1) Economic exposure is the risk resulting from the effects of changes in foreign
exchange rates on a firm’s value.
2) The constant growth model is an approach to dividend valuation that assumes a
constant future dividend.
3) The two basic measures of liquidity are the debt-to-equity ratio and the asset turnover
ratio.
4) The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents
the percent of estimated cash inflows that investors would be satisfied to receive for
certain rather than the cash inflows that are possible for each year.
5) A controller typically handles the accounting activities, such as tax management, data
processing, financial accounting, and cost accounting.
6) The basic cash flows that must be considered when determining the initial
investment associated with a capital expenditure are the installed cost of the new asset,
the after-tax proceeds (if any) from the sale of an old asset, and the change (if any) in
net working capital.
7) The risk to a U.S. importer with foreign-currency-denominated accounts payable is
that the dollar will depreciate.
8) In general, with an amortized loan, the payment amount remains constant over the
life of the loan, both the principal portion of and the interest portion declines over the
life of the loan.
9) The amount of leverage in a firm’s capital structurethe mix of long-term debt and
equity maintained by the firmcan significantly affect its value by affecting return and
risk.
10) The prime rate of interest fluctuates with changing supply-and-demand
relationships for short-term funds.
11) Because a security is first sold with a conversion price above the current market
price of a firm’s stock, conversion is initially not attractive.
12) A reorganization plan ________.
A) seeks to build a high debt-equity ratio
B) generally exchanges equity for debt
C) must increase the fixed charges for a firm
D) must maintain the priorities of the contractual claims of all parties
13) A ________ is when a firm acquires a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
14) The acquiring firm pays a price that is a premium above the market price of the
acquired firm. This means that the ratio of exchange in market price is ________.
A) less than 1
B) greater than 1
C) 0, because the ratio of exchange results in no increase or decrease of shares
D) equal to 1
15) Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year
ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest
expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of
$150,000 during 2015. Hennesaw Lumber, Inc.’s income statement for the year ended
December 31, 2014 is shown below. From your preparation of the pro forma income
statement, answer the following multiple choice questions.
The pro forma net profits after taxes for 2015 are ________. (See Table 4.4)
A) $202,500
B) $207,000
C) $52,500
D) $57,000
16) A spin-off means ________.
A) a subsidiary being sold to existing management resulting in a new company
B) a subsidiary merging completely with its holding company
C) a subsidiary becoming an independent company
D) a subsidiary being taken over by the federal government due to its incapabilities to
survive on its own
17) Which of the following is a reason why equity capital is considered riskier than debt
capital?
A) Equity capital has a higher priority claim against assets and earnings
B) Equity capital requires regular periodic payments in the form of dividends
C) Equity capital expects dividend payments which are not tax-deductible
D) Equity capital remains invested in a firm indefinitely
18) The clientele effect refers to ________.
A) the relevance of dividend policy on a firm’s share value
B) a firm’s ability to attract stockholders whose dividend preferences are similar to the
firm’s dividend policy
C) the informational content of dividends that helps in predicting the future earnings
and growth of a firm
D) the “bird-in-the-hand” argument
19) Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The firm’s cash flow from operating activities is ________. (See Table 4.1)
A) $50
B) $350
C) $150
D) $200
20) Table 12.2
A firm is considering investment in a capital project which is described below. The
firm’s cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a
risk index of 1.5. The firm uses the following equation to determine the risk adjusted
discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital – Rf)
The net present value without adjusting the discount rate for risk is ________. (See
Table 12.2)
A) $336,000
B) $250,000
C) $179,400
D) $87,000
21) The key securities traded in the capital markets are ________.
A) commercial papers and Treasury bills
B) Treasury bills and certificates of deposit
C) stocks and bonds
D) bills of exchange and commercial papers
22) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 2, the book value of the existing asset at the end of the fifth year is
________. (See Table 11.2)
A) $13,600
B) $34,400
C) $66,400
D) $80,000
23) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4.
Each asset costs $35,000 and is expected to provide earnings over a three-year period as
described below.
Based on the wealth maximization goal, the financial manager would choose ________.
A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4
24) As credit standards are tightened, sales are expected to ________ and the
investment in accounts receivable is expected to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
25) Which of the following factors can influence the operations of an MNC?
A) foreign ownership of portions of equity
B) debt and equity structures based on home country’s capital market
C) dividend payout policy
D) consolidation of financial statements based on only one currency
26) Johnson, Inc. has just ended the calendar year making a sale in the amount of
$10,000 of merchandise purchased during the year at a total cost of $7,000. Although
the firm paid in full for the merchandise during the year, it is yet to collect at year end
from the customer. The net profit and cash flow from this sale for the year are
________.
A) $3,000 and $10,000, respectively
B) $3,000 and -$7,000, respectively
C) $7,000 and -$3,000, respectively
D) $3,000 and $7,000, respectively