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 pay cash
dividends.
2) When a firm has fixed operating costs, operating leverage is present. In that case, an
increase in sales results in a more-than-proportional increase in EBIT, and a decrease in
sales results in a more-than-proportional decrease in EBIT.
3) Any action taken by a financial manager that increases risk will also increase the
required return.
4) The NPV of a project with an initial investment of $2,500 that provides after-tax
operating cash flows of $500 per year for four years where the firm’s cost of capital is
15 percent is $427.49.
5) Greater the range of an asset, more the variability, or risk, the asset is said to possess.
6) The cost of retained earnings is always lower than the cost of a new issue of common
stock due to the absence of flotation costs when financing projects with retained
earnings.
7) The cost of giving up a cash discount is the implied rate of interest paid in order to
delay payment of an account payable for an additional number of days.
8) For a given positive interest rate, the future value of $100 increases with the passage
of time. Thus, the longer the period of time, the greater the future value.
9) One of the key attributes that makes a firm a good candidate for an LBO is that it has
stable and predictable cash flows that are adequate to meet interest and principal
payments on the debt.
10) All stock purchase warrants are non-detachable, which means that the bondholders
must keep the warrants until they mature.
11) The level of risk associated with a given cash flow positively affects its value.
12) The shorter the amount of time until a bond’s maturity, the more responsive is its
market value to a given change in the required return.
13) The discount rate is the minimum return that must be earned on a project to leave a
firm’s market value unchanged.
14) Global Logistics purchased a new machine on October 20th, 2014 for $1,000,000
on credit. The supplier has offered A&A terms of 2/10, net 45. The current interest rate
the bank is offering is 16 percent.
(a)Compute the cost of giving up cash discount.
(b)Should the firm take or give up the cash discount?
(c)What is the effective rate of interest if the firm decides to take the cash discount by
borrowing money on a discount basis?
15) The straight bond value is ________.
A) the conversion premium minus the conversion value
B) the present value of the interest and principal payments discounted at a rate the firm
would have to pay on a convertible bond
C) the market value minus the conversion value
D) the present value of the interest and principal payments discounted at a rate the firm
would have to pay on a nonconvertible bond
16) A firm has an average age of inventory of 20 days, an average collection period of
30 days, and an average payment period of 60 days. The firm’s cash conversion cycle is
________ days.
A) 70
B) 50
C) -10
D) 110
17) According to the catering theory, firms cater to the preferences of ________.
A) investors
B) creditors
C) managers
D) government
18) A firm has issued cumulative preferred stock with a $100 par value and a 12 percent
annual dividend. For the past two years, the board of directors has decided not to pay a
dividend. At the end of the current year, the preferred stockholders must be paid
________ prior to paying the common stockholders.
A) $0/share
B) $12/share
C) $24/share
D) $36/share
19) The use of a large amount of debt to finance the acquisition of other firms is a
________.
A) conglomerate merger
B) leveraged buyout
C) hostile merger
D) congeneric buyout
20) The book value of an asset is equal to the ________.
A) fair market value minus the accounting value
B) original purchase price plus annual depreciation expense
C) original purchase price minus accumulated depreciation
D) depreciated value plus recaptured depreciation
21) A corporation ________.
A) must use the straight-line depreciation method for tax purposes and double declining
depreciation method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation
method financial reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated
depreciation methods for financial reporting purposes
22) ________ are projected financial statements.
A) Pro forma statements
B) Statements of retained earnings
C) Cash budgets
D) Cash flow statements
23) Jannet Company, currently pays its employees at the end of a week. The weekly
payroll totals $400,000. If it were to extend the pay period so as to pay its employees 1
week later throughout an entire year, the employees would in effect be lending the firm
________ for a year.
A) $400,000
B) $20,800,000
C) $4,800,000
D) $675,000
24) Which of the following is an unsophisticated capital budgeting technique?
A) internal rate of return
B) payback period
C) profitability index
D) net present value