1) When a company is obligated contractually to pay interest on debt, it must pay the
interest even if it shows no profit for the year, or else it may go bankrupt.
2) The higher the cost of bank financing, the more beneficial it is to take the cash
discount.
3) Because of the legal problems associated with specific asset claims in a secured bond
offering, the trend is for companies to issue more debentures.
4) Most firms are able to use 60% to 70% debt in their capital structure without
exceeding norms acceptable to most creditors and investors.
5) A Eurobond is a bond payable in the borrower’s currency but sold outside the
borrower’s country.
6) Property taxes and depreciation expense are examples of variable costs.
7) Capital markets are becoming increasingly international as investors and issuers seek
out the best risk-return opportunities.
8) In order to calculate basic earnings per share, the earnings after taxes must be
adjusted for the elimination of the convertible bond interest expense.
9) The largest underwriter of both stocks and bonds during 2012 was Citigroup.
10) Social responsibility and profit maximization are synonymous.
11) Generally speaking, convertible bonds reverse the risk-return trade-off that applies
to most investments.
12) In determining the interest factor (IF) for the present value of $1, one could use the
reciprocal of that IF for the future value of $1 at the same rate and time period.
13) An annuity is a series of consecutive payments of equal amount.
14) Retained earnings represent the firm’s cumulative earnings since inception, minus
dividends and other adjustments.
15) The years 2008 and 2009 will likely go down in history as one of the worst
environments for companies wishing to go public.
16) The interwoven boundaries of banks and different trading companies in Japan make
it easier to acquire credit in Japan than in the U.S.
17) Participating preferred stock gives its owners voting rights.
18) Issuers of commercial paper can be divided into finance paper or direct paper,
dealer paper, and asset-backed commercial paper.
19) As interest rates decline, bond refunding should become more common.
20) The investment banking industry has shifted its activities to underwriting new
securities, rather than advising on mergers and acquisitions.
21) “Float” takes place because
A.a firm is early in paying its bills
B.the level of cash on the firm’s books is equal to the level of cash in the bank
C.a lag exists between writing a check and clearing it through the banking system
D.a customer writes checks without adequate supporting balances
22) A step-up in the conversion price refers to
A.the ability of the company to step up the maturity of the bond to an earlier date
B.the provision that decreases the conversion ratio the longer a convertible bond is held
C.a refunding of a convertible bond when the conversion value equals the pure bond
value
D.None of these options
23) The dollar interest received divided by the market price of the bond is called the
A.par value
B.coupon rate
C.current yield
D.yield to maturity
24) Projects that are totally uncorrelated provide
A.no risk reduction
B.some risk reduction
C.extreme risk reduction
D.More information is needed to answer this question
25) If the stock price rises substantially above the conversion price, an advantage to the
corporation would be
A.the premium would decrease
B.the floor price would offer the investor downside protection
C.the bond would most likely be converted into common stock and the debt would not
have to be repaid
D.None of these options are advantages to the corporation
26) Which of the following is the correct order of corporate issues based on risk and
return? (From most risk-return to least risk-return.)
A.Common stock, subordinated debentures, secured debt, Treasury bills
B.Preferred stock, common stock, subordinated debentures, secured debt
C.Common stock, long-term government bonds, secured debt, subordinated debt
D.Common stock, secured debt, subordinated debentures, preferred stock
27) Which of the following is an outflow of cash?
A.Profitable operations
B.The sale of equipment
C.The sale of the company’s common stock
D.The payment of cash dividends
28) Retail companies like Target and Limited Brands are more likely to have
A.stable sales and earnings per share
B.cyclical sales but less volatile earnings per share
C.cyclical sales and more volatile earnings per share
D.cyclical sales but stable accounts receivable and inventory
29) Firm A produces semiconductors using highly technical machinery; Firm B is a
retail clothing store. Consider which firm employs a higher degree of operating
leverage and then answer the following question: “Which of the following comparative
statements about firms A and B is true?”
A.A has a lower break-even point than B, but A’s profit grows faster after the breakeven
B.A has a higher break-even point than B, but A’s profit grows slower after the
breakeven
C.B has a lower break-even point than A, but A’s profit grows faster after the breakeven
D.B has a lower break-even point than A, and profit grows at the same rate for both
companies after the break-even point
30) Many companies such as Tyco, Enron, and WorldCom that suffered financial
distress in the late 1990s and early 2000s
A.committed fraud
B.had failed corporate governance oversight
C.wentbankrupt
D.All of the options are true
31) For MACRS depreciation, automobiles and light trucks fit into the
A.3-year MACRS category
B.5-year MACRS category
C.7-year MACRS category
D.10-year MACRS category
32) Which of the following was NOT a major supplier of funds to credit markets in
2008?
A.Households
B.Government sponsored agencies
C.Mutual funds and ETFs
D.All of the options were major suppliers of funds
33) For a given level of profitability as measured by profit margin, the firm’s return on
equity will
A.increase as its debt-to-assets ratio decreases
B.decrease as its current ratio increases
C.increase as its debt-to-assets ratio increases
D.decrease as its times-interest-earned ratio decreases
34) The following adjustments must be made when interest is paid semi-annually versus
annually except:
A.Annual interest rate divided by 2
B.Total number of years divided by 2
C.Annual yield to maturity divided by 2
D.Annual coupon payment divided by 2
35) Tabletop Ranches Inc. is considering the purchase of a new helicopter for $400,000.
