1) Holding all other factors constant, a firm that is subject to a greater level of business
risk should employ more total leverage than an otherwise equivalent firm that is subject
to a lesser level of business risk.
2) The effective interest rate for a discount loan is greater than the loan’s stated interest
rate.
3) Operating change restrictions are contractual restrictions that a bank may impose on
a firm as part of a line of credit agreement.
4) International capital budgeting differs from domestic capital budgeting as cash
inflows and outflows occur in a foreign currency and foreign investments potentially
face significant political risk.
5) The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than
maximization of owners’ wealth.
6) Effective capital structure decisions can lower the cost of capital, resulting in higher
NPVs and more acceptable projects, thereby increasing the value of a firm.
7) The shadow banking system describes a group of institutions that engage in lending
activities, much like traditional banks.
8) The ordinary income of a corporation is income earned through the sale of goods or
services and is currently taxed subject to the individual income tax rates.
9) An underwritten issue of common stock is one in which a firm purchases insurance
to cover unexpected losses suffered by shareholders.
10) Mutually exclusive projects are projects whose cash flows are unrelated to one
another; the acceptance of one does not eliminate the others from further consideration.
11) Although differences in the magnitude and timing of cash flows explain conflicting
rankings under the NPV and IRR techniques, the underlying cause is the implicit
assumption concerning the reinvestment of intermediate cash inflows.
12) The danger that an unexpected change in the exchange rate between the dollar and
the currency in which a project’s cash flows are denominated will reduce the market
value of that project’s cash flow is called exchange rate risk.
13) The marginal cost of capital is a relevant cost of capital for evaluating a firm’s
future investment opportunities.
14) The components of risk premium includes business risk, financial risk, interest rate
risk, liquidity risk, and tax risk.
15) An efficient market is one where ________.
A) prices of stocks move up and down widely without apparent reason
B) prices of stocks remain low for long periods of time
C) prices of stocks are unaffected by market news
D) the price of a security is an unbiased estimate of its true value
16) Table 12.2
A firm is considering investment in a capital project which is described below. The
firm’s cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a
risk index of 1.5. The firm uses the following equation to determine the risk adjusted
discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital – Rf)
The net present value of the project when adjusting for risk is ________. (See Table
12.2)
A) -$9,300
B) $0
C) $87,000
D) $105,000
17) A firm plans to retire outstanding bonds in the next planning period. Which of the
following gets affected?
A) pro forma income statement and pro forma balance sheet
B) previous year income statement and previous year balance sheet
C) previous year income statement and statement of retained earnings
D) pro forma income statement and proxy statement
18) One of the most common designations for the beginning of the credit period is
________.
A) 2/10
B) the date of invoice
C) the end of a quarter
D) the transaction date
19) The cost of retained earnings is ________.
A) less than the cost of debt
B) equal to the cost of a new issue of common stock
C) equal to the cost of common stock equity
D) irrelevant to the investment/financing decision
20) Commercial paper issues have maturities ranging from ________.
A) six months to one year
B) one year to three years
C) three days to 270 days
D) 0 to 30 days
21) At a firm’s quarterly dividend meeting held April 9, the directors declared a $0.50
per share cash dividend for the holders of record on Monday, May 1. The firm’s stock
will sell ex dividends on ________.
A) April 28
B) May 5
C) April 29
D) April 27
22) Most businesses raise money by selling their securities in a ________.
A) public offering
B) forex market
C) futures market
D) commodities market
23) If a corporation has an average tax rate of 40 percent, the approximate annual,
after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is
________.
A) 3.6 percent
B) 4.8 percent
C) 6 percent
D) 8 percent
24) Time-series analysis is often used to ________.
A) assess developing trends
B) correct errors of judgment
C) evaluate the value of a firm or its assets
D) standardize results
25) A firm has common stock with a market price of $100 per share and an expected
dividend of $5.61 per share at the end of the coming year. A new issue of stock is
expected to be sold for $98, with $2 per share representing the underpricing necessary
in the competitive capital market. Flotation costs are expected to total $1 per share. The
dividends paid on the outstanding stock over the past five years are as follows:
The cost of this new issue of common stock is ________.
A) 5.8 percent
B) 7.7 percent
C) 10.8 percent
D) 12.8 percent
26) The sale of a new security directly to an investor or a group of investors is called
________.
A) arbitraging
B) short selling
C) a capital market transaction
D) a private placement