1) The payment of a call premium may generally be taken as an immediate tax
write-off.
2) The key to current asset planning is the ability of management to forecast sales
accurately and then match production schedules with the sales forecast.
3) One of the advantages of the BATS exchange stems from its home in Kansas.
4) Approximately 40% of all short-term financing is in the form of accounts payable or
trade credit.
5) A firm with a high degree of combined leverage will, other things being equal,
experience higher earnings in the expansionary part of the business cycle.
6) In the financing of a foreign affiliate, the simplest and most common arrangement is
a direct loan from the parent company to the subsidiary.
7) A firm with a high degree of financial leverage could face financial difficulty even
though it is in a stable industry.
8) Ke represents an expected return to stockholders as well as a cost to the firm.
9) The total required real rate of return is equal to the real rate of return plus the
inflation premium.
10) A cash discount calls for a reduction in price if payment cannot be made within a
specified time period.
11) Convertible bonds offer minimal risk of loss to the investor due to their floor value.
12) Theoretically, stock options are granted to employees so that the employees will
make decisions that benefit shareholders.
13) An increase in sales and profits generates the necessary cash required for economic
growth.
14) Corporate governance issues have become less important to the financial
community during the first decade of the new millennium.
15) Stockholders in general prefer large dividends to small dividends.
16) Financial intermediaries channel funds into the capital markets from the household
sector.
17) Automated clearinghouses are commonly used by consumers to make direct
payments for
A.insurance premiums
B.mortgage payments
C.utility bills
D.All of the options
18) The higher the tax rate, the ______ the net underwriting cost on the new bond issue,
from a cash flow point of view.
A.higher
B.lower
C.higher or lower
D.substantially higher
19) A portfolio of international stocks in comparison to purely U.S. stocks generally
shows
A.a lower percentage risk for a given number of stocks
B.higher percentage risk for a given number of stocks
C.the same percentage risk for a given number of stocks
D.a lower percentage return for a given number of stocks
20) Trend and industry analysis provide all of the following information except
A.benchmarking
B.the progress of the company
C.a basis for decision making about capital structure
D.future information about the company
21) International cash management systems are more complex than domestic cash
management systems because
A.many developing countries still use a cash payments system
B.some countries rely on electronic funds transfer more than the U.S
C.liquidity management, involving short-term cash balances and deficits, has to be
managed across international boundaries and time zones and is subject to the risks of
currency fluctuations
D.None of the options
22) Which of the following is not a reason for U.S. firms operating in foreign markets?
A.Less expensive labor
B.Better economic and political environment (in the U.S.)
C.Tax incentives
D.To achieve international diversification
23) Commercial paper that is sold without the use of an actual paper certificate is
known as
A.finance paper
B.dealer paper
C.book-entry paper
D.term paper
24) A firm with earnings per share of $3 and a price-earnings ratio of 20 will have a
stock price of
A.$60.00
B.$15.00
C.$6.67
D.The market assigns a stock price independent of EPS and the P/E ratio
25) When a tobacco firm merges with a steel company, it would be called
A.a horizontal merger
B.a vertical merger
C.a conglomerate merger
D.a consolidation
26) If prices double in New York while the prices in Germany remain the same, the
purchasing power of the dollar relative to the euro
A.should increase by 50%
B.should increase by 100%
C.should decrease by 50%
D.should decrease by 100%
27) Which of the following does not represent a tax implication in the bond refunding
decision?
A.The call premium
B.The cost savings in lower interest rates
C.Underwriting costs of a new issue
D.All of these options have tax implications
28) An issue of common stock has just paid a dividend of $2.00. Its growth rate is equal
to 4%. If the required rate of return is 7%, what is its current price?
A.$19.04
B.$80.00
C.$69.33
D.None of these options
29) Which of the following is not a characteristic of a zero-coupon bond?
