1) Selling stockholders may receive a price well above current market or book value.
2) When a company defaults on a secured debt, it is rare for the secured asset to be sold
and the proceeds distributed to the debtor.
3) The issues of corporate governance are really agency problems.
4) Linear break-even analysis assumes that costs are linear functions of volume.
5) Myrdal Boots can borrow from its bank at 12% to take a cash discount. The terms of
the cash discount are 3/10, net 90 . Myrdal Boots should borrow from the bank to take
the discount.
6) Financial leverage breakeven occurs when return on total assets is equal to the cost
of borrowed funds.
7) A foreign exchange rate specifies how much a currency is worth in terms of another
currency.
8) ADRs are subject to foreign exchange risk unlike direct methods of investing in the
foreign exchange market.
9) Regional exchanges are primarily engaged in dual trading activities, although some
local stocks are listed on regional exchanges only.
10) A banker or trade creditor is most concerned about a firm’s profitability ratios.
11) Generally, a downward sloping yield curve indicates an imminent economic boom.
12) The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for
the accuracy of their firm’s financial statements.
13) A major trend of privatization in foreign markets began in the 1990s.
14) Under MACRS depreciation, taxes paid in the first year of an asset’s life are
subtracted from the base used to calculate depreciation expense.
15) Asset utilization ratios describe how capital is being utilized to buy assets.
16) Companies such as Coca-Cola and IBM generate more than 50% of their sales
revenues from foreign activities.
17) The profitability index is calculated by dividing the project’s net present value by
the present value of the projected cash outflows.
18) Pre-emptive rights offerings are an especially popular way in Europe to raise money
and fund expansions.
19) Loretta & Niece’s fixed costs are $425,000, including $25,000 of depreciation
expense. The price of each unit sold is $120, and the variable cost per unit is $60. How
many units must the firm sell to reach the cash break-even point?
A.Less than 7,333 units
B.7,333 units
C.More than 7,333 units
D.Not enough information has been provided to determine the cash break-even point
20) Which investment has the least amount of risk?
A.Standard deviation = $450, expected return = $4,500
B.Standard deviation = $600, expected return = $400
C.Standard deviation = $500, expected return = $800
D.Standard deviation = $400, expected return = $5,000
21) Expected cash dividends are $3.00, the dividend yield is 4%, flotation costs are 4%
of price, and the growth rate is 3%. Compute the approximate cost of new common
stock.
A.7.00%
B.7.2%
C.6.9%
D.4.2%
22) Which of the following is not a characteristic of convertible bond issues?
A.The average size of the offering is small
B.A 15-20% conversion premium at the time of issue is common
C.Large companies with billions of dollars in sales and assets are the primary issuers
D.Primary issuers tend to have less than AAA bond credit ratings
23) Leasing is a popular form of financing because
A.lease provisions are generally less restrictive than a bond indenture
B.the lessor likely has experience with the equipment being leased
C.the lessee may not be financially able to purchase
D.All of these options
24) General Rent-All’s officers arrange a $50,000 loan. The company is required to
maintain a minimum checking account balance of 10% of the outstanding loan. This
practice is called
A.an installment loan
B.a compensating balance
C.a discounted loan
D.a balloon payment
25) Commercial paper that is sold without going through a broker or dealer is known as
A.direct paper
B.dealer paper
C.a book-entry transaction
D.term paper
26) Which of the following would represent a source of funds and, indirectly, an
increase in cash balances?
A.A reduction in accounts receivable
B.The repurchase of shares of the firm’s stock
C.A decrease in net income
D.A reduction in notes payable
27) All of the following are methods of controlling receivables except
A.offering a cash discount
B.reducing net terms
C.using DBIS
D.reducing cash sales
28) ABC Co. has an average collection period of 90 days. Total credit sales for the year
were $6,000,000. What is the balance in accounts receivable at year-end?
A.$150,000
B.$2,250,000
C.$1,500,000
D.$40,000
29) Which of the following is a characteristic of beta?
