budgeting. Cash flows and budgeting models have been integrated and discussed in providing the principles of capital budgeting. […]

P12-12. Risk classes and RADR LG 4; Basic a. Project X Project Y CF0  −$235,000, CF1  $50,000, CF2  $60,000, CF3  $70,000, CF4  $80,000, CF5  $90,000 Set I  13% Solve for NPV  $2,663.99 […]

Chapter 13 Leverage and Capital Structure  Instructor’s Resources Overview This chapter introduces the student to the concepts of operating and financial leverage and the associated business and financial risks. As a prerequisite to operating leverage, breakeven analysis is presented through […]

P13-6. Breakeven point—changing costs/revenues LG 1; Intermediate a. Q  F  (P  VC)Q  $40,000  ($10  $8.00)  20,000 books b. Q  $44,000  ($10 − $8.00)  22,000 books c. Q  $40,000  […]

P13-23. EBIT-EPS and preferred stock LG 5: Intermediate a. Structure A Structure B EBIT $30,000 $50,000 $30,000 $50,000 Less: Interest 12,000 12,000 7,500 7,500 Net profits before taxes $18,000 $38,000 $22,500 $42,500 Less: Taxes 7,200 15,200 9,000 17,000 Net profit […]

Chapter 14 Payout Policy Instructor’s Resources  Overview Chapter 14 concentrates on the payout decision from the viewpoint of both the firm and the investors. The types of payout policies, forms of dividends, and their possible effects on the value of […]

P14-13. Stock split—firm LG 6; Intermediate a. CS  $1,800,000 (1,200,000 shares @ $1.50 par) P14-14. Stock splits LG 6; Easy a. 400  2  800 shares will be owned by Nathan after the split. b. $75.14  2 […]

Part 7 Short-Term Financial Decisions Chapters in This Part Chapter 15 Working Capital and Current Assets Management Chapter 16 Current Liabilities Management Integrative Case 7: Casa de Diseño © 2015 Pearson Education, Inc. Chapter 15 Working Capital and Current Assets […]

P15-3. Multiple changes in CCC LG 2; Intermediate a. AAI 365  6 times inventory  61 days b. OC 56 days  35 days 91 days CCC 91 days  40 days 51 days Resources needed $8,219  51 […]

Chapter 16 Current Liabilities Management Instructor’s Resources  Overview This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm’s current liability accounts. The management of current liabilities requires choosing appropriate levels […]

P16-15. Cost of commercial paper LG 4; Intermediate a. $1,000,000 $978,000 Effective 90-day rate = 2.25% $978,000 –= Effective annual rate  (1  0.0225)365/90  1  9.44% b. Effective 90-day rate with transaction costs: P16-16. Accounts receivable as […]

Part 8 Special Topics in Managerial Finance Chapters in This Part Chapter 17 Hybrid and Derivative Securities Chapter 18 Mergers, LBOs, Divestitures, and Business Failure Chapter 19 International Managerial Finance Integrative Case 8: Organic Solutions © 2015 Pearson Education, Inc. […]

P17-5. Lease versus purchase LG 2; Challenge a. Lease Purchase Year Loan Payment (1) Main- tenance (2) Depre- ciation (3) Interest at 14% (4) Total Deductions (2  3  4) (5) Tax Shields [(0.40)  (5)] (6) After-Tax Cash […]

128  Gitman/Zutter • Principles of Managerial Finance,  Fourteenth Edition Chapter 18 Mergers, LBOs, Divestitures, and Business Failure  Instructor’s Resources Overview This chapter covers the fundamentals of mergers, leveraged buyouts (LBOs), and divestitures, as well as methods for reorganizing or liquidating a firm […]

P18-6. Personal finance: Divestitures LG 3; Easy P18-7. Ratio of exchange and EPS LG 3; Intermediate a. Number of additional shares needed 1.8  4,000 7,200 EPS of merged firm $28,000 ¸ (20,000  7,200) $1.029 EPS of Marla’s Cafe […]

