1) Independent projects are those whose cash flows are unrelated to one another; the
acceptance of one does not eliminate the others from further consideration.
2) For calculating payback period for an annuity, all cash flows must be adjusted for
time value of money.
3) Receipts and disbursements management techniques are aimed at minimizing a firm’s
financing requirements by taking advantage of certain imperfections in the collection
and payment system.
4) A consolidated corporation has voting control of one or more other corporations.
5) The cost of capital acts as a major link between a firm’s long-term investment
decisions and the wealth of the firm’s owners as determined by the market value of their
shares.
6) In credit terms, EOM (End-of-Month) indicates that the accounts payable must be
paid by the end of the month in which the merchandise has been purchased.
7) Processing float is the delay between the receipt of a check by a payee and its deposit
in firm’s account.
8) The balance sheet is a statement which balances a firm’s assets (what it owns) against
its debt (what it owes) or its equity (what is provided by owners).
9) The cost of capital is described as the rate of return required by the market suppliers
of capital in order to attract their funds to the firm.
10) The Gramm-Leach-Bliley Act ________.
A) is created to monitor banks on a regular basis to ensure that they were safe and
sound
B) allows business combinations between commercial banks and investment banks, but
not insurance companies
C) allows business combinations between commercial banks, investment banks, and
insurance companies
D) was signed during the Great Depression because of the financial crisis
11) Which of the following represents a current asset?
A) automobiles
B) buildings
C) marketable securities
D) equipment
12) For minimizing the cash conversion cycle, a firm should ________.
A) grant longer credit terms to customers to maintain healthy business relations
B) pay off accounts payables as fast as possible to gain credibility
C) turn over inventory as quickly as possible without stockouts
D) increase mail managing, processing, and clearing time when collecting from
customers
13) In capital budgeting, risk refers to ________.
A) the chance that a project will prove acceptable
B) the conflicting IRR and NPV in a project
C) the degree of variability of initial outlay
D) the uncertainty of cash inflows
14) Which of the following is a difference between common stock and bonds?
A) Bondholders have a voice in management; common stockholders do not
B) Bondholders have a senior claim on assets and income relative to stockholders
C) Stocks have a stated maturity but bonds do not
D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are
not
15) Breakeven analysis is used by a firm ________.
A) to determine the level of operations necessary to cover all fixed operating costs
B) to determine the least cost of producing goods and services
C) to evaluate the profitability associated with various levels of sales
D) to determine the demand of a product
16) Which of the following is an area of career opportunities in financial services?
A) supply chain management
B) personal financial planning
C) auditing of financial statements
D) production planning
17) Smith Corporation’s common stock is expected to pay a dividend of $3.00 forever
and currently sells for $21.42. What is the required rate of return?
A) 10%
B) 12%
C) 13%
D) 14%
18) What would be the cost of retained earnings equity for Tangshan Mining if the
expected return on U.S. Treasury Bills is 5.00%, the market risk premium is 10.00
percent, and the firm’s beta is 1.3?
A) 11.5%
B) 18.0%
C) 10.0%
D) 19.5%
19) Tangshan China’s stock is currently selling for $160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s
most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the
expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan’s stock
would be ________.
A) overvalued because the market price is higher than the resulting share value
B) undervalued because the market price is less than the resulting share value
C) overvalued because the resulting share value is higher than the market value
D) undervalued because the resulting share value is less than the market value
20) If a firm’s credit period is decreased, the sales volume can be expected to ________,
the investment in accounts receivable can be expected to ________, and the bad debt
expenses can be expected to ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease
21) A firm has a cash conversion cycle of 80 days, an average collection period of 25
days, and an average age of inventory of 70 days. Its operating cycle is ________ days.
A) 95
B) 105
C) 60
D) 130
22) If bankruptcy were to occur, ________ would have the first claim on assets.
A) preferred stockholders
B) unsecured creditors
C) equity stockholders
D) secured creditors
23) A firm has a current capital structure consisting of $400,000 of 12 percent annual
interest debt and 50,000 shares of common stock. The firm’s tax rate is 40 percent on
ordinary income. If the EBIT is expected to be $200,000, the firm’s earnings per share
will be ________.
A) $2.40
B) $3.04
C) $7.04
D) $1.82
24) ________ refers to the effects that fixed costs have on the returns that shareholders
earn.
A) Purchase power parity
B) Leverage
C) Business risk
D) Pecking order theory
25) If a firm has a limited capital budget to fund its capital projects, it is said to be
facing the problem of ________.
A) constrained capital
B) wealth optimization
C) capital rationing
D) profitability
26) Which of the following is true of sole proprietorships and corporations?
A) It is difficult to transfer ownership of corporations compared to that of sole
proprietorships
B) Income from both forms of organizations are taxed only at the corporate level
C) Both sole proprietorships and corporations are equally scrutinized and regulated by
government bodies
D) In sole proprietorships, owners have unlimited liability; whereas, in corporations,
owners have limited liability
27) Which of the following is true of arguments for dividend relevance?
A) A firm’s value is determined solely by the earning power and risk of its assets
B) Investors are generally risk averse and attach less risk to current dividends than
future dividends or capital gains
C) The value of a firm is unaffected as it functions in a perfect market
D) A clientele effect exists which causes a firm’s shareholders to receive the dividends
that they expect
28) Which of the following is true of preferred stocks?
A) Preferred stock with a conversion feature allows holders to change each share into a
stated number of shares of common stock
B) Like bonds, preferred stocks are due for payment on a fixed maturity date along with
interest
C) Restrictive covenants of preferred stocks include provisions about listing of stocks
on the securities exchange and determining the price of stock
D) A firm’s bond indenture indicates how many authorized preferred shares and bonds it
can issue
29) Table 6.2
(a)Calculate the current value of Bond N. (See Table 6.2)
(b)What will happen to value/price as the bond approaches maturity?