1) Asymmetric information results when managers of a firm have more information
about the firm’s operations and future prospects than investors have.
2) The cost of new common stock is normally greater than any other long-term
financing cost.
3) The major attraction of a line of credit from the bank’s point of view is that it
eliminates the need to examine the creditworthiness of a customer each time it borrows
money within the year.
4) The use of differing accounting treatmentsespecially relative to inventory and
depreciationcan distort the results of ratio analysis, regardless of whether
cross-sectional or time-series analysis is used.
5) An attractive candidate for acquisition through leveraged buyout usually has a
relatively high level of debt and a low level of “bankable” assets.
6) Venture capitalists invest in promising early-stage companies in exchange for a
portion of the firm’s equity.
7) Projects with a small chance of being acceptable and a broad range of possible cash
flows are riskier than projects having a high chance of being acceptable and a narrow
range of possible cash flows.
8) NASDAQ is considered an OTC market since it is not recognized by the SEC as a
“listed exchange.”
9) In the statement of cash flows, cash flows from operating activities are cash flows
directly related to purchase and sale of fixed assets.
10) Floating-rate bonds are bonds that can be redeemed at par at the option of their
holder either at specific date after the date of issue and every 1 to 5 years thereafter or
when and if the firm takes specified actions such as being acquired, acquiring another
company, or issuing a large amount of additional debt.
11) Table 9.1
A firm has determined its optimal capital structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A
flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share
par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the
stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The
dividend expected to be paid at the end of the coming year is $1.74. Its dividend
payments have been growing at a constant rate for the last four years. Four years ago,
the dividend was $1.50. It is expected that to sell, a new common stock issue must be
underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is
40 percent.
The firm’s cost of preferred stock is ________. (See Table 9.1)
A) 7.2 percent
B) 8.3 percent
C) 13.3 percent
D) 13.9 percent
12) Table 3.1
Information (2013 values)
1> Sales totaled $110,000
2> The gross profit margin was 25 percent.
3> Inventory turnover was 3.0.
4> There are 360 days in the year.
5> The average collection period was 65 days.
6> The current ratio was 2.40.
7> The total asset turnover was 1.13.
8> The debt ratio was 53.8 percent.
Accounts receivable for CEE in 2013 was ________. (See Table 3.1)
A) $14,056
B) $19,861
C) $14,895
D) $18,333
13) Table 15.2
The company earns 5 percent on current assets and 15 percent on fixed assets. The
firm’s current liabilities cost 7 percent to maintain and the average annual cost of
long-term funds is 20 percent.
If the firm was to shift $2,000 of current liabilities to long-term funds, the firm’s net
working capital would ________, the annual cost of financing would ________, and the
risk of insolvency would ________, respectively. (See Table 15.2)
A) decrease; decrease; increase
B) increase; increase; decrease
C) decrease; increase; decrease
D) increase; decrease; decrease
14) The ________ is the taxation technique that increases the U.S. income of an MNC
by the amount of foreign income (before foreign taxes). The U.S. tax calculation is then
based on that higher level.
A) unitary tax law
B) grossing up procedure
C) GmbH
D) nationalization procedure
15) The problem with a constant-payout-ratio dividend policy from the shareholders’
perspective is that ________.
A) it pays constant dividend irrespective of the earnings of a firm
B) if the firm’s earnings drop, the dividends tend to be lower
C) even when earnings are low, the company must pay a fixed dividend
D) there is no uniformity in this type of dividend policy
16) Tangshan Mining Company is considering investing in a new mining project. The
firm’s cost of capital is 12 percent and the project is expected to have an initial after-tax
cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating
cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3, and
($1,300,000) in year 4?
(a)Calculate the project’s NPV.
(b)Calculate the project’s IRR.
(c)Should the firm make the investment?
17) ________ have a short maturities, typically one to five years, and which can be
renewed for a similar period at the option of their holders.
A) Floating rate bonds
B) Extendible notes
C) Putable bonds
D) Junk bonds
18) Mark must buy four new tires for his car. He is considering buying tires that are $25
a piece more than his regular brand, because the higher priced tires are supposed to
increase his miles per gallon by 20%. If the tires are good for 48,000 miles and Mark
drives an average of 1,000 miles per month, gas costs $2.50 per gallon over the next 4
years, and Mark’s car gets 30 miles to the gallon now (on the old tires), should Mark
purchase the more expensive tires?
A) Yes, because Mark will save about $660 dollars in gas over the four years but the
new tires will only be $100 more
B) Yes, because Mark will save about $560 dollars in gas over the four years but the
new tires will only be $100 more
C) No, because Mark will only save about $60 dollars in gas over the four years but the
new tires will only be $100 more
D) No, because Mark will only save about $90 dollars in gas over the four years but the
new tires will only be $100 more
19) Preferred stock is characterized by ________.
A) voting rights
B) maturity date
C) quasi-debt nature
D) preemptive rights
20) ________ mainly explains the tendency for the yield curve to be upward sloping.
A) Expectations theory
B) Liquidity preference theory
C) Market segmentation theory
D) Investor perception theory
21) You have provided your friend with a service worth $8,500. Your friend offers you
the following cash flow instead of paying $8,500 today. Should you accept his offer if
your opportunity cost is 8 percent?
22) The Bradshaw Company’s most recent dividend was $6.75. The historical dividend
payment by the company shows a constant growth rate of 5 percent per year. What is
the maximum you would be willing to pay for a share of its common stock if your
required rate of return is 8 percent?
23) Discuss and contrast the three types of loans discussed in the text that use inventory
as collateral: floating inventory liens, trust receipt inventory loans, and warehouse
receipt loans.
24) Table 10.5
Galaxy Satellite Co. is attempting to select the best group of independent projects
competing for the firm’s fixed capital budget of $10,000,000. Any unused portion of
this budget will earn less than its 20 percent cost of capital. A summary of key data
about the proposed projects follows.
Use the IRR approach to select the best group of projects, if the required rate of return
is 23.5%. (See Table 10.5)
25) Calculate the future value of an annuity of $5,000 each year for eight years,
deposited at 6 percent.
26) A corporate financial analyst must calculate the value of an asset which produces
year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third
year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the
value of this asset?
27)
28) A firm has determined its optimal capital structure, which is composed of the
following sources and target market value proportions:
Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A
flotation cost of 2 percent of the face value would be required in addition to the
discount of $20.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share
par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling
the stock is $3 per share.
Common Stock: The firm’s common stock is currently selling for $40 per share. The
dividend expected to be paid at the end of the coming year is $5.07. Its dividend
payments have been growing at a constant rate for the last five years. Five years ago,
the dividend was $3.45. It is expected that to sell, a new common stock issue must be
underpriced at $1 per share and the firm must pay $1 per share in flotation costs.
Additionally, the firm’s marginal tax rate is 40 percent.
Calculate the firm’s weighted average cost of capital assuming the firm has exhausted
all retained earnings.
29) Tina’s Medical Equipment Company paid $2.25 common stock dividend last year.
The company’s policy is to allow its dividend to grow at 5 percent per year indefinitely.
What is the value of the stock if the required rate of return is 8 percent?