1) When computing an interest or growth rate, the rate will increase with an increase in
future value, holding present value and the number of periods constant.
2) One aspect of risk associated with the aggressive strategy’s maximum use of
short-term financing is the fact that changing short-term interest rates can result in
significantly higher borrowing.
3) In capital budgeting, one of the most common scenario approaches is to estimate the
NPVs associated with pessimistic (worst), most likely (expected), and optimistic (best)
estimates of cash inflow.
4) Political risk is easier to protect as compared to exchange rate risk.
5) The value of zero for beta coefficient of the risk-free asset reflects not only its
absence of risk but also the fact that the asset’s return is unaffected by movements in the
market return.
6) Table 9.2
A firm has determined its optimal structure which is composed of the following sources
and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The
dividend expected to be paid at the end of the coming year is $5. Its dividend payments
have been growing at a constant rate for the last five years. Five years ago, the dividend
was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2
per share and the firm must pay $1 per share in flotation costs. Additionally, the firm
has a marginal tax rate of 40 percent.
The firm’s cost of a new issue of common stock is ________. (See Table 9.2)
A) 10.2 percent
B) 14.3 percent
C) 16.7 percent
D) 19.2 percent
7) The Steel Works, Inc. is required to carry a minimum of 40 days’ raw steel, which is
250 tons. It takes 15 days between order and delivery. At what level of steel would Steel
Works reorder?
A) 3,750 tons
B) 600 tons
C) 667 tons
D) 344 tons
8) Which of the e following is true of cash basis accounting?
A) All credit sales will be recorded as revenue
B) Revenue is recognized when a customer pays cash
C) Expenses are recognized when they are incurred
D) Accounts receivable and accounts payable can never be zero
9) A decrease in current assets and an increase in current liabilities will ________ net
working capital, thereby ________ the risk of insolvency.
A) increase; increasing
B) decrease; increasing
C) increase; reducing
D) decrease; reducing
10) A ________ give bondholders the right to purchase a certain number of shares of
the issuer’s common stock at a specified price over a certain period of time.
A) stock purchase warrant
B) call feature
C) swap
D) conversion feature
11) ________ ensure that money lent under a line of credit agreement is actually being
used to finance seasonal needs.
A) Operating-change restrictions
B) Annual cleanups
C) Compensating balances
D) Commitment fees
12) A partnership between a multinational company and a foreign investor in which
contractually specified amounts of money and expertise are contributed by the
participants for stated proportions of ownership and profit is a ________.
A) multinational corporation
B) floating relationship
C) joint venture
D) consolidation
13) ________ are claims that are not satisfied until those of the creditors holding certain
(senior) debts have been fully satisfied.
A) Convertible debentures
B) Subordinated debentures
C) Mortgage bonds
D) Collateral trust bonds
14) A firm has had the following earnings history over the last five years:
If the firm’s dividend policy is based on a $0.50 payout per share whenever it makes a
positive earnings, increasing by $0.05 to previous year dividends per share whenever
earnings exceed $1.50 per share, the annual dividends for 2014 and 2015 were
________.
A) $0.50 and $0.60, respectively
B) $0.50 and $0.55, respectively
C) $0.55 and $0.65, respectively
D) $0.60 and $0.65, respectively
15) Hayley’s Theatrical Supply is in the process of negotiating a line of credit with two
local banks. The prime rate is currently 8 percent. The terms follow:
(a)Calculate the effective interest rate of both banks.
(b)Recommend which bank’s line of credit Hayley’s Theatrical Supply should accept.
16) Which of the following is considered in designing a dividend policy that is
favorable to wealthy owners?
A) the tax status of the firm’s owners
B) the political risk of the firm
C) the liability of the firm’s owners
D) the reinvestment risk of the firm
17) The ________ is a significant economic force currently made up of 28 nations with
a population of more than 500 million that permits free trade within the countries that
make up this group.
A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Asian Economic Area Network (ASEAN)
D) European Union (EU)
18) Which of the following line items in a balance sheet is considered the most for
making a financing decision?
A) current assets
B) long-term liabilities
C) revenue
D) cost of goods sold
19) A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and
total variable costs of $2,250,000. The firm’s degree of operating leverage is ________.
A) 0.77
B) 1.30
C) 0.81
D) 4.29
20) Ashley’s Ad Agency’s accounts receivable totaled $451,000 on January 30, 2015.
An aging summary of receivables at this date follows:
The firm extends 30-day credit terms to all its credit customers.
(a)Prepare an aging schedule for Ashley’s Ad Agency.
(b)Evaluate the firm’s collection performance.
21) The underlying cause of conflicts in ranking for projects by internal rate of return
and net present value methods is ________.
A) the reinvestment rate assumption regarding intermediate cash flows
B) that neither method explicitly considers the time value of money
C) the assumption made by the IRR method that cash inflows are spread equally
throughout the timeline
D) that NPV approach favors small projects with high returns