Chapter 19 International Managerial Finance    145 Chapter 19 International Managerial Finance  Instructor’s Resources Overview In today’s global business environment, the financial manager must also be aware of the international aspects of finance. A variety of international finance topics are presented […]

Chapter 2 The Financial Market Environment Instructor’s Resources  Overview Money and capital markets and their major components are introduced in this chapter. Firms need to raise capital in order to survive. Financial institutions give firms access to the money they […]

Part 2 Financial Tools Chapters in This Part Chapter 3 Financial Statements and Ratio Analysis Chapter 4 Cash Flow and Financial Planning Chapter 5 Time Value of Money Integrative Case 2: Track Software, Inc. © 2015 Pearson Education, Inc. Chapter […]

P3-5. Calculation of EPS and retained earnings LG 1; Intermediate a. Earnings per share: Net profit before taxes $436,000 Less: Taxes at 40% 174,400 Net profit after tax $261,600 Less: Preferred stock dividends 64,000 Earnings available to common stockholders $197,600 […]

P3-20. Common-size statement analysis LG 5; Intermediate Creek Enterprises Common-Size Income Statement for the Years Ended December 31, 2014 and 2015 2015 2014 Sales revenue 100.0% 100.0% P3-21. The relationship between financial leverage and profitability LG 4, 5; Challenge a. […]

Chapter 4 Cash Flow and Financial Planning Instructor’s Resources  Overview This chapter introduces the student to the financial planning process, with the emphasis on short-term (operating) financial planning and its two key components: cash planning and profit planning. Cash planning […]

P4-11. Cash budget—advanced LG 4; Challenge a. Xenocore, Inc. ($000) Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. Forecast Sales $210 $25 0 $170 $160 $140 $180 $200 $250 Cash sales (0.20) $ 34 $ 32 $ 28 $ 36 […]

Chapter 5 Time Value of Money Instructor’s Resources  Overview This chapter introduces an important financial concept: the time value of money. The present value and future of a sum, as well as the present and future values of an annuity, […]

P5-15. Personal finance: Time value and discount rates LG 2; Intermediate a. (1) N  10, I  6%, FV  $1,000,000 (2) N  10, I  9%, FV  $1,000,000 (3) N  10, I  12%, FV […]

P5-39. Personal finance: Compounding frequency and time value LG 5; Challenge a. (1) N  10; I  8%, PV  $2,000 (2) N  20, I  4%, PV  $2,000 b. (1) ieff  (1  0.08/1)1  […]

Part 3 Valuation of Securities Chapters in This Part Chapter 6 Interest Rates and Bond Valuation Chapter 7 Stock Valuation Integrative Case 3: Encore International © 2015 Pearson Education, Inc. Chapter 6 Interest Rates and Bond Valuation Instructor’s Resources  Overview […]

P6-7. Term structure of interest rates LG 1; Intermediate a. b. and c. d. Five years ago, the 10-year bond was paying 9.5%, which would result in approximately 95% in interest over the coming decade. At the same time, the […]

Chapter 7 Stock Valuation Instructor’s Resources  Overview This chapter continues on the valuation process introduced in Chapter 6 for bonds. Models for valuing preferred and common stock are presented. For common stock, the zero growth, constant growth, and variable growth […]

P7-13. Personal finance: Common stock value—variable growth LG 4; Challenge P0  0 1 1 (1 ) (1 ) N t t ts D g r = ´ + + å  1 2 1 (1 ) ( ) N […]

Part 4 Risk and the Required Rate of Return Chapters in this Part Chapter 8 Risk and Return Chapter 9 The Cost of Capital Integrative Case 4: Eco Plastics Company © 2015 Pearson Education, Inc. Chapter 8 Risk and Return […]

