1) Generally, the greater a firm’s times interest earned ratio, the less able it is to meet
payments as they come due.
2) In computing the weighted average cost of capital, from a strictly theoretical point of
view, the preferred weighing scheme is target market value proportions.
3) Diluted earnings per share (EPS) are found by adjusting basic EPS for the impact of
converting all convertibles and exercising all warrants and options that would have
diluting effects on a firm’s earnings.
4) The capital budgeting process consists of five distinct but interrelated steps: proposal
generation, review and analysis, decision making, implementation, and follow-up.
5) Large firms evaluate the merits of individual capital budgeting projects to ensure that
the selected projects have the best chance of increasing the firm value.
6) Unlike the spontaneous sources of unsecured short-term financing, bank loans are
negotiated and result from deliberate actions taken by the financial manager.
7) In the Eurobond market, corporations and governments typically issue bonds
denominated in dollars and sell them to investors located outside the United States.
8) Recessions associated with a banking crisis tend to be more severe than other
recessions because many businesses rely on credit to operate.
9) The more certain the return from an asset, the less variability and therefore the less
risk.
10) Generally, decreases in leverage result in increased return and risk, whereas
increases in leverage result in decreased return and risk.
11) Compensating balance is a checking account balance equal to a certain percentage
of the amount borrowed from a bank under a line-of-credit or revolving credit
agreement.
12) A firm has an average age of inventory of 60 days, an average collection period of
45 days, and an average payment period of 30 days. The firm’s cash conversion cycle is
________ days.
A) 15
B) 45
C) 75
D) 135
13) Managing a firm’s assets includes ________.
A) accruals
B) notes payable
C) cash
D) accounts payable
14) Accruals and accounts payable are ________.
A) negotiated and secured sources of long-term financing
B) negotiated and unsecured sources of short-term financing
C) secured sources of short-term financing
D) spontaneous and unsecured sources of short-term financing
15) The beta of a portfolio ________.
A) is the sum of the betas of all assets in the portfolio
B) is the product of the betas of the individual assets in the portfolio
C) is the median of the range of beta of the portfolio
D) is the weighted average of the betas of the individual assets in the portfolio
16) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
Since 2012, the liquidity of Dana Dairy Products ________. (See Table 3.2)
A) has deteriorated
B) has remained the same
C) has improved
D) is not determinable
17) Of the following components of a cash budget, generally the easiest to estimate
would be the ________.
A) cash sales
B) cash receipts
C) cash disbursements
D) month-to-month short-term borrowing
18) Which of the following is true of par value of a common stock?
A) It is determined on the basis of the stock’s market value
B) It is an arbitrary value established for legal purposes in a firm’s corporate charter
C) It indicates the market value at which the stock was originally sold
D) It allows stockholders to purchase additional shares at a price below the market price
19) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
The return on total assets for Dana Dairy Products for 2013 was ________. (See Table
3.2)
A) 0.9 percent
B) 5.5 percent
C) 25 percent
D) 2.5 percent
20) The rate of return earned on an investment of $50,000 today that guarantees an
annuity of $10,489 for six years is approximately ________.
A) 5%
B) 7%
C) 10%
D) 12%
21) Calculate a firm’s free cash flow if it has net operating profit after taxes of $60,000,
depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a
net current asset requirement of $30,000 and a tax rate of 30%.
A) $0
B) $30,000
C) -$30,000
D) $60,000
22) Macro political risk and micro political risk in international business refer to the
risk ________.
A) that will affect all foreign firms and the risk that will affect an individual firm or
specific industry, respectively
B) of the devaluation of the host country’s currency and the risk of sudden taxes on
exporting the manufactured goods of a particular industry, respectively
C) that will affect an individual firm or specific industry and the risk that will affect all
foreign firms, respectively
D) of sudden taxes on exporting the manufactured goods of a particular industry and the
risk of the devaluation of the host country’s currency, respectively
23) The tax liability of a corporation with ordinary income of $105,000 is ________.
Range of taxable incomeMarginal rate
$ 0to$ 50,00015%
50,000 to75,00025
75,000 to100,00034
100,000 to 335,00039
335,000to10,000,00034
10,000,000 to15,000,00035
A) $42,000
B) $35,700
C) $23,950
D) $24,450
24) The ability to use the same sales and distribution channels to reach customers of
both businesses is a benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
25) Which of the following typically applies to common stock but not to preferred
stock?
A) par value
B) dividend yield
C) legally considered as equity in the firm
D) voting rights
26) ________ is one of the solution to the agency problem in publicly-held
corporations.
A) Stock options
B) Stock split
C) Demotion of employee designation
D) Distribution of dividends
27) The primary advantage of a holding company, that permits the firm to control a
large amount of assets with a relatively small dollar investment is known as ________.
A) the leverage effect
B) tax effects
C) administrative effect
D) risk protection
28) ________ allow bondholders to purchase a certain number of shares of the firm’s
common stock at a specified price over a certain period of time.
A) Call options
B) Stock purchase warrants
C) Debentures
D) Put options
29) An example of an external factor that affects a corporation’s risk or beta, is
________.
A) a change in the financing mix used
B) toxic spills used during takeovers
C) a change in the asset mix
D) a change in top management