1) The net fixed asset investment (NFAI) is defined as the change in net fixed assets
plus depreciation.
2) While an earnings requirement limiting the amount of dividends paid is sometimes
imposed, a firm is not prohibited from paying more in dividends than its current
earnings.
3) For a project that has an initial cash outflow followed by cash inflows, the
profitability index (PI) is equal to the present value of cash inflows divided by the cost
of capital.
4) A vertical merger is a merger of two firms in the same line of business.
5) For firms that are able to raise funds through the sale of commercial paper, it is
generally cheaper than borrowing from a commercial bank.
6) An agency problem occurs when a firm selects an ineffective marketing, advertising,
and PR firm to represent them.
7) Treasury stock is generally reclassified as class B common stock and has voting
rights.
8) The common stock book value model ignores a firm’s expected earnings potential
and generally lacks any true relationship to the firm’s value in the marketplace.
9) The IRR is the compounded annual rate of return that a firm will earn if it invests in
a project and receives the estimated cash inflows.
10) A corporate treasurer typically handles both the cost accounting and financial
accounting.
11) For a risk-indifferent manager, no change in return would be required for an
increase in risk.
12) The objective for managing accounts receivable is to avoid credit sales as much as
possible.
13) Firms do not usually get rewarded by diversifying investments in different lines of
business because ________.
A) the capital markets are efficient and they quickly respond to change in economic
conditions
B) cash flows from such projects tend to respond less to changing economic conditions
C) investors themselves can diversify by holding securities in a variety of firms; they do
not need the firm to do it for them
D) it is not possible for a firm to diversify its risk as the inflation premium is different
for different projects
14) Which of the following is true?
A) The process of pooling mortgages or other types of loans and then selling claims or
securities against that pool in a secondary market is called capitalization
B) Corporations pay taxes on all dividends received from other corporations, no matter
their share of ownership
C) Corporations may pay taxes depending on their percentage of ownership
D) Capital gains are treated separately from ordinary corporate income for tax purposes
15) ________ projects do not compete with each other; the acceptance of one ________
the others from consideration.
A) Capital; eliminates
B) Independent; does not eliminate
C) Mutually exclusive; eliminates
D) Replacement; eliminates
16) An applicant’s capacity to repay its requested credit can be found by ________.
A) analyzing financial statements
B) checking bank account balances
C) analyzing tax payment history
D) checking the covenants
17) Table 15.5
Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As
a result, sales are expected to increase 15 percent from 300 canoes per year to 345
canoes per year. The average collection period is expected to increase to 40 days from
30 days and bad debts are expected to double the current 1 percent level. The price per
canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the
300 unit level is $700. The firm’s required return on investment is 20 percent. (Assume
a 360-day year)
What is the cost of marginal bad debts under the proposed plan? (See Table 15.5)
A) $383
B) $765
C) $3,315
D) $5,100
18) Perfectly ________ correlated series move exactly together and have a correlation
coefficient of ________, while perfectly ________ correlated series move exactly in
opposite directions and have a correlation coefficient of ________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
D) positively; +1; negatively; -1
19) According to the efficient market hypothesis, prices of actively traded stocks
________.
A) can be under- or over-valued in an efficient market
B) can only be under-valued in an efficient market
C) do not differ from their true values in an efficient market
D) can only be over-valued in an efficient market
20) One basic technique used to evaluate after-tax operating cash flows is to ________.
A) add noncash charges to net income
B) subtract depreciation from operating revenues
C) add cash expenses to net income
D) subtract cash expenses from noncash charges
21) ________ are debt rated Ba or lower by Moody’s or BB or lower by Standard &
Poor’s and are commonly used by rapidly growing firms to obtain growth capital, most
often to finance mergers and takeovers.
A) Subordinated debentures
B) Mortgage bonds
C) Junk bonds
D) Equipment trust certificates
22) Julian is considering purchasing the stock of Pepsi Cola because he really loves the
taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to
pay a $2 dividend in one year and he expects dividends to grow at 5 percent
indefinitely? Julian requires a 12 percent return to make this investment.
A) $28.57
B) $29.33
C) $31.43
D) $43.14
23) The before-tax cost of debt for a firm, which has a marginal tax rate of 40 percent,
is 12 percent. The after-tax cost of debt is ________.
A) 4.8 percent
B) 6.0 percent
C) 7.2 percent
D) 12 percent
24) The use of the ________ is especially helpful in valuing firms that are not publicly
traded.
A) liquidation value
B) book value
C) P/E multiple
D) present value of the dividends
25) Tangshan Industries has issued a bond which has a $1,000 par value and a 15
percent annual coupon interest rate. The bond will mature in ten years and currently
sells for $1,250. Using this information, the yield to maturity on the Tangshan
Industries bond is ________.
A) 10.79 percent
B) 11.39 percent
C) 12.19 percent
D) 13.29 percent
26) $1,200 is received at the beginning of year 1, $2,200 is received at the beginning of
year 2, and $3,300 is received at the beginning of year 3. If these cash flows are
deposited at 12 percent, their combined future value at the end of year 3 is ________.
A) $ 6,700
B) $17,072
C) $12,510
D) $ 8,142
27) ________ are obligations of the U.S. Treasury with common maturities of 91 to 182
days and that have a strong secondary market.
A) Treasury notes
B) Treasury bills
C) Federal agency issues
D) Banker’s acceptances
28) The portion of an asset’s sale price that is below its book value and below its initial
purchase price is called ________.
A) a capital gain
B) recaptured depreciation
C) a capital loss
D) book value
29) Which of the following is true of a stock right and a warrant?
A) They are similar to a put option
B) They both result in new equity capital for a firm
C) They are both issued with exercise or subscription prices below the prevailing
market price of stock
D) They both may be traded independently from the security to which they were
attached
30) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Summarize the incremental after-tax cash flow (relevant cash flows) for years t = 0
through t = 5. (See Table 11.4)
31) Jia’s Kitchen Stuff has recently sold 1,000 shares of preferred stock. What is the
value of the stock assuming 10 percent required rate of return and a preferred dividend
of $6.75?
32) Ken borrows $15,000 from a bank at 10 percent annually compounded interest to be
repaid in six equal installments. Calculate the interest paid in the second year.
33) Table 13.1
At about what EBIT level should the financial manager be indifferent to either plan?
(See Table 13.1)
34) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Given the information in Table 11.4, compute the payback period.
35) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Calculate the incremental earnings before depreciation and taxes. (See Table 11.4)
36) Calculate the future value of $10,000 received today and deposited for six years in
an account which pays interest of 12 percent compounded quarterly.
37) You have been given the opportunity to earn $20,000 five years from now if you
invest $9,524 today. What will be the rate of return to your investment?