1) An action on the part of a firm that increases the level of expected cash flows without
a corresponding increase in risk should reduce share value; an action that reduces the
level of expected cash flows without a corresponding decline in risk should increase
share value.
2) Factoring accounts receivable is relatively an expensive source of unsecured
short-term funds.
3) A conversion feature in a bond allows bondholders to change each bond into a stated
number of shares of common stock.
4) One basic weakness of the simplified pro forma approaches lies in the assumption
that certain variables, such as cash, accounts receivable, and inventories, can be forced
to take on certain “desired” values.
5) LBOs are an example of a financial merger undertaken to create a high-debt private
corporation with improved cash flow and value.
6) Operating financial plans are planned short-term financial actions and the anticipated
financial impact of those actions.
7) Companies involved in international capital budgeting projects can minimize the
long-term currency risk by financing the foreign investment at least partly in the local
capital markets.
8) The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment
obligations by maintaining a specified level of fixed assets.
9) The actual ratio of exchange in a stock-exchange acquisition is the ratio of the
amount paid per share of the target company to the per-share market price of the
acquiring firm.
10) A positive cash conversion cycle means that a firm must obtain financing to support
the cash conversion cycle.
11) As firms are unable to match cash inflows to outflows with certainty, most of them
need current liabilities.
12) The bond indenture identifies any collateral pledged against a bond and specifies
how it is to be maintained.
13) 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 3, the cash flow pattern for the replacement project is ________. (See
Table 11.2)
A) a mixed stream and conventional
B) a mixed stream and nonconventional
C) a perpetuity and conventional
D) an annuity and nonconventional
14) The call price of a security generally exceeds the security’s par value by an amount
equal to ________.
A) one year’s stated interest
B) the straight bond value
C) the market value of one share of common stock
D) the market premium
15) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate
outstanding. The issue pays interest annually and has 20 years remaining to its maturity
date. If bonds of similar risk are currently earning 11 percent, the firm’s bond will sell
for ________ today.
A) $1,000
B) $716.67
C) $840.73
D) $1,123.33
16) Legal capital refers to ________.
A) a legal constraint imposed by lenders of a firm to maintain a certain level of debt to
equity ratio and capital
B) capital impairment restrictions are generally established to provide a sufficient
equity base to protect creditors’ claims
C) the capital which is typically measured by the retained earnings
D) the capital which is typically measured by net income
17) The result of spin-off to the parent company is ________.
A) additional stock to the parent through stock dividend
B) additional cash from the sale
C) additional debt by the parent through issue of bonds
D) no additional cash to the subsidiary
18) The ________ in the capital market is the basis for determining a bond’s coupon
interest rate.
A) cost of money
B) weighted average cost of capital
C) bond’s face value
D) average coupon interest rate
19) ________ is the amount earned on a deposit that has become the part of the
principal at the end of a specified time period.
A) Discount interest
B) Compound interest
C) Primary interest
D) Future value
20) When the net present value is negative, the internal rate of return is ________ the
cost of capital.
A) greater than
B) greater than or equal to
C) less than
D) equal to
21) Ria’s Doll Company has an outstanding preferred issue of stock with a par value of
$100 and an annual dividend of 10 percent (of par). Similar risk preferred stocks are
yielding an 11.5 percent annual rate of return.
(a)What is the current value of the outstanding preferred stock?
(b)What will happen to price as the risk-free rate increases? Explain.
22) The combination of two or more companies to form a completely new corporation
is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) conglomerate merger
23) Which of the following is a reason for mergers?
A) to reduce common stock outstanding
B) to gain monopoly control over the markets
C) to decrease the level of provision for doubtful accounts
D) to gain increased managerial skills
24) A firm’s financing requirements can be separated into ________.
A) current liabilities and short-term funds
B) current assets and fixed assets
C) current liabilities and long-term debt
D) seasonal and permanent
25) Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as
follows:
Given the information in Table 8.2, what is the expected annual return of this portfolio?
A) 11.4%
B) 10.0%
C) 11.0%
D) 11.7%
26) The time value concept/calculation used in amortizing a loan is ________.
A) future value of a dollar
B) future value of an annuity
C) present value of a dollar
D) present value of an annuity
27) Motive for merging includes ________.
A) increased financial leverage
B) increased common stock outstanding
C) increased provision for doubtful accounts
D) increased liquidity
28) ________ float results from the lapse between the time when a firm deducts a
payment from its checking account ledger and the time when funds are actually
withdrawn from its account.
A) Mail
B) Processing
C) Collection
D) Disbursement
29) Table 15.4
Bowring Ball Bearings has 10 different items in its inventory. The average number of
units held in inventory and the average unit cost are listed for each item. The firm uses
an ABC system of inventory control.
Inventory items that belong in the C category include ________. (See Table 15.4)
A) Items 4 and 6
B) Items 6 and 8
C) Items 1, 7, and 9
D) Items 1 and 3