1) The U.S. approaches used in hostile takeovers is an effective method of changing
corporate control and used in many areas of the world including China and Japan.
2) Preferred stockholders must receive their stated dividends prior to the distribution of
any earnings to common stockholders and bondholders.
3) The asymmetric information explanation of capital structure suggests that firms will
issue new equity only when the managers believe the firm’s stock is overvalued; as a
result, issuing new equity is considered a negative signal that will result in a decline in
share price.
4) Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity is
the return required by investors as compensation for a firm’s nondiversifiable risk.
5) In the broadest sense, activities involving expansion or contraction of a firm’s
operations or changes in its assets or ownership structure are called corporate
restructuring.
6) Systematic risk is that portion of an asset’s risk that is attributable to firm-specific,
random causes.
7) The board of directors is responsible for managing day-to-day operations and
carrying out the policies established by the chief executive officer.
8) The higher the risk-adjusted net present, the more viable the project.
9) Depreciation is considered to be an outflow of cash.
10) A local bank is offering a zero-coupon certificate of deposit for $25,000. At
maturity, three years from now, the investor will receive $32,000. What is the rate of
return on this investment?
A) 3 percent
B) 6 percent
C) 9 percent
D) 12 percent
11) When evaluating projects using NPV approach, ________.
A) projects having lower early-year cash flows tend to be preferred at higher discount
rates
B) projects having higher early-year cash flows tend to be preferred at higher discount
rates
C) projects having higher early-year cash flows tend to be preferred at lower discount
rates
D) the discount rate and magnitude of cash flows do not affect the ranking by NPV
approach
12) The expected value and the standard deviation of returns for asset A is ________.
(See below.)
Asset A
A) 12 percent and 4 percent
B) 12.7 percent and 2.3 percent
C) 12.7 percent and 4 percent
D) 12 percent and 2.3 percent
13) According to the traditional approach to capital structure, the value of a firm will be
maximized when ________.
A) the financial leverage is maximized
B) the cost of debt is minimized
C) the weighted average cost of capital is minimized
D) the dividend payout is maximized
14) A firm has fixed operating costs of $10,000, the sale price per unit of its product is
$25, and its variable cost per unit is $15. The firm’s operating breakeven point in units
is ________ and its breakeven point in dollars is ________.
A) 1,000; $6,250
B) 400; $10,000
C) 400; $25,000
D) 1,000; $25,000
15) The key inputs for preparing pro forma income statements using the simplified
approaches are the ________.
A) sales forecast for the preceding year and financial statements for the coming year
B) sales forecast for the coming year and the cash budget for the preceding year
C) sales forecast for the coming year and financial statements for the preceding year
D) cash budget for the coming year and sales forecast for the preceding year
16) Foreign exchange risk refers to the risk created by ________.
A) the potential seizure of an MNC’s operations in a host country
B) the varying exchange rate between two currencies
C) the fixed exchange rate between two currencies
D) the potential nationalization of the MNC’s operations by a host government
17) In general, ________.
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash
flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash
flows
C) a shorter depreciable life is preferred, because management can then purchase new
assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing
new assets, since the old assets still have a useful life
18) In the ABC system of inventory management, the ________ method could be
utilized to control C items.
A) basic economic order quantity
B) materials requirement planning
C) two-bin
D) just-in-time
19) A divestiture that results in an operating unit becoming an independent company is
a ________.
A) sale of a line of business
B) strategic merger
C) spin-off of an operating unit
D) leveraged buyout
20) The ending cash balance for February is ________. (See Table 4.3)
A) $750
B) $1,750
C) $2,500
D) -$1,000
21) Which of the following affects business risk?
A) operating leverage
B) interest rate stability
C) preferred stock
D) financial lease
22) A firm has an operating cycle of 120 days, an average collection period of 40 days,
and an average payment period of 30 days. The firm’s average age of inventory is
________ days.
A) 80
B) 50
C) 90
D) 70