P8-10. Assessing return and risk LG 2; Challenge a. Project 257 (1) Range: 1.00  (.10)  1.10 (2) Expected return: =1 n i ri i r r P= ´ å Rate of Return ri Probability Pr i Weighted Value […]

P8-20. Interpreting beta LG 5; Basic Effect of change in market return on asset with beta of 1.20: a. 1.20  (15%) 18.0% increase P8-21. Betas LG 5; Basic a. and b. Asset Beta Increase in Market Return Expected Impact […]

Chapter 9 The Cost of Capital Instructor’s Resources  Overview This chapter introduces the student to an important financial concept, the cost of capital. The mechanics of computing the sources of capital debt, preferred stock, common stock, and retained earnings are […]

P9-13. WACC—book weights LG 6; Basic a. Type of Capital Book Value Weight Cost Weighted Cost Long-term debt $700,000 0.500 5.3% 2.650% b. The WACC is the rate of return that the firm must receive on long-term projects to maintain […]

1) Efficient-market hypothesis is the theory describing the behavior of an assumed “perfect” market in which securities are typically in equilibrium, security prices fully reflect all public information available and react swiftly to new information, and, because stocks are fairly […]

1) One basic weakness of the simplified pro forma approaches lies in the assumption that the firm’s past financial condition is an accurate indicator of its future. 2) When considering a firm’s financial decision alternative, financial managers should accept only […]

1) A firm may face increase in the weighted average cost of capital either when retained earnings have been exhausted or due to increases in debt, preferred stock, and common equity costs as additional new funds are required. 2) In […]

1) In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or […]

1) The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm’s true financial condition. 2) An internal sales forecast is based on the relationships that can be observed between a firm’s sales and […]

1) Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing. 2) Real options are opportunities that are embedded in capital budgeting projects that enable managers to alter […]

1) The average investment of a firm in accounts receivable is equal to the firm’s total variable cost of annual sales divided by its average collection period. 2) The amount of preferred stock dividends that must be paid each year […]

1) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced. 2) One of the major reasons for attaching a stock purchase warrant is that investors do not require the issuing firm to […]

1) The market rewards firms that adopt a fixed or increasing level of dividends rather than a fixed dividend payout policy through higher share prices. 2) In theory, the rate of return on U.S. Treasury bills should always exceed the […]

1) Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on a firm’s value. 2) The constant growth model is an approach to dividend valuation that assumes a constant future dividend. Answer: FALSE 3) […]

1) The cost of preferred stock is the ratio of the preferred stock dividend to a firm’s net proceeds from the sale of the preferred stock. 2) A takeover target’s management will not support a proposed takeover due to a […]

1) Generally, the greater a firm’s times interest earned ratio, the less able it is to meet payments as they come due. 2) In computing the weighted average cost of capital, from a strictly theoretical point of view, the preferred […]

1) A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio’s overall risk below the risk of the least risky asset. 2) An inverted yield curve is a downward-sloping yield curve that indicates that short-term […]

1) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation. 2) While an earnings requirement limiting the amount of dividends paid is sometimes imposed, a firm is not prohibited from paying more […]

1) An action on the part of a firm that increases the level of expected cash flows without a corresponding increase in risk should reduce share value; an action that reduces the level of expected cash flows without a corresponding […]

1) Since lenders are generally reluctant to grant loans to a firm to pay dividends, the firm’s ability to pay cash dividends is generally constrained by the amount of excess cash available. 2) In capital budgeting, risk refers to a […]

1) One of the key inputs to the final credit decision is a credit analyst’s subjective judgment of a firm’s creditworthiness since it can provide a better feel of a firm’s operation than any quantitative figures. 2) The market segmentation […]

1) Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS). 2) If a firm is subject to capital rationing, it is able to accept […]

1) Holding all other factors constant, a firm that is subject to a greater level of business risk should employ more total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk. 2) The […]

1) When computing an interest or growth rate, the rate will increase with an increase in future value, holding present value and the number of periods constant. 2) One aspect of risk associated with the aggressive strategy’s maximum use of […]