The firm’s old helicopter has a book value of $90,000, but can only be sold for $60,000.
It was being depreciated at the rate of $13,500 per year for four more years under an old
depreciation method.
The new helicopter will be depreciated using the 5-year MACRS schedule. It is
expected to save $75,000 after taxes through reduced fuel and maintenance expenses.
Tabletop Ranch is in the 34% tax bracket and has a 12% cost of capital. Assume a
six-year time horizon.
a) Calculate the cash inflows from selling the old helicopter.
b) Calculate the net cost of the new helicopter.
c) Calculate the incremental depreciation for the new helicopter.
d) Calculate the net cash flows for the purchase.
e) Calculate the net present value of the helicopter purchase and state whether or not the
firm should buy it.
36) Which of the following is concerned with the change in operating profit as a result
of a change in volume?
A.Financial leverage
B.Break-even point
C.Operating leverage
D.Combined leverage
37) If projected net cash outflow for November is ($10,000), the beginning cash
balance is $4,000, the minimum cash balance is $3,000, and the beginning loan balance
is $8,000, what will be the cumulative loan balance at the end of November?
A.$14,000
B.$5,000
C.$17,000
D.$22,000
38) An issue of common stock is expected to pay a dividend of $3 at the end of the year.
Its growth rate is equal to 3%, and the current share price is $40. What is the required
rate of return on the stock?
A.Between 7% and 10%
B.Between 10% and 12%
C.Between 12% and 14%
D.Between 14% and 17%
39) The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is
10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of
debt for a new issue of bonds?
A.5.28%
B.2.48%
C.6.90%
D.3.14%
40) All of the following are advantages of going public except for which one?
A.More funds are available to publicly traded firms
B.The fact that a company is public helps in bank negotiations and marketing
C.Publicly traded stocks afford the stockholders more liquidity
D.The firm must disseminate more information to the public on corporate affairs
41) Which of the following is NOT addressed by the Dodd-Frank Act?
A.Liquidation of non-bank financial companies such as insurance companies
B.Limits upon speculative investing by federally insured banks
C.Written certifications of financial statements by the CEO and CFO
D.Registration of hedge funds with the SEC
42) Which of the following is not one of the components included in the required rate of
return on a bond?
A.Risk premium
B.Real rate of return
C.Inflation premium
D.Maturity payment
43) Which of the following would not be included in the balance sheet investment
account?
A.Stocks of other corporations
B.Long-term government bonds
C.Marketable securities
D.Investments in other corporations
44) East Coast Cleaners borrows $20,000 for 120 days and pays $400 interest. What is
the effective rate of interest if the loan is discounted?
A.Less than 5.5%
B.More than 5.5% but less than 6.0%
C.More than 6.0% but less than 6.5%
D.More than 6.5%
45) Working capital management is primarily concerned with the management and
financing of
A.cash and inventory only
B.current assets and current liabilities
C.current assets
D.receivables and payables
46) Which of the following regarding preferred stock is true?
A.If the price decreases, the required rate of return has decreased
B.If the required rate of return increases, the price decreases
C.If the required rate of return increases, the price increases
D.The price in the market remains at par
47) Match the following with the items below:
1>subordinated debenture
2>maturity date
3>debenture
4>serial payments
5>secured debt
6>zero-coupon bond
7>sinking fund
8>mortgage agreement
9>floating-rate bond
10>after-acquired property clause
11>indenture
12>par value
13>unsecured debt
A. A long-term unsecured corporate bond.
B. A legal contract covering every detail of a bond issue.
C. The point at which the principal value of a bond is repaid to the lender.
D. A loan that requires no assets as collateral.
E. Payment to the holder will take place only after the designated senior bondholders
are satisfied.
F. A loan based on the use of real property as collateral.
G. Indicates the loan was obtained by pledging assets as collateral.
H. The principal value of the bond.
I. A method of retiring bonds in an orderly process over the life of the bond issue.
J. Arise when a bond issue has several different maturity dates as part of the same issue.
K. A debt instrument that pays interest at a rate dependent on the market interest rate.
L. A debt instrument for which corporations incur only one cash outflowthe face value
of the instrument at maturity.
M. A requirement in the bond issue stipulating that any new equipment purchased after
the issue be placed under the original mortgage.
48) A firm has total assets of $3,000,000. It has $1,200,000 in long-term debt. The
stockholders equity is $1,000,000. What is the debt-to-total asset ratio?
A.45%
B.75%
C.55%
D.67%
49) Pedro Gonzalez will invest $5,000 at the beginning of each year for the next nine
years. The interest rate is 8%. What is the future value?
A.$58,471
B.$62,440
C.$67,435
D.$72,435
50) Assuming a tax rate of 40%, depreciation expenses of $500,000 will
A.reduce income by $200,000
B.reduce taxes by $200,000
C.reducetaxes by $500,000
D.have no effect on income or taxes, since depreciation is not a cash expense