Cumulative voting makes it possible for minority shareholders to gain representation on
the board of directors.
Commercial paper is an example of marketable securities.
If a firm has missed one or more dividends on cumulative preferred stock, it must make
them up before any dividends can be paid to common shareholders.
Junk bonds pay high interest rates and are issued by even the most solid companies.
A good business plan conveys a comprehensive image of the firm’s future including
information about products, markets, employees, technology, facilities, capital, revenue,
profitability, and anything else that might be relevant.
Foreign exchange rates are quoted in terms of U.S. dollars. Therefore, when converting
one non US currency into another, it is necessary to convert to US dollars first.
Which of the following may reduce the effectiveness of ratio analysis?
A.Highly diversified companies may have activities that obscure trends that may appear
more clearly in single function companies.
B.Management may use window dressing at the end of the year to improve apparent
performance.
C.Companies in the same industry may use different accounting practices which may
indicate differing levels of performance that don’t really exist.
D.Book values may not be comparable from company to company because of the age of
the asset, inflation, etc.
E.All of the above can reduce the effectiveness of ratio analysis.
When incorporating risk into capital budgeting through the interest rate used in NPV or
IRR calculations, the rates used are called:
A.inflation adjusted rates.
B.market risk premium.
C.risk-free rates.
D.risk-adjusted rates.
Sigma is thinking about purchasing a new clam digger for $14,000. The expected net
cash flows resulting from the digger are $9,000 in year 1, $7,000 in year 2, $5,000 in
year 3, and $3,000 in year 4. Should Sigma purchase this digger if its cost of capital is
12 percent?
A.Yes, NPV = $3,176
B.Yes, NPV = $5,084
C.Yes, NPV = $16,605
D.Yes, NPV= $19,084
The sustainable growth rate is equal to:
A.the retention ratio multiplied by ROE.
B.the dividend payout ratio multiplied by ROA.
C.the dividend payout ratio multiplied by ROE.
D.the retention ratio multiplied by ROA.
Which is generally not a defensive measure for a target firm?
A.A tender offer
B.A poison pill
C.Greenmail
D.A preemptive merger
A moral hazard is a situation that tempts people to act in immoral or unethical ways.
Which of the following is true of a moral hazard?
A.It leads auditors to ensure compliance with accounting standards.
B.It can lead to the suppression of unfavorable information by management.
C.The confidence of auditing in the company is unaffected by such activities.
D.The unethical activities are limited to middle-level executives.
Stocks with equal stand-alone risk can have:
A.the same risk impacts on a portfolio.
B.opposite risk impacts on a portfolio.
C.no risk impacts on a portfolio.
D.All of the above
The rate of return on a security is the:
A.interest rate that a security pays over its life.
B.interest rate that equates the current outflow to acquire the security with its current
price.
C.capital gains rate that a security promises over its life.
D.interest rate that makes the present value of the security€s expected cash flows equal
to its price.
Financial leverage is a direct function of the ratio of:
A.net income to sales.
B.EBIT to sales.
C.interest expense to EBIT.
D.net income to the number of shares of common stock.
Financial leverage increases a firm’s ROE and EPS under which of the following
circumstances?
A.ROCE = cost of debt
B.ROCE > after tax cost of debt
C.ROCE < pretax cost of debt
D.ROCE = cost of equity
Hatfield, Inc. sells its product for $14.00. Variable costs are $9.00 per unit, and Hatfield
has $800,000 in fixed costs. Assume that Hatfield has $1.0 million in total debt and
equity and a 40% tax rate. What is Hatfield’s ROCE when sales are at 10% above
breakeven?
A.4.8%
B.1.4%
C.7.6%
D.9.1%
A real option that allows a company to respond more easily to changes in business
conditions is known as a(n):
A.expansion option.
B.investment timing option.
C.flexibility option.
D.None of the above
The usefulness of financial statements in assessing the investment value of securities is
always somewhat limited because:
A.the information in financial statements more subjective rather than objective.
B.companies are not always honest about their figures.
C.past performance may not be indicative of future performance.
D.the information is often confusing.
Kelly Brown has $12,000 invested in American Cyanamid, $15,000 in Gannett
Company, and $3,000 in Texas International. If American Cyanamid has a beta of 1.05,
Gannett a beta of .85, and Texas International a beta of 1.30, what is Kelly’s portfolio
beta?
A.0.975
B.1.34
C.0.90
D.3/20
Overland has a part with a unit cost of $40. It costs $52 to place, process and receive an
order. The carrying cost of the inventory is approximately 20% of the part’s dollar value
per year. The firm uses 2,000 of the parts each year. What order quantity minimizes
total inventory cost?
A.93
B.127
C.161
D.205