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 the development of pro forma statements, a firm that requires external funds
means that its projected level of cash is in excess of its needs and that funds would
therefore be available for repaying debt, repurchasing stock, or increasing the dividend
to stockholders.
3) Beta coefficient is an index that measures the degree of movement of an asset’s
return in response to a change in the market return.
4) Monte Carlo simulation programs usually build a histogram of the results.
5) If a firm’s sales are constant, its investment in operating assets should also be
constant, and the firm will have only a permanent funding requirement.
6) Lines of credit are guaranteed loans that specify the maximum amount that a firm
can owe the bank at any point in time.
7) Common stock equivalents are all contingent securities that derive a major portion of
their value from their conversion privileges or common stock characteristics.
8) Generally, increases in leverage result in increased return and risk.
9) When the required return is different from the coupon interest rate and is constant
until maturity, the value of the bond will approach its par value as it nears maturity.
10) Risk, the magnitude and timing of cash flows are the key determinants of share
price, which represent the wealth of the owners in the firm.
11) Total leverage exists whenever the percentage change in earnings per share (EPS)
resulting from a given percentage change in sales is greater than the percentage change
in sales.
12) In most states, legal capital is measured not only by the par value and paid-in
capital in excess of par, but also by any accumulated retained earnings.
13) Find the present value of the following stream of a firm’s cash flows, assuming that
the firm’s opportunity cost is 14 percent.
A) $121,256
B) $ 69,000
C) $ 60,513
D) $ 51,903
14) With regard to dividend payments, which of the following is included in the
contractual constraints imposed by loan agreements?
A) limiting the payment to suppliers
B) limiting the percentage of earnings that can be paid out in dividends
C) sustaining a constant dividend payout ratio
D) making fixed payment to equityholders
15) A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is
convertible into 100 shares of common stock at a conversion price of $10 per share and
callable at $1,090. The current market price of the firm’s stock is $12 per share. The
bond holder will ________.
A) allow the call to be exercised realizing $90 over par value
B) convert the bond into stock realizing $200 over par value
C) convert the bond into stock realizing only par value
D) wait until the stock price goes up further
16) ________ measures the percentage of profit earned on each sales dollar before
interest and taxes but after all costs and expenses.
A) Net profit margin
B) Operating profit margin
C) Gross profit margin
D) Earnings available to common shareholders
17) The ________ from the sale of a security are the funds actually received from the
sale after ________.
A) gross proceeds; adding the after-tax costs
B) gross proceeds; reducing the flotation costs
C) net proceeds; reducing the flotation costs
D) net proceeds; adding the after-tax costs
18) Which of the following is a restrictive covenant?
A) to maintain satisfactory accounting records
B) to pay the taxes due
C) to supply audited financial statements
D) to impose fixed asset restrictions
19) Which of the following is true of a dealer market?
A) Buyers and sellers are never brought together directly
B) Brokers execute the buy or sell orders in a dealer market
C) It has centralized trading floors
D) It is a part of the broker market
20) A key consideration in the holding company decision is ________.
A) the risk-return tradeoff due to the leverage effect
B) the greater “distance” between top level and operating management
C) the risk of the domino effect if one company in the holding company fails
D) the risk from the separate “companies” in the holding company being classed as one
company
21) The key aspects of a financial planning process are ________.
A) cash planning and investment planning
B) operations planning and investment planning
C) investment planning and profit planning
D) cash planning and profit planning
22) The percentage-of-sales method of preparing pro forma income statements assumes
that ________.
A) sales are fixed
B) all costs inversely vary with sales
C) all costs are independent
D) all costs are variable
23) The key outputs of the short-term financial planning process are the ________.
A) cash budget, pro forma income statement, and pro forma balance sheet
B) sales forecast and capital assets journal
C) sales forecast and schedule of changes in working capital
D) income statement, balance sheet, and source and use statement
24) A firm has an average age of inventory of 101 days, an average collection period of
49 days, and an average payment period of 60 days. The firm’s cash conversion cycle is
________ days.
A) 150
B) 90
C) 109
D) 11
25) Which of the following is true of a capital expenditure?
A) It is an outlay made to replace current assets
B) It is an outlay expected to produce benefits within one year
C) It is commonly used for current asset expansion
D) It is commonly used to expand the level of operations
26) The effective interest rate generally is ________.
A) higher on a loan if interest is paid at maturity
B) lower if the loan is a discount loan
C) higher if the loan is a discount loan
D) not affected by whether the loan is a discount loan or a loan with interest paid at
maturity
27) In defending against a hostile takeover, the strategy that involves the target firm
finding a more suitable acquirer and prompting it to compete with the initial hostile
acquirer to take over the firm is called the ________ strategy.
A) poison pill
B) white knight
C) golden parachute
D) greenmail
28) The annual incremental after-tax cash flow from operations for year 1 is ________.
(See Table 11.3)
A) $13,950
B) $16,600
C) $25,600
D) $30,000
29) A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and
requires compensating balances of 10 percent of the face value of the loan. The
effective annual interest rate associated with this loan is ________.
A) 12 percent
B) 13.3 percent
C) 13.6 percent
D) 15.4 percent
30) Table 9.3
Balance Sheet
General Talc Mines
December 31, 2014
General Talc Mines has compiled the following data regarding the market value and
cost of the specific sources of capital.
Market price per share of common stock $50
Market value of long-term debt $980 per bond
The weighted average cost of capital using market value weights is ________. (See
Table 9.3)
A) 11.7 percent
B) 13.5 percent
C) 15.8 percent
D) 17.5 percent