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 their cash flows and risks in a way that affects project
acceptability.
3) A nominal rate of interest is equal to the sum of the real rate of interest plus the risk
free rate of interest.
4) Economic value added is the difference between an investment’s net operating profit
after taxes and the accounting profit.
5) Finance is concerned with the process institutions, markets, and instruments involved
in the transfer of money among and between individuals, businesses, and government.
6) A negative cash conversion cycle (CCC) means the average payment period (APP)
exceeds the operating cycle (OC).
7) The MACRS depreciation method requires use of the half-year convention. Assets
are assumed to be acquired in the middle of the year and only one-half of the first year’s
depreciation is recovered in the first year.
8) Marginal cost-benefit analysis states that financial decisions should be made and
actions should be taken only when the added benefits exceed the added costs.
9) The ability to purchase production inputs on credit allows a firm to partially offset
the length of time resources are tied up in the operating cycle.
10) The wealth of corporate owners is measured by the share price of the stock.
11) Using certain standardized and generally accepted principles, an accountant
prepares financial statements that recognize revenue at the point of sale and expenses
when incurred.
12) The asymmetric information explanation of capital structure suggests that firms will
issue new debt only when the managers believe the firm’s stock is overvalued; as a
result, issuing new debt is considered a negative signal that will result in a decline in
share price.
13) According to the CAPM, the required return of an asset is the sum of risk-free rate
of return and beta times the risk premium.
14) Legal constraints prohibit the payment of cash dividends until a certain level of
earnings has been achieved or limit the amount of dividends paid to a certain dollar
amount or percentage of earnings.
15) Firms are usually prohibited by state law from distributing ________.
A) retained earnings as dividends
B) paid-in capital in excess of par as dividends
C) dividends in a year the firm has a net loss
D) preferred dividends
16) The ________ approach is used to convert the net present value of unequal-lived
projects into an equivalent annual amount (in net present value terms).
A) internal rate of return
B) investment opportunities schedule
C) risk-adjusted discount rate
D) annualized net present value
17) Leveraged buyouts are clear examples of ________.
A) strategic mergers
B) vertical mergers
C) financial mergers
D) congeneric mergers
18) Zheng Sen’s Chinese Take-Out had earnings before interest and taxes of $4,000,000
last year. The firm has a marginal tax rate of 40 percent and currently has the following
capital structure:
(a)Calculate the firm’s after-tax return on equity (ROE) and earnings per share (EPS).
(b)If the firm retires $4,000,000 of preferred stock using the proceeds from an equal
increase in long-term debt, what would have been the after-tax return on equity (ROE)
and earnings per share (EPS)?
(c)If the firm retires $4,000,000 of preferred stock using the proceeds from the sale of
500,000 shares of common stock, what would have been the after-tax return on equity
(ROE) and earnings per share (EPS)?
19) If the cash discount period is increased, a firm’s investment in accounts receivable is
expected to ________.
A) increase because new customers attracted by the new policy will result in new
accounts
receivable
B) decrease because new customers will doubt the quality of product due to increase in
discount
C) increase because existing discount takers will pay more to get more discount
D) decrease because of existing discount takers will now pay earlier to avail the cash
discount
20) Which of the following is one of the positive benefits of an effective ethics
program?
A) reduce potential litigation and judgment costs
B) maintain and build competitor confidence
C) gain the loyalty, commitment, and respect of the firm’s competitors
D) making sure violations are penalized, while at the same time not subjecting the
employee to publicity
21) The term structure of interest rates is the relationship between ________.
A) the present value of principal and coupon rate of the bonds
B) the general expectation of inflation and nominal rate of return for bonds
C) the general expectation of inflation and real rate of return for bonds
D) the maturity and rate of return for bonds with similar level of risk
22) Allocation of the historic costs of fixed assets against the annual revenue they
generate is called ________.
A) arbitraging
B) securitization
C) depreciation
D) amortization
23) 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.
Long-term debt for CEE in 2013 was ________. (See Table 3.1)
A) $30,763
B) $52,372
C) $10,608
D) $41,372
24) Between two major currencies, the spot exchange rate is the rate ________ and the
forward exchange rate is the rate ________.
A) on that date; today
B) at some specified future date; on that date
C) today; on that date
D) on that date; at some specified future date
25) Seasonal buildups of inventory and receivables are generally financed with
________.
A) short-term loans
B) long-term loans
C) retained earnings
D) stockholders’ equity
26) Table 9.1
A firm has determined its optimal capital structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A
flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share
par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the
stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The
dividend expected to be paid at the end of the coming year is $1.74. Its dividend
payments have been growing at a constant rate for the last four years. Four years ago,
the dividend was $1.50. It is expected that to sell, a new common stock issue must be
underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is
40 percent.
If the target market proportion is reduced to 15 percent, what will be the revised
weighted average cost of capital? (See Table 9.1)
A) 13.6 percent
B) 11.0 percent
C) 12.34 percent
D) 10.4 percent
27) The future value of $200 received today and deposited at 8 percent compounded
semiannually for three years is ________.
A) $380
B) $158
C) $253
D) $252
28) ________ means that subsequent creditors agree to wait until all claims of the are
senior debt satisfied before having their claims satisfied.
A) Security interest
B) Subordination
C) Sinking fund requirement
D) Bond indenture
29) A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm
might ________.
A) improve its collection practices by providing extended credit policy
B) improve its collection practices and pay accounts payable, thereby decreasing
current liabilities and decreasing the current and quick ratios
C) decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios
D) increase inventory, thereby increasing current assets and the current and quick ratios
30) If managers are not owners of their company, then they are ________.
A) dealers
B) agents
C) bondholders
D) brokers
31) If a United States Savings bond can be purchased for $29.50 and has a maturity
value of $100 at the end of 25 years, what is the annual rate of return on the bond?
A) 5 percent
B) 6 percent
C) 7 percent
D) 8 percent
32) Which of the following provides savers with a secure place to invest funds and offer
both individuals and companies loans to finance investments?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks