1) Under majority voting a majority (>50%) shareholder will be able to elect the entire
board of directors.
2) In general, interest rates are short-term debt are higher than interest rates on
long-term debt because the borrower has less time to repay the loans, and hence the risk
to the lender is higher.
3) Accounts receivable is an asset representing sales made on credit.
4) A key tool for evaluating business risk is break-even analysis.
5) If the future value of an annuity is known, then the present value of the annuity can
be found using the present value of a lump sum formula, even if the amount of each
annuity payment is unknown.
6) The mixture of financing sources used by a firm will vary from year to year, so many
firms use target capital structure proportions when calculating the firm’s weighted
average cost of capital.
7) Monthly cash receipts in the cash budget are typically made up of cash sales during
the month and collections from credit sales from prior months.
8) The tax shield on interest is calculated by multiplying the interest rate paid on debt
by the principal amount of the debt and the firm’s marginal tax rate.
9) For a typical firm expecting higher sales, external financing needed will be greater
than discretionary financing needed.
10) A secured loan should have a higher interest rate because the lender has less risk
and therefore values the loan more highly.
11) According to the bird-in-the-hand dividend theory, investors value a dollar of
expected capital gain more highly than a dollar of expected dividends because capital
gains are more unpredictable than dividends.
12) The payback period may be more appropriate to use for companies experiencing
capital rationing.
13) One of the disadvantages of the payback method is that it ignores time value of
money.
14) The ex-dividend date occurs prior to the declaration date.
15) The percent of sales method assumes that all assets and all liabilities increase
proportionally with sales, but retained earnings does not.
16) One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt
financing.
17) Tillamook Farms invests in a new kind of frozen dessert called polar cream that
becomes very popular. So many new customers come to the store that the sales of
existing ice cream products are increased. The extra sales revenue
A) should not be counted as incremental revenue for the polar cream project because
the sales come from existing products
B) are synergistic effects that should be counted as incremental revenues for the polar
cream project
C) are cannibalized sales that should be excluded from the analysis
D) should be included in the analysis, but not the cost of the ice cream that is sold as
that is a recurring expense
18) Advantages of the corporate form of business organization include
A) easier transfer of ownership
B) double taxation
C) minimal legal requirements
D) none of the above
19) Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on
the CAPM. If the risk free rate of return is 4.2%, the expected return on the market
portfolio is
A) 21%
B) 19.2%
C) 13.4%
D) 10.2%
20) A retirement plan guarantees to pay you or your estate a fixed amount for 25 years.
At the time of retirement you will have $100,000 to your credit in the plan. The plan
anticipates earning 7% interest annually over the period you receive benefits. How
much will your annual benefits be assuming the first payment occurs one year from
your retirement date?
A) $6,182
B) $7,272
C) $8,101
D) $8,581
21) Many preferred stocks have a feature that requires a firm to periodically set aside an
amount of money for the retirement of its preferred stock. What is the name of this
feature?
A) convertible
B) callable
C) cumulative
D) sinking fund
22) Trinitron, Inc. purchased a new molding machine for $85,000. The company paid
$8,000 for shipping and another $7,000 to get the machine integrated with the
company’s existing assets. Trinitron must maintain a supply of special lubricating oil
just in case the machine breaks down. The company purchased a supply of oil for
$4,000. The machine is to be depreciated on a straight-line basis over its expected
useful life of 8 years. What will depreciation expense be during the first year?
A) $13,000
B) $12,500
C) $11,625
D) $11,500
23) SNL has sales of $2,250,000; a gross profit of $825,000; total operating costs of
$620,000; income taxes of $74,800; total assets of $995,000; and interest expense of
$18,000. What is SNL’s times interest earned ratio?
A) 1.3
B) 11.4
C) 8.1
D) 45.8
24) All of the following statements about agency problems are TRUE EXCEPT
A) Agency problems interfere with the goal of maximizing shareholder value
B) Agency costs are paid by the managers who do not act in the shareholders’ best
interest
C) Agency problems result from the separation of management and the ownership of a
firm
D) The root cause of agency problems is conflicts of interest
25) You plan to go to Asia to visit friends in three years. The trip is expected to cost a
total of $10,000 at that time. Your parents have deposited $5,000 for you in a Certificate
of Deposit paying 6% interest annually, maturing three years from now. Uncle Lee has
agreed to pay for all remaining expenses. If you are going to put Uncle Lee’s gift in an
investment earning 10% over the next three years, how much must he deposit today, so
you can visit your friends three years from today?
A) $3,757
B) $3,039
C) $5,801
D) $3,345
26) California Retailing Inc. has sales of $4,000,000; the firm’s cost of goods sold is
$2,500,000; and its total operating expenses are $600,000. What is California
Retailing’s EBIT?
A) $850,000
B) $875,000
C) $900,000
D) $1,300,000
27) The costs associated with issuing securities to the public can be high. Some types of
securities have greater expenses associated with them than others. Which of the
following is the most costly security to issue?
A) common stock
B) corporate bonds
C) preferred stock
D) all of the above
28) Which of the following is the most important goal that a corporation should strive
for?
A) maximize current profits
B) maximize market share
C) maximize revenue
D) maximize shareholder wealth
29) Table 4-1
Stewart Company
Balance Sheet
The times interest earned ratio is
A) 32.33 times
B) 23.75 times
C) 19.00 times
D) 12.33 times
30) Which of the following would NOT normally be considered a “flotation cost”?
A) underwriter’s spread
B) dividends
C) legal fees
D) printing and engraving expenses
31) FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six
months and will mature in 10 years.
a.Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent,
respectively.
b.Explain the impact on price if the required rate of return decreases.
c.Compute the coupon rate on the bonds. How does the relationship between the
coupon rate and the yield to maturity determine how a bond’s price will compare to it
par value?
32) You are going to pay $800 into an account at the beginning of each of 20 years. The
account will then be left to compound for an additional 20 years until the end of year
40, when it will turn into a perpetuity. You will receive the first payment from the
perpetuity at the end of the 41st year. If the account pays 14%, how much will you
receive from the perpetuity each year (round to nearest $1,000)?
A) $140,000
B) $150,000
C) $160,000
D) $170,000
33) A deferred annuity will pay you $500 at the end of each year for 10 years, however
the first payment will not be made until three years from today (payments will be made
at the end of years 3 through 12). What amount will you have to deposit today to fund
this deferred annuity? Use an 8% discount rate and round your answer to the nearest
$100.
A) $2,200
B) $2,400
C) $2,900
D) $3,400
34) What information does a firm’s income statement provide to the viewing public?
A) an itemization of all of a firm’s assets and liabilities for a defined period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined
period of time
C) a report of revenues and expenses for a defined period of time
D) a report of investments made and their cost for a specific period of time
35) Table 4-3
Emery Corporation
The debt ratio is
A) 18.38%
B) 40.24%
C) 48.48%
D) 53.43%
36) Nelson Industries has a higher debt ratio than Butler, Inc., and Nelson also has a
higher times interest earned ratio than Butler. If Nelson and Butler both have the same
amount of total assets, then
A) Nelson must have higher operating income than Butler
B) if both companies have the same operating income, Butler must be paying a higher
interest rate on its long-term debt than Nelson is paying
C) Nelson may have more non-interest bearing liabilities, such as accounts payable,
than Butler has
D) if both companies have the same operating income, a mistake was made in the
calculations because the company with a higher debt ratio must have a lower times
interest earned ratio
37) What is the term for a graphical representation of the relationship between interest
rates and the maturities of debt securities?
A) term curve
B) maturity chart
C) yield curve
D) inflationary expectations
38) Exchange rate risk
A) exists when the contract is written in terms of the foreign currency
B) exists also in direct foreign investments and foreign portfolio investments
C) does not exist if the international trade contract is written in terms of the domestic
currency
D) all of the above
39) Operating leverage has to do with
A) borrowing money to finance a firm’s growth
B) using preferred stock to increase sales volume
C) the incurrence of fixed operating costs in the firm’s income stream
D) financing with fixed cost sources of capital
40) Assume that you expect to hold a $20,000 investment for one year. It is forecasted
to have a year end value of $21,000 with a 30% probability; a year end value of
$24,000 with a 45% probability; and a year end value of $30,000 with a 25%
probability. What is the standard deviation of the holding period return for this
investment?
A) 12.06%
B) 14.36%
C) 16.36%
D) 33.45%
41) Which of the following premiums is NOT factored into the price of a long-term
Treasury bond?
A) a real risk-free interest rate
B) a maturity premium
C) a default-risk premium
D) an inflation-risk premium
42) You determine that LMN common stock has an expected return of 24%. LMN has a
Beta of 1.5 . The risk-free rate is 5%, and the market expected return is 15%. Which of
the following is most likely to happen?
A) You and other investors will buy up LMN stock and its price will rise
B) You and other investors will sell LMN stock and its return will fall
C) You and other investors will buy up LMN stock and its return will rise
D) You and other investors will sell LMN stock and its price will fall
43) Given an accounts receivable turnover of 10 and annual credit sales of $900,000,
the average collection period is
A) 18.25 days
B) 36.50 days
C) 90 days
D) 40.56 days
44) The recapture of net working capital at the end of a project will
A) increase terminal year free cash flow
B) decrease terminal year free cash flow by the change in net working capital times the
corporate tax rate
C) increase terminal year free cash flow by the change in net working capital times the
corporate tax rate
D) have no effect on the terminal year free cash flow because the net working capital
change has already been included in a prior year
45) Which of the following statements about Generally Accepted Accounting Principles
(GAAP) is NOT TRUE?
A) GAAP is a set of rule-based accounting standards established by the Financial
Accounting Standards Board (FASB)
B) GAAP sets out the standards, conventions, and rules that accountants must follow
when preparing audited financial statements
C) GAAP is complex, providing more than 150 “pronouncements” as to how to account
for different types of transactions
D) All of the statements above are TRUE
46) Flotation costs
A) include the fees paid to the investment bankers, lawyers, and accountants involved
in selling a new security issue
B) encourage firms to pay large dividends
C) are encountered whenever a firm fails to pay a dividend
D) are incurred when investors fail to cash their dividend check