A.Beta measures only the volatility of returns on an individual bond relative to a bond
market index
B.A beta of 1.0 is of equal risk with the market
C.A beta of greater than 1.0 has less risk than the market
D.Two of the options
30) Using the risk-adjusted discount rate approach, the firm’s weighted average cost of
capital is applied to projects with
A.no risk
B.low risk
C.normal risk
D.high risk
31) How many of the following balance sheet items are classified as current?
Retained earnings
Accounts payable
Plant and equipment
Inventory
Common stock
Bonds payable
Accrued wages payable
Accounts receivable
Preferred stock
A.Three of these items are classified as current
B.Four of these items are classified as current
C.Five of these items are classified as current
D.Six of these items are classified as current
32) Under the Financial Accounting Standards Board’s SFAS 141 and 142, which of the
following occurred?
A.Goodwill is now amortized
B.At least four times per year, goodwill must be tested to determine if it is impaired
C.It allowed a one-time write-down of all past goodwill impairment
D.It created pooling of interests accounting
33) All of the following are important considerations for minimizing the cost of capital
except:
A.future inflation rates
B.industry debt ratios
C.future economic conditions
D.current coupon rates of outstanding debt
34) Match the following with the items below:
1>yield
2>discount rate
3>annuity
4>future value of an annuity
5>future value
6>semi-annual compounding
7>interest factor (IF)
8>present value
A. The payment of an equal stream of cash into a fund that increases in size (depending
on the interest rate received) up to a future point in time.
B.The interest or return is accumulated every six months.
C. The discounted value of a future sum or annuity as of today’s value.
D. A series of consecutive payments or receipts of an equal amount.
E. The percentage rate at which future sums or annuities are brought back to their
present value.
F. The future value of a single amount or annuity when compounded at a given interest
rate for a specified period of time.
G. It is based on the number of periods (n) and the interest rate (i) and whether or not
there is more than one cash flow.
H. The interest rate that equates a future value of an annuity to a given present value.
35) Global capital markets are influenced by
A.interest rates
B.investor confidence
C.relative economic growth
D.All of these options
36) Which of the following is a potential problem of utilizing ratio analysis?
A.Trends and industry averages are historical in nature
B.Financial data may be distorted due to price-level changes
C.Firms within an industry may not use similar accounting methods
D.All of the options
37) What is the primary goal of financial management?
A.Increased earnings
B.Maximizing cash flow
C.Maximizing shareholder wealth
D.Minimizing risk of the firm
38) The preferred stock of Gapers Inc. pays an annual dividend of $3.00. What is the
price of the preferred stock if the required return is:
a) 6%
b) 8%
c) 10%
39) The International Finance Corporation (IFC) is
A.a unit of the World Bank charged with the responsibility of providing capital to
multinational corporations and others involved in international trade
B.a regulatory agency for international trade
C.a private firm that provides accounts receivable financing to international firms
D.a foreign affiliate of 10 major U.S. banks
40) An investor would consider investing in a zero coupon bond because of the
A.tax benefits of amortization
B.lower volatility
C.ability to lock in a multiplier of the initial investment
D.None of these options are reasons to invest in zero coupons
41) A stock dividend will
A.increase the total value of stockholders’ equity
B.decrease the total value of stockholders’ equity
C.not affect the total value of stockholders’ equity
D.change the total value of stockholders’ equity but the direction cannot be determined
unless the market price and par value is known
42) A firm has operating profit of $210,000 after deducting lease payments of $30,000.
Interest expense is $50,000. What is the firm’s fixed charge coverage?
A.6.00x
B.2.33x
C.2.00x
D.3.00x
43) A firm’s preferred stock pays an annual dividend of $2, and the stock sells for $65.
Flotation costs for new issuances of preferred stock are 5% of the stock value. What is
the after-tax cost of preferred stock if the firm’s tax rate is 30%?
A.1.2%
B.1.58%
C.3.20%
D.5.26%
44) In the percent-of-sales method
A.as the dividend payout ratio goes up, the required new funds also rises
B.as the dividend payout ratio rises, the required new funds declines
C.the dividend payout ratio does not affect new funds
D.None of the options