1) Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land
were purchased.
2) Under a line of credit agreement, a bank may retain the right to revoke the line if any
major changes occur in the firm’s financial condition or operations.
3) In a financial lease, the lessor must receive more than the asset’s purchase price in
order to earn its required return on the investment.
4) The higher cost of unsecured as opposed to secured borrowing is due to the greater
risk of default.
5) A Eurobond bond is a bond denominated in Euros.
6) Typically, higher coverage ratios are preferred, but a very high ratio may indicate
under-utilization of fixed-payment obligations, which may result in unnecessarily low
risk and return.
7) Behavioral approaches for dealing with risk include annualized net present values
and risk-adjusted discount rates.
8) It would be a financially sound decision to pay employees once every two weeks
rather than once a month.
9) A real rate of interest is the compensation paid by the borrower of funds to the lender.
10) When computing an interest or growth rate, the rate will decrease with an increase
in future value, holding present value and the number of periods constant.
11) An example of a standard debt provision is to ________.
A) limit the corporation’s annual cash dividend payments
B) pay taxes and other liabilities when due
C) restrict the corporation from disposing of fixed assets
D) maintain a minimum level of liquidity
12) Tangshan Mining Company has released the following information.
(a)What are Tangshan Mining’s current earnings per share?
(b)What is Tangshan Mining’s current P/E ratio?
(c)Tangshan Mining wants to use half of its earnings either to pay shareholders
dividends or to repurchase shares for inclusion in the firm’s employee stock ownership
plan. If the firm pays a cash dividend, what will be the dividend per share received by
existing shareholders?
(d)Instead of paying the cash dividend, what if the firm uses half of its earnings to pay
$55 per share to repurchase the shares, what will be the firm’s new EPS? What should
be the firm’s new share price?
(e)Compare the impact of a stock dividend and stock repurchase on shareholder wealth.
13) A nonconventional cash flow pattern associated with capital investment projects
consists of an initial ________.
A) outflow followed by a series of both cash inflows and outflows
B) inflow followed by a series of both cash inflows and outflows
C) outflow followed by a series of inflows
D) inflow followed by a series of outflows
14) Government can obtain funds ________.
A) by trading in equity market
B) by issuing financial instruments such as futures and options
C) through forex market
D) by selling debt securities
15) Tangshan Mining Company must choose its optimal capital structure. Currently, the
firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of
$4.89 per share and dividends are expected to grow at a constant rate of 5 percent for
the foreseeable future. Stockholders currently require a 10.89 percent return on their
investment. Tangshan Mining is considering changing its capital structure if it would
benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent,
it will increase its expected dividend to $5.24 per share. Because of the additional
leverage, dividend growth is expected to increase to 6 percent and this growth will be
sustained indefinitely. However, because of the added risk, the required return
demanded by stockholders will increase to 11.34 percent.
(a)What is the value per share for Tangshan Mining under the current capital structure?
(b)What is the value per share for Tangshan Mining under the proposed capital
structure?
(c)Should Tangshan Mining make the capital structure change? Explain.
16) A friendly merger transaction ________.
A) is a transaction in which merger is completed by forceful acquisition of the target’s
shares from the secondary market
B) requires a public announcement for its plan of acquisition
C) can be consummated through an exchange of the acquirer’s stock and cash
D) can only be completed by purchasing all the outstanding bonds of the target firm
17) The ________ ratios are primarily used as measures of return.
A) liquidity
B) activity
C) debt
D) profitability
18) The present value of a $20,000 perpetuity at a 7 percent discount rate is ________.
A) $186,915
B) $285,714
C) $140,000
D) $325,000
19) A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of
$40 per share. The amount recorded for the paid-in capital in excess of par account is
________.
A) $420,000
B) $380,000
C) $400,000
D) $800,000
20) The ________ is the firm’s desired optimal mix of debt and equity financing.
A) book value
B) market value
C) cost of capital
D) target capital structure
21) Key inputs to short-term financial planning are ________.
A) cash flow statements and income statement
B) pro forma financial statements
C) sales forecasts, and operating and financial data
D) leverage analysis and pro forma income statement
22) The two categories of ratios that should be utilized to assess a firm’s true liquidity
are the ________.
A) liquidity and market ratios
B) liquidity and profitability ratios
C) market and debt ratios
D) liquidity and activity ratios
23) If you expect the market to increase which of the following portfolios should you
purchase?
A) a portfolio with a beta of 1.9
B) a portfolio with a beta of 1.0
C) a portfolio with a beta of 0
D) a portfolio with a beta of -0.5
24) A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees
to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset’s
services.
A) operating lease
B) financial lease
C) capital lease
D) direct lease
25) An investment advisor has recommended a $50,000 portfolio containing assets R, J,
and K; $25,000 will be invested in asset R, with an expected annual return of 12
percent; $10,000 will be invested in asset J, with an expected annual return of 18
percent; and $15,000 will be invested in asset K, with an expected annual return of 8
percent. The expected annual return of this portfolio is ________.
A) 12.67%
B) 12.00%
C) 10.00%
D) 11.78%