1) The acceptance of a particular project usually has no impact on a firm’s overall risk. 2) A financial manager’s primary activities include making investment and financing decisions. Answer: TRUE 3) Factoring accounts receivable is relatively an inexpensive source of […]

1) Asymmetric information results when managers of a firm have more information about the firm’s operations and future prospects than investors have. 2) The cost of new common stock is normally greater than any other long-term financing cost. Answer: TRUE […]

1) Independent projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration. 2) For calculating payback period for an annuity, all cash flows must be adjusted for […]

1) Profitability ratios capture both risk and return. 2) Mercosur is a major South American trading bloc that includes countries that account for more than half of the total of Latin America’s GDP. Answer: TRUE 3) Average age of inventory […]

1) Operating-change restrictions gives the bank a right to revoke the line of credit if any major changes occur in a firm’s financial condition or operations. 2) The various causes that increase the chances of business failures are current ratio […]

1) The U.S. approaches used in hostile takeovers is an effective method of changing corporate control and used in many areas of the world including China and Japan. 2) Preferred stockholders must receive their stated dividends prior to the distribution […]

1) The spot exchange rate is the rate of exchange between two currencies at some specified future date. 2) A single key ratio of a firm provides all the information required to judge the overall performance of the firm. Answer: […]

1) Financial breakeven point represents the level of earnings after interest and taxes necessary for a firm to cover its fixed operating and financial changesthat is, the point at which dividends per share is equal to zero. 2) In exchange […]

1) Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation. 2) The cost of capital is the rate of return a firm must earn on investments in […]

1) The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price. 2) For a risk-averse manager, required return would decrease for an increase in risk. Answer: FALSE 3) A bond issued by […]

1) Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased. 2) Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur […]

1) The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander. 2) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific […]

1) Lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default. 2) RADRs are popular because they are consistent with the general disposition of financial […]

1) The Jobs and Growth Tax Relief Reconciliation Act of 2009 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of […]

1) Most federal agency issues have short maturities and offer slightly higher yields than U.S. Treasury issues having similar maturities. 2) Spontaneous unsecured financing has a specific interest cost associated with it that can be at a fixed or floating […]

1) The operating breakeven point can be found by solving for the sales level that just covers total fixed and variable costs. 2) From a bond issuer’s perspective, the IRR on a bond’s cash flows is its cost to maturity; […]

1) Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less financial leverage than an otherwise equivalent firm that is subject to a lesser level of business risk. 2) A […]

1) Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives in a manner that is consistent with the firm’s strategic goals. 2) The World Trade Organization is an international body established to police world trading practices […]

1) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance. 2) If a market is truly efficient, investors should not waste their time trying […]

1) The cost of capital is a static concept and it is not affected by economic and firm-specific factors such as business risk and financial risk. 2) The accountant of a firm evaluates financial statements, develops additional data, and makes […]

1) A prospectus is another term for a firm’s annual report showing the firm’s prospects for the coming year. 2) Increased collection expenditures should reduce the investment in accounts receivable and bad debt expenses, increasing profits. Answer: TRUE 3) Historical […]

1) Regular dividend policy is a dividend policy based on the payment of a certain fixed percentage of earnings to owners in each dividend period. 2) Because dividends are taxed at the same rate as capital gains under the 2003 […]

1) Self-liquidating loans are intended merely to carry a firm through seasonal peaks in financing needs that are due primarily to buildups of accounts receivable and inventory. 2) The representative theory of dividends, as espoused by Modigliani and Miller, suggests […]

1) The two basic types of risk associated with international cash flows are inflation and foreign exchange risks and political risks. 2) A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms […]

1) The claims of the equityholders on a firm’s assets have priority over the claims of creditors because the equityholders are the owners of the firm. 2) The interest rate on a line of credit is normally stated as a […]

1) A market risk-return function is a graphical presentation of the discount rates associated with each level of project risk. 2) It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation. Answer: […]

