1) Under the “modified accelerated-cost-recovery system” (MACRS) of depreciation,
cash flow tends to decline with the passage of time.
2) A call provision is a commonly used device by a corporation to force conversion into
common stock.
3) Financial capital is composed of long-term plant and equipment, as well as other
tangible investments.
4) Computerized cash management and electronic funds transfer allow firms to carry
smaller cash balances.
5) In a replacement decision, a book loss on an old asset can be a valuable feature.
6) Convertible bonds and convertible preferred stock are used on a regular basis by
corporations to diversify their capital structure.
7) Even though the IRS tries to minimize occurrences, small business owners often
intermingle business and personal expenses in order to minimize taxable income.
8) Short-term financing is risky because of the possibility of rising short-term rates and
the inability of always being able to refund short-term debt.
9) A current ratio of 2 to 1 is always acceptable for a company in any industry.
10) A fronting loan disguises the identity of a parent multinational corporation that
infuses money into a foreign subsidiary. This technique is intended to reduce the
political risk of operating a subsidiary in a foreign country.
11) The “economic ordering quantity” helps a firm determine the most efficient order
size to place.
12) An increase in accounts receivable results in a cash inflow on the statement of cash
flows.
13) Hewlett-Packard’s capital stock has largely recovered from the loss of confidence
brought about by the failure to find a successful CEO and the multimillion-dollar
severance packages the ousted executives received.
14) A rights offering may be of limited value to shareholders.
15) The firm’s highest risk-adjusted discount should be applied to
A.the repair of old machinery
B.a new product in a related field
C.a new product in a foreign market
D.the purchase of new equipment
16) ______________ occurs when a company is broken up into smaller divisions and
sold for a profit.
A.Liquidation
B.Internal reorganization
C.Chapter 11
D.Restructuring
17) Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year
for the next 10 years. What table would you use to calculate the value of this contract in
today’s dollars?
A.Present value of an annuity
B.Present value of a single amount
C.Future value of an annuity
D.None of these options
18) If a firm with $49,000 in fixed costs breaks even on unit sales of 7,000, how many
units must the firm sell to earn $30,000 in operating profit?
A.30,000 units
B.11,286 units
C.15,824 units
D.There is not enough information to determine the unit sales required
19) Which of the following is a false statement?
A.Risky investments may produce large losses
B.Risky investments may produce large gains
C.The coefficient of variation is a risk measure
D.Risk-averse investors cannot be induced to invest in risky assets
20)
Refer to the figure above. Fixed charge coverage for Tew Company is ____.
A.23x
B.13.6x
C.1.3x
D.8.0x
21) Match the following with the items below:
1>a call
2>step-up in conversion price
3>conversion ratio
4>convertible security
5>conversion value
6>floor price
7>warrant
8>pure bond value
9>basic earnings per share
10>forced conversion
A. May be traded in to the company for a different form of security.
B.Sometimes used as a financial sweetener in a bond offering.
C. The number of shares an investor will receive if he or she exchanges one convertible
bond for common stock.
D. The value of a convertible bond if its present value was computed at a discount rate
equal to interest rates on straight bonds of equal risk without conversion privileges.
E. The right to buy an asset for a given time at a specified price.
F. Equals the conversion ratio multiplied by the market price per share of common
stock.
G. Is usually equal to the “pure value” of a convertible bond.
H. Equals earnings after taxes divided by shares outstanding.
I. This feature, when written into the contract, allows the conversion ratio to decline
over time.
J. Occurs when a company calls a convertible security that has a conversion value
greater than the call price.
22) When a firm employs no debt
A.it has a financial leverage of one
B.it has a financial leverage of zero
C.its operating leverage is equal to its financial leverage
D.it will not be profitable
23) Which of the following bonds offers the most security to the bondholder?
A.Junior mortgage bonds
B.Senior mortgage bonds
C.Debenture bonds
D.Income bonds
24) The degree of operating leverage may be defined as
A.the percent change in operating income divided by the percent change in unit volume
B.Q(P – VC) divided by Q(P – VC) – FC
C.S – TVC divided by S – TVC – FC
D.All of the options
25) Dilution is
A.the short-term impact of a new issuance upon earnings per share
B.the result of underwriting expenses
C.generally acceptable by corporations and investors
D.Two of the options
26) The required return by investors is important to financial managers except for
which of the following reasons?
A.It influences the firm’s cost of financing
B.It influences their stock price
C.It is the primary driver of their financial ratios
D.It helps when pricing new issues of securities
27) In determining the future value of a single amount, one measures
A.thefuture value of periodic payments at a given interest rate
B.the present value of an amount discounted at a given interest rate
C.the future value of an amount allowed to grow at a given interest rate
D.the present value of periodic payments at a given interest rate
28) In a cash budget, the cumulative cash balance is equal to
A.net cash flow minus the beginning cash balance
B.net cash flow plus the beginning cash balance
C.the cumulative loan balance minus the ending cash balance
D.the cumulative loan balance plus the ending cash balance
29) The preferred stock of Lewis-Schultz Enterprises pays an annual dividend of $1.32.