A.It doesn’t pay interest
B.It is sold at a deep discount from face value
C.The annual increase in the bond’s price is not taxable as ordinary income
D.It provides a means for corporations to take annual deductions without current cash
outflow
30) With an S corporation
A.income is taxed as direct income to stockholders
B.stockholders have the same liability as members of a partnership
C.the number of stockholders is unlimited
D.the life of the corporation is limited
31) Which of the following is the lowest in priority of claims against a bankrupt firm?
A.A junior mortgage bond
B.A senior debenture
C.Common stock
D.A subordinated debenture
32) You buy a new piece of equipment for $7,360, and you receive a cash inflow of
$1,000 per year for 10 years. What is the internal rate of return?
A.5%
B.6%
C.7%
D.More than 7%
33) Bank loans to business firms
A.are usually short-term in nature
B.are preferred by the banker to be self-liquidating
C.may require compensating balances
D.All of these options
34) The effect of a rights offering on a stockholder is
A.to increase his/her wealth
B.to increase his/her wealth only if the new stock is purchased
C.to decrease his/her wealth unless the stock is purchased
D.to decrease his/her wealth if nothing is done
35) Within the capital asset pricing model
A.the risk-free rate is usually higher than the return in the market
B.the higher the beta, the lower the required rate of return
C.beta measures the volatility of an individual stock relative to a stock market index
D.Two of the options
36) Ellis Sport Shop projects the following sales:
Seventy percent of Ellis’ sales are on credit, with 60% of receivables collected in the
month after the sale and the rest of receivables collected in the second month after the
sale. February sales were $60,000, and March sales were $70,000. In the past, Ellis’ bad
debt percentage has been 0 and is expected to continue.
a) Prepare a monthly schedule of cash receipts for April-June.
b) What is the balance of receivables at the end of June?
37) The main cause for the increase in corporate debt in America is
A.rapid business expansion
B.inflationary impacts
C.inadequate internally raised funds
D.All of these options
38) The component parts of the cost of capital should be weighted by their proportion in
the firm’s
A.current capital structure
B.historical capital structure
C.optimum capital structure
D.expected capital structure
39) Security markets are efficient EXCEPT for when which of the following exists?
A.Security prices follow the leading indicators such as the DJIA very closely
B.The markets absorb large dollar amounts of stock without destabilizing the price
C.Prices adjust rapidly to new information
D.There is a continuous market where each successive trade is made at a price close to
the previous trade
40) An equipment replacement decision, under incremental analysis, requires
A.calculating the present value of all cash flows associated with the new equipment
minus the salvage value of the old asset
B.calculating the present value of all changes in cash flows from the old equipment to
the new equipment
C.subtracting the purchase price of the old equipment from the purchase price of the
new equipment
D.Two of the options
41) Oak Enterprises has a beta of 1.2, the market return is 8%, and the T-bill rate is 4%.
What is their expected required return of common equity?
A.Between 11% and 12%
B.Between 8% and 9%
C.Between 7% and 8%
D.Between 4% and 5%
42)
Refer to the figure above. Times interest earned for Megaframe Computer is ____.
A.4.5x
B.9x
C.11x
D.7.6x
43) A bond with a call provision would generally be sold to yield
A.less than a noncallable bond of similar character
B.the same as a similar noncallable bond
C.more than a noncallable bond of similar character
D.the same as similar convertible bonds
44) Evidence of how global markets are linked was provided in 1997 and 1998 when
international markets reacted to
A.the collapse of Asian currencies in Thailand, Indonesia, Malaysia, and Korea
B.Russia’s default on its sovereign debt
C.Japan’s seven years of economic stagnation
D.the collapse of Asian currencies in Thailand, Indonesia, Malaysia, and Korea, and
Russia’s default on its sovereign debt
45)
Refer to the figure above. The firm’s receivable turnover is ____.
A.5.0x
B.1.7x
C.6.25x
D.0.2x
46) A Aa2 bond is rated lower than a _____ bond.
A.Aa1
B.Aa3
C.A1
D.A2
47) Three years ago, the U.S. dollar’s exchange rate with the Iceland krona was .0008
dollars per krona. Today, the exchange rate is .0006 dollars per krona. These figures
indicate that over this three-year period, the dollar
A.strengthened against the krona
B.weakened against the krona
C.is not highly correlated to the krona
D.The answer cannot be determined without knowing the number of kronas needed to
buy a dollar
48) Newdex has net income of $3,000,000 (INCLUDING the effect of expected
underwriting costs) and 1,000,000 shares outstanding. It needs to raise $5,000,000 in
funds for a new asset. Its investment banker plans to sell an issue of common stock to
the public for $40, less a spread of 10%. How much must Newdex’s after-tax income
increase to prevent dilution of EPS?
A.$40,000
B.$416,667
C.$350,000
D.None of these options
49) A firm’s break-even point will rise if
A.fixed costs decrease
B.contribution margin increases
C.price per unit rises
D.variable cost per unit rises
50) The efficient market hypothesis deals primarily with
A.random speculation in securities
B.the degree to which prices adjust to new information
C.the degrees to which price movements are the result of past trends
D.how an investor can significantly outperform the market in general
51) A possible advantage to a rights offering is that
A.current shareholders are protected against dilution
B.the firm has a built-in market of knowledgeable investors
C.distribution costs are lower than a public offering
D.All of these options
52) Brand Advertising is offered a 3/10, net 40 trade discount by its supplier. In the
past, Brand has been able to get away with paying for supplies on credit in 60 days.
Since it doesn’t have money on hand to take advantage of the discount, it tries to
negotiate a loan with Portland State Bank. The amount of $400,000 with a 12%
compensating balance and a $6,200 interest charge has been negotiated for the month of
May. Brand already maintains a $16,250 balance at the bank. Compute the effective rate
of interest on the loan, and the cost of not taking the discount. Should Brand take
advantage of the cash discount?
53) Given the information about Jury Co. in the previous problem, calculate the
company’s weighted average cost of capital assuming that its new financing will consist
of 40% debt, 10% preferred stock, and 50% retained earnings.
54) Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank
gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the loan is a discounted loan with a 10%
compensating balance?
55) The King Solomon Mining Company is contemplating a cash tender offer for the
outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide
$175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the
next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King
Solomon Mining can use over the next two years ($200,000 per year).
If King Solomon Mining’s corporate tax rate is 34% and its cost of capital is 12%, what
is the cash price it should be willing to pay to acquire Roanoke based solely on its
cash-flow benefit over the next 20 years?
56) Complete the following balance sheet for the Range Company using the following
information:
Debt to assets = 60 percent
Quick ratio = 1.1
Asset turnover = 5x
Fixed asset turnover = 12.037x
Current ratio = 2
Average collection period = 16.837 days
Assume all sales are on credit, and data are based upon a 360-day year.
57) Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of
common stock. The cumulative preferred stock has a stated dividend of $1.75 per share.
Under normal conditions, Kreisler pays out preferred dividends and 30% of remaining
earnings to common stockholders; however, because of a severe recession, Fritz
retained all earnings last year. This year, Fritz earned net income of $5 million.
Calculate the dividend per share to be received by the common stockholders this year.
58) You have an opportunity to buy a $1,000 bond that matures in 10 years. The bond
pays $30 every six months. The current market interest rate for similar bonds is 8%.
What is the most you would be willing to pay for this bond?
59) Golden Corporation is considering the purchase of new equipment costing $77,000.
The expected life of the equipment is 10 years. The potential increase in annual net
income from the new equipment for the next 10 years depends on the state of the
economy as follows.
The equipment will be depreciated using straight line depreciation. The equipment will
have no scrap value at the end of the 10 years. Golden’s cost of capital is 12%. What is
the expected NPV? Should they purchase the new equipment?