1) The acceptance of a particular project usually has no impact on a firm’s overall risk.
2) A financial manager’s primary activities include making investment and financing
decisions.
3) Factoring accounts receivable is relatively an inexpensive source of unsecured
short-term funds that allows firms to turn accounts receivable immediately into cash.
4) Operating leverage is defined as the use of fixed operating costs to magnify the
effects of changes in sales on a firm’s earnings before interest and taxes.
5) In cash budgeting, the impact of depreciation is reflected in a reduction in tax
payments.
6) Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated
interest rate of 8 percent and a 10 percent compensating balance. Thus, the firm keeps a
balance of about $800 in its checking account.
7) Under a conservative funding strategy, the firm funds both its seasonal and its
permanent requirements with long-term debt.
8) Everything else being equal, the longer the period of time, the lower the present
value.
9) The greater the interest rate and the longer the period of time, the higher the present
value.
10) When implementing the cash management strategies, a firm should avoid damaging
a firm’s credit rating by overstretching accounts payable.
11) At the operating breakeven point, the sales revenue is equal to the sum of the fixed
and variable operating costs.
12) Earnings per share represents the dollar amount earned and distributed to
shareholders.
13) From a bond issuer’s perspective, the IRR on a bond’s cash flows is its yield to
maturity (YTM); from the investor’s perspective, the IRR on a bond’s cash flows is the
cost to maturity.
14) The dividend payment date is set by a firm’s board of directors and represents the
actual date on which the firm mails the dividend payment to the holders of record.
15) Which of the following is a source of long-term funds?
A) commercial paper
B) retained earnings
C) factoring
D) money market instruments
16) A firm has the following accounts and financial data for 2014:
The firm’s earnings per share for 2014 is ________.
A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024
17) What is the net result of implementing the proposed plan? (See Table 15.5)
A) $3,952
B) $3,869
C) $2,084
D) -$2,084
18) A corporation is evaluating the relevant cash flows for a capital budgeting decision
and must estimate the terminal cash flow. The proposed machine will be disposed of at
the end of its usable life of five years at an estimated sale price of $2,000. The machine
has an original purchase price of $80,000, installation cost of $20,000, and will be
depreciated under the five-year MACRS. Net working capital is expected to decline by
$5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital
gain. The terminal cash flow is ________.
A) $5,800
B) $7,800
C) $8,200
D) $6,200
19) ________ are short-term money market instruments that can be easily converted
into cash.
A) Preferred stocks
B) Treasury bonds
C) Accounts receivable
D) Marketable securities
20) The major shortcoming of the EBIT-EPS approach to capital structure is that
________.
A) the technique does not promote the maximization of shareholder wealth
B) the technique does not consider the cost of capital
C) the technique only considers leverage-related risk
D) the technique does not maximize earnings per share
21) Debt is generally the least expensive source of capital. This is primarily due to
________.
A) the fixed interest payments
B) the priority of claims on assets and earnings in the event of liquidation
C) the tax deductibility of interest payments
D) the secured nature of a debt obligation
22) A firm needs $2 million of new long-term financing. The firm is considering the
sale of common stock or a convertible bond. The current market price of the common
stock is $42 per share. To sell this new issue, the stock would have to be underpriced by
$2 and sold for $40 per share. The firm currently has 300,000 shares of common stock
outstanding. The alternative is to issue 20-year, 10 percent, and $1,000 par-value
convertible bonds. The conversion price would be set at $50 per share, and the bond
could be sold at par. The earnings for the firm are expected to be $500,000 in the
coming year. Assuming the firm chooses the sale of common stock, the earnings per
share in the coming year will be ________.
A) $1.43
B) $1.44
C) $1.45
D) $1.47
23) The primary purpose in preparing a cash budget is ________.
A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm’s short-term cash requirements
C) for risk analysis
D) to estimate sales
24) An annuity is ________.
A) a mix of cash flows in conventional and nonconventional
B) a stream of perpetual cash flows
C) a series of constantly growing cash flows
D) a series of equal annual cash flows
25) In the next planning period, a firm plans to change its policy of all cash sales and
initiate a credit policy requiring payment within 30 days. The statements that will be
directly affected immediately are the ________.
A) pro forma income statement, balance sheet, and cash budget
B) pro forma balance sheet and cash budget
C) cash budget and statement of retained earnings
D) pro forma income statement and pro forma balance sheet
26) In case of a manufacturing organization, which of the following is a variable cost
that varies directly with the sales volume?
A) interest cost
B) dividend cost
C) shipping cost
D) rental cost
27) The value of a bond is the present value of its interest payments plus ________.
A) future value of its par value
B) present value of its par value
C) its face value
D) present value of interest payment
28) In comparing the internal rate of return and net present value methods of evaluation,
________.
A) internal rate of return is theoretically superior, but financial managers prefer net
present value
B) net present value is theoretically superior, but financial managers prefer to use
internal rate of return
C) financial managers prefer net present value, because it is presented as a rate of return
D) financial managers prefer net present value, because it measures benefits relative to
the amount invested
29) A short-term financial decision based on an MNC management’s expectation that
the local foreign currency will appreciate may be ________.
A) increasing local customers’ accounts receivable and increasing local notes payable
B) decreasing local notes receivable and decreasing accruals
C) increasing local inventories and increasing local notes payable
D) increasing local accounts receivable and decreasing local accounts payable
30) Hayley’s Optical has a stockholders’ equity account as shown below. The firm’s
common stock currently sells for $20 per share.
(a) What is the maximum dividend per share Hayley’s Optical can pay? (Assume
capital includes all paid-in capital.)
(b) Recast the partial balance sheet (the stockholders’ equity accounts) to show
independently
(1) a 2-for-1 stock split of the common stock.
(2) a cash dividend of $1.50 per share.
(3) a stock dividend of 5% on the common stock.
(c) At what price would you expect Hayley’s Optical stock to sell after
(1) the stock split?
(2) the stock dividend?
31) Ride World has estimated the market value of its assets to be $1,250,000. What is
the value of Ride World’s common stock if it has $900,000 in liabilities, $50,000 in
preferred stock, and 7,500 shares of common stock outstanding?
32) To expand its operation, International Tools Inc. has applied to the International
Bank for a 3-year, $3,500,000 loan. Prepare a loan amortization table assuming 10
percent rate of interest.
33) Calculate the present value of the following stream of cash flows, assuming that the
firm’s opportunity cost is 15 percent.
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.
Calculate the tax effect from the sale of the existing asset. (See Table 11.4)
35) Based on analysis of the company and expected industry and economic conditions,
China Imports is expected to earn $4.60 per share of common stock next year. The
average price/earnings ratio for firms in the same industry is 8. Calculate the estimated
value of a share of China Imports common stock.
36) Table 7.1
Calculate the estimated dividend for 2015. (See Table 7.1)
37) 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 initial investment required for the new asset. (See Table 11.4)
38) To buy his favorite car, Larry is planning to accumulate money by investing his
Christmas bonuses for the next five years in a security which pays a 10 percent annual
rate of return. The car will cost $20,000 at the end of the fifth year and Larry’s
Christmas bonus is $3,000 a year. Will Larry accumulate enough money to buy the car?