What is the required return if the market value of the preferred stock is:
a) $40
b) $30
c) $20
30) Project X has a cost of $100,000 and provides the following annual earnings: year 1
$35,000; year 2 $25,000; year 3 $175,000; and year 4 $10,000. Under the payback
method, in which year is the investment recouped?
A.Year 2
B.Year 3
C.Year 4
D.Not enough information is given to determine an answer
31) Which of the following is NOT a benefit of dividend reinvestment plans to firms?
A.Increased cash flow for reinvestment
B.No underwriting fees required
C.Leads to higher earnings per share
D.All of these options are benefits
32) Middle- to small-sized companies that are centered in one city or state would most
likely be found on the
A.NASDAQ National Market
B.NASDAQ Small Cap Market
C.Supplemental list
D.New York Stock Exchange
33) The efficient market hypothesis has several forms. The weak form states that
A.past price data is unrelated to future prices
B.prices reflect all public information
C.all information both public and private is immediately reflected in stock prices
D.None of these options
34) Publicly traded companies generally have
A.more pressure for short-term performance
B.less pressure for short-term performance
C.very strong stock market performance
D.low distribution costs in selling securities
35) Kuznets Rental Center requires $500,000 in financing over the next two years.
Kuznets can borrow long-term at 8 percent interest per year for two years. Alternatively,
Kuznets can borrow short-term and pay 6 percent interest in the first year, followed by
their paying 9 percent interest in the second year. Assuming Kuznets pays off the
accrued interest at the end of each year, which of the following statements is true?
A.Kuznets will end up paying more in total interest under the long-term financing plan
B.Kuznets will end up paying less in total interest under the long-term financing plan
C.Kuznets will pay less in the first year under the long-term financing plan
D.Kuznets will pay less in the second year under the short-term financing plan
36) Heister Corporation produces class rings to sell to college and high school students.
These rings sell for $75 each, and cost $30 each to produce. Heister has fixed costs of
$45,000.
a) Calculate Heister’s break-even point.
b) How much profit (loss) will Heister have if it sells 800 rings? 6,000 rings?
c) Heister’s president, J. R. D’Angelo, expects an annual profit of $200,000. How many
rings must be sold to attain this profit?
37) A firm’s long-term assets = $100,000, total assets = $400,000, inventory = $50,000
and current liabilities = $200,000.
A.current ratio = 0.5; quick ratio = 1.25
B.current ratio = 1.0; quick ratio = 2.0
C.current ratio = 1.5; quick ratio = 1.25
D.current ratio = 2.5; quick ratio = 2.0
38) A dollar today is worth more than a dollar to be received in the future because
A.a stated rate of return is guaranteed on all investment opportunities
B.the dollar can be invested today and earn interest
C.inflation will increase the purchasing power of a future dollar
D.None of these options
39) Which contract is an option?
A.A call
B.A put
C.A futures contract
D.Both a call and a put
40) Which of the following statements about floating rate preferred stock is true?
A.The dividend rate changes quarterly
B.The price of the stock fluctuates with the market
C.The dividend rate is tied to the inflation rate
D.More than one of the options
41) If you borrow $15,000 at $1,000 interest for one year, what is your effective interest
cost for the following payment plans?
42) Linkup Systems, which provides investors with computerized information about
stock prices, is considering the establishment of a lockbox system with its bank. The
firm receives daily collections of $2.0 million, and could earn 6% on any funds freed up
through faster collections. If the lockbox system can save two days in the collection
process, and the firm’s bankers will charge $200,000 per year to operate the lockbox
system, is it worth it to establish the system?
43) Maxwell Electronics had net income of $21 million last year, and had 3 million
common shares outstanding. They declared a 12% stock dividend. Calculate EPS before
and after the stock dividend.
44) Madison Corporation has a $1,000 par value bond outstanding paying annual
interest of 7%. The bond matures in 20 years. If the present yield to maturity for this
bond is 8%, calculate the current price of the bond using annual compounding.
45) Gary Kiraly wants to buy a new Italian sports car in three years. The vehicle is
expected to cost $80,000 at that time. If Gary should be solucky as to find an
investment yielding 12% over that three-year period, how much would he have to
invest now in order to accumulate $80,000 at the end of the three years?
46) Washington Corporation has a $1,000 par value bond outstanding paying annual
interest of 6%. The bond matures in 25 years. If the present yield to maturity for this
bond is 10%, calculate the current price of the bond. Use annual analysis.
47) In January, 2000, Harold Black bought 100 shares of Country Homes for $37.50 per
share. He sold them in January 2010 for a total of $9,715.02. Calculate Harold’s
approximate annual rate of return.
48) Kimberly Ford invested $10,000 10 years ago at 16%, compounded quarterly. How
much has she accumulated?
49) Marcia Stubern is planning for her golden years. She will retire in 20 years, at
which time she plans to begin withdrawing $60,000 annually. She is expected to live for
20 years following her retirement. Her financial advisor thinks she can earn 9%
annually. How much does she need to invest at the end of each year before she retires,
to prepare for her financial needs after her retirement?
50) Sandler Inc. plans to acquire Young Corp. Information on each for last year and
today, the last day of that period, follows (all shares outstanding are common shares):
The companies will swap one share of each other’s stock evenly, one for one, 100%.
What will Sandler’s new earnings per share be as a result of this merger?