1) One of the key inputs to the final credit decision is a credit analyst’s subjective
judgment of a firm’s creditworthiness since it can provide a better feel of a firm’s
operation than any quantitative figures.
2) The market segmentation theory suggests that the shape of the yield curve is
determined by the supply and demand for funds within each maturity segment.
3) Standard deviation is a measure of relative dispersion that is useful in comparing the
risks of assets with different expected returns.
4) Fixed assets are the most desirable short-term-loan collateral since they normally
have a longer life, or duration, than the term of the loan.
5) The marginal tax rate represents the rate at which the next dollar of income is taxed.
6) The aggressive funding strategy is risky due to its minimum level of net working
capital, high dependency on short-term sources of funds, and the changing short-term
interest.
7) An acquisition of a “cash-rich” company immediately increases the acquiring firm’s
borrowing power by decreasing its financial leverage.
8) The liquidity of a business firm refers to the solvency of the firm’s overall financial
position.
9) Scenario analysis is a behavioral approach that uses a number of possible outcomes
to asses the variability of returns.
10) Diversifiable risk is the relevant portion of risk attributable to market factors that
affect all firms.
11) High net cash flow with fixed risk is generally associated with a higher share price.
12) If a firm’s variable costs per unit increase,the firm’s ________.
A) financial breakeven point will decrease
B) operating breakeven point will increase
C) sale price per unit will decrease
D) fixed costs per unit will increase
13) Other factors remaining constant, a decrease in the average age of inventory will
result in ________.
A) a decrease in the average collection period
B) a decrease in the cash conversion cycle
C) an increase in the cash conversion cycle
D) an increase in the average collection period
14) 1/15 net 30 date of invoice translates as ________.
A) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is
taken, the balance is due in 30 days after the middle of the month
B) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is
taken, the balance is due 30 days after the invoice date
C) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is
taken, the balance is due 30 days after the end of the month
D) a 1 percent discount may be taken on 15 percent of the purchase if the account is
paid within 30 days after the end of the month
15) A tax adjustment must be made in determining the cost of ________.
A) long-term debt
B) common stock
C) preferred stock
D) retained earnings
16) ________ costs require the payment of a specified amount in each accounting
period.
A) Operating
B) Variable
C) Semi-variable
D) Fixed
17) The risk of the debt capital is less than that of other long-term contributors of
capital because ________.
A) they have a lower priority of claim against any earnings or assets available for
payment
B) they have the stockholders’ personal assurance for all future interest payments
C) there is no interest rate risk as the interest rate is predetermined
D) the tax-deductibility of interest payments lowers the debt cost to a firm substantially
18) When the ratio of exchange in a merger is equal to one and both the acquiring and
the target companies have the same premerger earnings per share, both the acquiring
and the target companies have the same ________.
A) debt ratio
B) book value per share
C) return on equity
D) P/E ratio
19) Other factors remaining constant, an increase in the average collection period will
result in ________.
A) an increase in the operating cycle
B) an increase in the average payment period
C) a decrease in the operating cycle
D) a decrease in the average payment period
20) A college received a contribution to its endowment fund of $2 million. It can never
touch the principal, but can use the earnings. At an assumed interest rate of 9.5 percent,
how much can the college earn to help its operations each year?
A) $95,000
B) $19,000
C) $190,000
D) $18,000
21) The present value of an ordinary annuity of $350 each year for five years, assuming
an opportunity cost of 4 percent, is ________.
A) $288
B) $1,896
C) $1,750
D) $1,558
22) Which of the following major variables should be considered when evaluating
proposed changes in credit standards?
A) level of inventories
B) accounts payable
C) level of liquid assets
D) bad debt expenses
23) Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year
ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest
expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of
$150,000 during 2015. Hennesaw Lumber, Inc.’s income statement for the year ended
December 31, 2014 is shown below. From your preparation of the pro forma income
statement, answer the following multiple choice questions.
The pro forma operating expenses for 2015 are ________. (See Table 4.4)
A) $150,000
B) $200,000
C) $210,000
D) $225,000
24) In ________, an assignment may be made by the creditors of an insolvent firm to a
third party who then has the power to liquidate the firm’s assets.
A) a voluntary private liquidation
B) a greenmail
C) an involuntary liquidation under Chapter Seven of the Bankruptcy Reform Act of
1978
D) a voluntary liquidation under Chapter Seven of the Bankruptcy Reform Act of 1978
25) The purpose of managing current assets and current liabilities is to ________.
A) achieve a balance between short-term and long-term financing of a firm
B) achieve as low a level of current liabilities as possible
C) achieve a balance between profitability and risk that contributes to a firm’s value
D) achieve as high a level of current liabilities as possible
26) The money market is a market ________.
A) that enables suppliers and demanders of long-term funds to make transactions
B) which brings together suppliers and demanders of short-term funds
C) where smaller, unlisted securities are traded
D) where all derivatives are traded