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 priced, investors need not waste time looking for mispriced
securities.
2) Conflicting rankings in the case of mutually exclusive projects using NPV and IRR
often result from differences in the magnitude and/or timing of cash flows.
3) Commitment fee is the fee that is normally charged on a revolving credit agreement.
4) Net working capital can be defined as the portion of a firm’s current assets financed
with long-term funds.
5) Free cash flow (FCF) is the cash flow a firm generates from its normal operations;
calculated as EBIT minus taxes plus depreciation.
6) The price/earnings (P/E) ratio represents the degree of confidence that investors have
in a firm’s future performance.
7) All projects should always use the WACC as the required return for capital budgeting
purposes.
8) A downward-sloping yield curve indicates generally cheaper short-term borrowing
costs than long-term borrowing costs.
9) Because risk premiums increase with increases in financial leverage, maximizing
EPS does not assure owners’ wealth maximization.
10) On average in U.S., during the past 75 years, the return on U.S. Treasury bills has
exceeded the return on long-term government bonds.
11) American Depositary Receipts (ADRs) are claims issued by U.S. banks representing
ownership of shares of a foreign company’s stock held on deposit by the U.S. bank in
the foreign market and issued in dollars to U.S. investors.
12) A stock swap transaction is an acquisition method in which an acquiring firm
exchanges its shares for shares of the target company according to a predetermined
ratio.
13) Stockholders expect to earn higher rates of return on investments with lower risk
and lower rates of return on investments with higher risk.
14) The cost of preferred stock is the ratio of the preferred stock dividend to a firm’s
total earnings.
15) A U.S.-based MNC has three subsidiaries: S1 (40 percent owned by the MNC); S2
(33 percent owned by S1), and S3 (20 percent owned by S2). The taxable income for
each firm is $100 million. The local taxes for each firm are $15 million, $20 million,
and $10 million, respectively. The MNC’s tax rate is 40 percent.
(a)Can the MNC apply all of its local taxes as a credit against its U.S. taxes?
(b)Based on the “grossing up” concept, calculate all tax credits applicable to the MNC.
16) Holding risk constant, the implementation of projects with a rate of return above the
cost of capital will decrease the value of a firm, and vice versa.
17) Firms that require funds from external sources can obtain them ________.
A) through financial institutions
B) from central bank directly
C) through forex market
D) by issuing T-bills
18) If a manager prefers investments with greater risk even if they have lower expected
returns, then he is following a ________ strategy.
A) risk-seeking
B) risk-indifferent
C) risk-averse
D) risk-neutral
19) One of the key motives for mergers is ________.
A) reducing the marginal tax rate
B) taking advantage of the other firm’s tax loss carryforward
C) to sell the assets of the target company to increase the cash balance
D) increasing additional recaptured depreciation
20) Tangshan Mining has extended credit terms of 3/15 net 30 EOM. The cost of giving
up the cash discount, assuming payment would be made on the last day of the credit
period, is 75.26 percent. If the firm were able to stretch its accounts payable to 60 days
without damaging its credit rating, the cost of giving up the cash discount would only
be ________.
A) 18.81%
B) 18.25%
C) 21.90%
D) 25.09%
21) The objective of ________ is to select the group of projects that provides the
highest overall net present value and does not require more dollars than are budgeted.
A) capital rationing
B) scenario analysis
C) real options
D) sensitivity analysis
22) An increase in the beta of a corporation, all else being the same, indicates
________.
A) a decrease in risk, a higher required rate of return, and hence a lower share price
B) an increase in risk, a higher required rate of return, and hence a lower share price
C) a decrease in risk, a lower required rate of return, and hence a higher share price
D) an increase in risk, a lower required rate of return, and hence a higher share price
23) The board of directors is typically responsible for ________.
A) approving strategic goals and plans
B) managing day-to-day operations
C) arranging finance for approved long-term investments
D) maintaining and controlling the firm’s daily cash balances
24) If a firm’s fixed financial costs decrease, the firm’s operating breakeven point will
________.
A) decrease
B) increase
C) remain unchanged
D) change based on the sale price per unit
25) Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The largest single source of funds for the firm in 2015 is ________. (See Table 4.1)
A) an increase in net profits after taxes
B) an increase in notes payable
C) an increase in long-term debt
D) an increase in inventory
26) When home prices are falling, we would expect a(n) ________.
A) high mortgage default rates
B) low mortgage default rates
C) unchanged mortgage default rates
D) higher percentage of owner home equity
27) MACRS RATE
A mixer was purchased two years ago for $120,000 and can be sold for $125,000 today.
The mixer has been depreciated using the MACRS 5-year recovery period and the firm
pays 40 percent taxes on both ordinary income and capital gain.
(a)Compute recaptured depreciation and capital gain (loss), if any.
(b)Find the firm’s tax liability.
28) A firm has a cash conversion cycle of 60 days and average payment period of 40
days. The firm’s operating cycle is ________ days.
A) 20
B) 100
C) 50
D) 30
29) A Eurobond is ________.
A) a bond sold primarily to Europeans
B) a bond sold primarily in countries other than the country of the currency in which
the issue is denominated
C) a debt instrument sold exclusively in Europe
D) a bond issued by European Union
30) Smith has current assets of $800,000, which can be liquidated at 90 percent of book
value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000
shares of common stock outstanding. What is the liquidation value per share of
common stock?
31) P( = 242,800(1.06)-35 = 242,800(0.1 = $31,590
32) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Calculate the incremental depreciation. (See Table 11.4)
33) Calculate the present value of $5,800 received at the end of year 1, $6,400 received
at the end of year 2, and $8,700 at the end of year 3, assuming an opportunity cost of 13
percent.
34) Compute the initial purchase price for an asset with book value of $34,800 and total
accumulated depreciation of $85,200.