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 those actions that are expected to maximize shareholder value.
3) The temporal method requires specific assets and liabilities to be translated at
so-called historic exchange rates and that foreign-exchange translation gains or losses
be reflected in the current year’s income.
4) A decrease in collection efforts will result in an increase in sales volume, an increase
in the investment in accounts receivable, an increase in bad debt expenses, and a
decrease in collection expenditures.
5) When considering fixed operating cost increases, a financial manager must weigh the
increased financial risk associated with greater operating leverage against the expected
increase in returns.
6) An opportunity cost is a cash flow that could be realized from the best alternative use
of an owned asset.
7) To calculate the initial investment, we subtract all cash inflows occurring at time zero
from all cash outflows occurring at time zero.
8) The higher the financial breakeven point and the steeper the slope of the capital
structure line, the greater the financial risk.
9) The conversion feature permits a firm’s capital structure to be changed without
increasing the total financing.
10) Valuation is the process that links risk and return to determine the worth of an asset.
11) The basic shortcoming of EBIT-EPS analysis is that this model focuses on the
maximization of earnings rather than on the maximization of owner wealth as reflected
in a firm’s stock price.
12) Greater risk aversion results in lower required returns for each level of risk, whereas
a reduction in risk aversion would cause the required return for each level of risk to
increase as depicted by SML.
13) Factoring accounts receivable is relatively an inexpensive source of unsecured
short-term funds.
14) A nonconventional cash flow pattern is one in which an initial inflow is followed by
a series of inflows and outflows.
15) A crisis in the financial sector often spills over into other industries because when
financial institutions ________ borrowing, activity in most other industries ________.
A) increase; slows down
B) contract; slows down
C) increase; increases
D) contract; increases
16) Which of the following is one of the key activities of a financial manager?
A) making financing decisions
B) managing cost accounting
C) managing financial accounting
D) making legal policy decisions
17) Which of the following is a reason for undertaking mergers?
A) increasing dividends
B) profit maximization
C) easy process
D) wealth maximization
18) The purpose of adding an asset with a negative or low positive beta is to ________.
A) reduce profit
B) reduce risk
C) increase profit
D) increase risk
19) ________ is the value of a firm’s ownership in the event that all assets are sold for
their exact accounting value and the proceeds remaining after paying all liabilities
(including preferred stock) are divided among common stockholders.
A) Liquidation value
B) Book value
C) The P/E multiple
D) The present value of the common stock
20) If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the
exchange rate between the U.S. dollar and the Japanese yen is 120 Yen per dollar, then
what is the Euro per Yen exchange rate?
A) 0.0100
B) 144.00
C) 0.0069
D) 100.00
21) ________ is the actual amount each common stockholder would expect to receive if
a firm’s assets are sold for their market value, creditors and preferred stockholders are
repaid, and any remaining money is divided among the common stockholders.
A) Liquidation value
B) Book value
C) The P/E multiple
D) The present value of the dividends
22) Which of the following is a disadvantage of leasing from a lessee’s perspective?
A) capability of effectively depreciating land
B) ability to avoid restrictive covenants that are normally part of a long-term loan
C) benefit of the salvage value at the end of the term of the lease reverts to the lessor
D) 100 percent debt financing
23) If a corporation has an average tax rate of 40 percent, the approximate, annual,
after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is
________.
A) 10 percent
B) 10.6 percent
C) 7.7 percent
D) 6.0 percent
24) Table 3.1
Information (2013 values)
1> Sales totaled $110,000
2> The gross profit margin was 25 percent.
3> Inventory turnover was 3.0.
4> There are 360 days in the year.
5> The average collection period was 65 days.
6> The current ratio was 2.40.
7> The total asset turnover was 1.13.
8> The debt ratio was 53.8 percent.
Net fixed assets for CEE in 2013 were ________. (See Table 3.1)
A) $45,484
B) $48,975
C) $54,511
D) $69,341
25) The ending cash balance for March is ________. (See Table 4.3)
A) $250
B) $6,750
C) $2,500
D) $500
26) The acquisition of a “cash-rich” company allows the acquiring company ________.
A) to reap greater tax benefits
B) to reduce leverage and to increase borrowing power
C) to develop monopoly control over the markets
D) to achieve economies of scale in some phase of the business
27) A dividend reinvestment plan enables stockholders to ________.
A) reinvest the dividends in money market instruments which are risk free
B) reinvest all dividends in the firm with no accompanying increase in equity
C) acquire additional dividends through redemption of stock
D) acquire shares at little or no transaction costs
28) Which of the following is true of credit scoring?
A) It audits the amount of assets the applicant has available for use in securing the
credit
B) It specifies the terms of sale for customers who have been extended credit by a firm
C) It is an ongoing review of a firm’s accounts receivable to determine whether
customers are paying according to the stated credit terms
D) It applies statistically derived weights to an applicant’s scores on key financial and
credit characteristics