1) The nominal rate of interest is the actual rate of interest charged by the supplier of
funds and paid by demander.
2) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific
price and hold it until maturity.
3) Minimizing the weighted average cost of capital allows management to undertake a
larger number of profitable projects, thereby further increasing the value of a firm.
4) The net present value is found by subtracting a project’s initial investment from the
present value of its cash inflows discounted at a rate equal to the project’s internal rate
of return.
5) Contingent securities such as convertibles, warrants, and stock options affect the
reporting of a firm’s earnings per share (EPS).
6) Acquisitions are especially attractive when an acquiring firm’s stock price is high,
because fewer shares must be exchanged to acquire the firm.
7) The effective rate of interest and compounding frequency are inversely related.
8) The financial manager of a firm prepares financial statements that recognize revenue
at the point of sale and expenses when incurred.
9) A common stockholder has no guarantee of receiving any cash inflows, but receives
what is left after all other claims on the firm’s income and assets have been satisfied.
10) If the NPV is less than the initial investment, a project should be rejected.
11) One disadvantage of leasing is that in many cases, the return to the lessor is quite
high so the firm in need of an asset might be better off borrowing to purchase it.
12) To pay for her college education, Gina is saving $2,000 at the beginning of each
year for the next eight years in a bank account paying 12 percent interest. How much
will Gina have in that account at the end of 8th year?
A) $16,000
B) $17,920
C) $24,600
D) $27,552
13) If a manager requires greater return when risk increases, then he is said to be
________.
A) risk-seeking
B) risk-indifferent
C) risk-averse
D) risk-aware
14) A ________ measures the dispersion around the expected value.
A) coefficient of variation
B) chi square
C) mean
D) standard deviation
15) A ________ is a short-term, unsecured promissory note issued by firms with a high
credit standing. These notes are primarily issued by commercial finance companies.
A) line of credit
B) commercial paper
C) revolving line of credit
D) T-bill
16) Table 15.5
Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As
a result, sales are expected to increase 15 percent from 300 canoes per year to 345
canoes per year. The average collection period is expected to increase to 40 days from
30 days and bad debts are expected to double the current 1 percent level. The price per
canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the
300 unit level is $700. The firm’s required return on investment is 20 percent. (Assume
a 360-day year)
What is the firm’s additional profit contribution from sales under the proposed
relaxation of credit standards? (See Table 15.5)
A) $2,250
B) $6,750
C) $9,000
D) $69,000
17) ________ may indicate a firm is experiencing stockouts and lost sales.
A) Average payment period
B) Inventory turnover ratio
C) Average collection period
D) Quick
18) ________ ratio indicates that a firm will be able to meet interest obligations due on
outstanding debt.
A) Debt-to-equity
B) Interest turnover
C) Total assets turnover
D) Times interest earned
19) Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 3 percent cash discount for payment within 10 days. The
firm’s current average collection period is 90 days, sales are 400 films per year, selling
price is $25,000 per film, variable cost per film is $18,750, and the average cost per
film is $21,000. The firm expects that the change in credit terms will result in a minor
increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm’s required return on equal-risk investments is 20
percent. (Assume a 360-day year.)
What is the net result of increasing the cash discount? (See Table 15.7)
A) +$33,750
B) -$33,750
C) +$128,750
D) -$58,750
20) A ________ is an agreement between a commercial bank and a business that states
the maximum amount of unsecured short-term borrowing the bank will make available
to the firm over a given period of time, provided sufficient funds are available.
A) revolving credit agreement
B) line of credit
C) commercial paper
D) single payment note
21) A debenture is ________.
A) a bond secured by specific assets that any firm can issue
B) a secured bond that is secured by unspecified assets
C) a secured bond issued by startup firms
D) an unsecured bond that only creditworthy firms can issue
22) In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales
method) when preparing pro forma financial statements will tend to ________.
A) overstate costs and overstate profits
B) overstate costs and understate profits
C) understate costs and overstate profits
D) understate costs and understate profits
23) The process that links risk and return in order to determine the worth of an asset is
termed ________.
A) securitization
B) valuation
C) discounting
D) compounding
24) In a(n) ________, a firm announces the price it is willing to pay to buy back shares
and the quantity of shares it wishes to repurchase.
A) Dutch auction
B) tender offer
C) American option
D) European auction
25) The ________ is the time period that elapses from the point when a firm uses the
raw materials in manufacturing a finished good to the point when the finished good is
sold.
A) cash turnover
B) cash conversion cycle
C) average age of inventory
D) average collection period