1) The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This results in a real rate of interest of 4% on the bond. 2) In case of unequal-lived, mutually exclusive projects, the use […]

1) Operating leverage is present when a firm has fixed operating costs. 2) The cost of capital is a dynamic concept and it is affected by economic and firm-specific factors such as business risk and financial risk. Answer: TRUE 3) […]

1) A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components. 2) The Gordon model assumes that the value of a share of stock equals […]

1) In CAPM, the total risk is defined as the sum of nondiversifiable and diversifiable risk. 2) Federal agency issues are low-risk securities issued by government agencies but not guaranteed by the U.S. Treasury. Answer: TRUE 3) Target weights are […]

1) The liquidity preference theory suggests that for any given issuer, long-term interest rates tend to be higher than short-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer-term securities; this causes the […]

1) If the risk-free rate decreases due to a shift in government policy, the required return goes up. 2) Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of […]

1) Accounting figures and cash flows are not necessarily the same due to the presence of certain non-cash expenditures on a firm’s income statement. 2) If the ending cash is greater than the minimum cash balance, excess cash exists. Answer: […]

1) Safety stocks are extra inventories that can be drawn down when actual lead times and/or usage rates are greater than expected. 2) Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they […]

1) A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project’s inflows to the present value of its outflows is called internal rate of return. 2) A […]

1) Average age of inventory is viewed as the average length of time inventory is held by a firm or as the average number of days’ sales in inventory. 2) Unsystematic risk can be eliminated through diversification. Answer: TRUE 3) […]

1) Higher the value of the times interest earned ratio, higher is the proportion of the firm’s interest income compared to its contractual interest payments. 2) A call option is an option to sell a specified number of shares of […]

1) Agents of corporate owners are themselves owners of the firm and have been elected by all the corporate owners to represent them in decision-making and management of the firm. 2) Capital markets are for investors who want a safe […]

1) Securitization made it harder for banks to lend money because they could not pass the risk on to other investors. 2) Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of mortgages. Answer: […]

1) Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on a firm’s balance sheet, leasing may result in misleading financial ratios. 2) If a new asset is being considered as […]

1) The cash conversion cycle of a firm is the length of time from the beginning of the production process to the collection of cash from the sale of finished products. 2) A bond will sell at a premium when […]

1) Holding all other factors constant, a firm that is subject to a greater level of business risk should employ more financial leverage than an otherwise equivalent firm that is subject to a lesser level of business risk. 2) Spontaneous […]

1) A capital expenditures analyst/manager is responsible for the evaluation and recommendation of proposed asset investments. 2) Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system uses no, or very little, safety stocks. Answer: TRUE 3) Nonmanufacturing […]

1) The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm’s profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to […]

1) The net effect of changes in a cash discount period is quite difficult to analyze because they are directly attributable to the three forces affecting a firm’s investment in accounts receivable. 2) In ratio analysis, the financial statements being […]

1) Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer. 2) Both warrants and rights result in new capital equity. However, warrants are issued […]

1) In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid-in capital in excess of […]

1) Net fixed assets represent the difference between gross fixed assets and accumulated depreciation of fixed assets. 2) Given a financial manager’s preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one. Answer: […]

1) Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment. 2) When a bond’s value differs from par, its yield to maturity will differ from its coupon interest rate. Answer: […]

1) In general, a firm’s theoretical optimal capital structure is that which balances the tax benefits of debt financing against the increase probability of bankruptcy that result from its use. 2) Primary motives for merging include growth or diversification, synergy, […]

1) A functional currency is the currency of the parent company’s country. 2) A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds. […]

1) Dividends paid to stockholders is tax deductible. 2) An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return. Answer: TRUE 3) A firm’s credit standard […]

1) A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option’s expiration date. 2) Financial markets are intermediaries that channel the savings […]

1) Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all its operational creditors for a certain number of days during the year. […]

1) The marginal tax rate paid on a firm’s ordinary income can be calculated by dividing its taxes by its net income. 2) The book value of an asset is equal to its installed cost of asset minus the accumulated […]

1) Mail float is the delay between the deposit of a check by a payee and the actual availability of the funds. 2) One advantage of leasing is that in many cases, the return to the lessor is quite low […]

1) The existence of specific regulations and controls on dollar deposits in the United States, including interest rate ceiling imposed by the government, has contributed to the growth of the Euromarket. 2) Restrictive covenants are contractual clauses in long-term debt […]

1) The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity. 2) A prospectus is a portion […]

1) The target capital structure is the desired optimal mix of debt and equity financing that most firms attempt to achieve and maintain. 2) The conversion feature, which can be part of either a bond or preferred stock, permits a […]

1) The lower the fixed-payment coverage ratio, the lower is the firm’s financial leverage. 2) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted […]

1) The nominal and effective rates are equivalent for annual compounding. 2) Because of their access to the international bond and equity markets, MNCs may have lower long-term financing costs, thus resulting in differences between the capital structures of these […]

1) On a purely theoretical basis, IRR is the better approach to capital budgeting than NPV because IRR implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm’s cost of capital. 2) An aging […]

1) When considering a firm’s financial decision alternative, financial managers should accept only those actions that are expected to increase the firm’s profitability. 2) The required return on an asset is an increasing function of its nondiversifiable risk. Answer: TRUE […]

1) Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders. 2) Standard deviation measures the dispersion […]

1) The book value per share of common stock is the amount per share of common stock that would be received if all of a firm’s assets were sold for their accounting value and the proceeds remaining were divided among […]

1) A treasurer is responsible for the firm’s accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. 2) An increase in cost (fixed cost or variable cost) tends to increase the operating breakeven point, whereas an […]

1) Since the issuer of zero (or low) coupon bonds can annually deduct the current year’s interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by […]

1) The presence of contingent securities such as warrants and stock options affects the reporting of a firm’s earnings per share. 2) The cost of marginal bad debts is found by multiplying a firm’s opportunity cost by the difference between […]

1) The pecking order explanation of capital structure states that a hierarchy of financing exists for firms, in which new external debt financing is employed first, followed by retained earnings and finally by external equity financing. 2) Both theory and […]

1) In case of international capital budgeting, a U.S. company can minimize its political risk by creating a joint venture with a competent and well-connected local partner. 2) A call feature in a bond allows bondholders to change each bond […]

1) Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended. 2) Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and […]

1) The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio’s overall risk below the risk of the least risky asset. 2) Mutually exclusive projects are those whose cash flows compete with […]

1) In the ABC system of inventory management, the two-bin method or system could be utilized to control C items. 2) For a Eurodollar bond, the interest rate will reflect several different rates, most notably the U.S. long-term rate, the […]

1) The real utility of the coefficient of variation is in comparing assets that have equal expected returns. 2) Treasury notes generate lower returns than U.S. Treasury bills. Answer: FALSE 3) Preferred stockholders are often referred to as residual claimants. […]

1) Research and development is considered to be a motive for making capital expenditures. 2) Disbursement float results from the delay between the time that a payer or customer deducts a payment from its checking account ledger (disburses it) and […]

1) Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price. 2) An increase in a firm’s risk will always result in a higher […]

1) Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true breakeven point may be different from those obtained using linear revenue and cost functions as assumed in the […]

1) A shareholder receiving a stock dividend typically receives nothing of value. 2) Pledges of accounts receivable are never made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit […]

1) The base level of sales must be held constant to compare the total leverage associated with different levels of fixed costs. 2) Foreign bond is an international bond that is sold primarily in countries other than the country of […]

1) The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs. 2) National entry control systems are comprehensive rules, regulations, and incentives introduced by host governments to regulate inflows of foreign direct […]

1) Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent. 2) The operating cycle is the length of time a firm’s cash is tied up between […]

1) A stock split commonly increases the stock’s per share par value. 2) Business risk is the risk to a firm of being unable to cover operating costs. Answer: TRUE 3) The dominant organized options exchange in which options are […]

1) The foreign direct investment (FDI) is a multi-national corporation’s transfer of capital, managerial, and technical assets from a foreign country to its home country. 2) A lease arrangement has many more restrictive covenants than those that are normally included […]

1) A primary market is a financial market in which pre-owned securities are traded. 2) GAAP is the accounting profession’s rule-setting body. Answer: FALSE 3) Consolidation involves the combination of two or more firms, and the resulting firm maintains the […]

1) A major decision confronting a business firm when purchasing marketable securities involves a trade-off between the opportunity to earn a return on idle funds during the holding period and the brokerage costs associated with the purchase and sale of […]

1) Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm’s relatively high debt levels. 2) Under conservative funding strategy, short-term financing is used only […]

1) The greater the leverage, the smaller the risk involved. 2) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of […]

1) Unlike convertible securities, warrants cannot be called, but their limited life stimulates holders to exercise them when the exercise price is below the market price of the firm’s stock. 2) In general, the greater a firm’s operating leverage, the […]

1) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders. 2) A firm can raise capital by issuing securities such as convertibles and warrants but a firm […]

1) One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of liquid assets. 2) A stock split is usually taxable […]

1) A corporate controller is an officer responsible for a firm’s financial activities such as financial planning and fund raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange. 2) Futures and options are opportunities […]

1) The motive to pay stock dividend to retain cash to satisfy past-due bills, may result in a decline in market value. 2) The effective rate of interest is the contractual rate of interest charged by a lender or promised […]

1) Because retained earnings are a form of internal financing, the dividend decision can significantly affect a firm’s external financing requirements. 2) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances (i.e., an […]

1) The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan. 2) Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and preferences of […]

1) Most managers are risk-averse, since for a given increase in risk they require an increase in return. 2) Marketable securities are short-term, interest-earning, money market instruments that can easily be converted into cash. Answer: TRUE 3) Purchasers of a […]

1) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion of each payment grows over […]

1) Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall. 2) The total leverage […]

1) Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation. 2) An investment’s total return is the sum of any cash distributions minus the change in the investment’s value, divided […]

1) The ratio of exchange in market price indicates the market price per share of an acquiring firm paid for each dollar of market price per share of the target firm. 2) Maintenance clauses are provisions normally included in an […]

1) The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the present value of future cash flows. 2) The conversion value is the […]

1) A project’s net present value profile is a graph that plots a project’s NPV for various discount rates. 2) A bond with short maturity has less “interest rate risk” than a bond with long maturity when all other featurescoupon […]

1) Weights that use accounting values to measure the proportion of each type of capital in a firm’s financial structure are called market value weights. 2) Capital budgeting is the process of evaluating and selecting short-term investments that are consistent […]

1) Cross-sectional analysis involves the comparison of different firms’ financial ratios at the same point in time. 2) A cash budget gives the financial manager a clear view of the timing of a firm’s expected profitability over a given period. […]

1) The cost of equity increases with increasing financial leverage in order to compensate the stockholders for the higher degree of financial risk. 2) A controller administers a firm’s credit policy by analyzing or managing the evaluation of credit applications, […]

1) The conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security. 2) Multinational companies are firms that have international assets but operations in domestic markets only and draw part of their total […]

1) The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by the prime rate inside the United States. 2) A compensating balance is a balance in checking account that is equal to a certain percentage […]

1) The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock. 2) The reorder point is the point at which a firm receives orders. Answer: FALSE 3) […]

1) In the U.S. over the past 30 years, foreign direct investment (FDI) came overwhelmingly in the form of mergers and acquisitions rather than through establishments. 2) The overriding goal for merging is the maximization of the owners’ wealth as […]