1) Most federal agency issues have short maturities and offer slightly higher yields than
U.S. Treasury issues having similar maturities.
2) Spontaneous unsecured financing has a specific interest cost associated with it that
can be at a fixed or floating rate.
3) The interest rate charged on secured short-term loans is always equal to the rate on
unsecured short-term loans.
4) The basic motives for capital expenditures are to expand operations, to replace or
renew fixed assets, or to obtain some other, less tangible benefit over a long period.
5) A conventional cash flow pattern is one in which an initial outflow is followed only
by a series of inflows.
6) The cost of common stock equity refers to the cost of the next dollar of financing
necessary to finance a new investment opportunity.
7) Because of the extensive research conducted in recent years in the area of capital
structure theory, it is now possible for financial managers to pinpoint with great
accuracy a firm’s optimal capital structure.
8) The value of an asset is determined by discounting the expected cash flows back to
its present value, using an appropriate discount rate.
9) For normal probability distributions, 95 percent of the possible outcomes will lie
between 1 standard deviation from the expected return.
10) The value of an asset depends on the historical cash flow(s) up to the present time.
11) The yields on Treasury bills are generally higher than those on any other marketable
securities due to their virtually risk-free nature.
12) Higher the riskiness of a borrower, higher is the premium charged above the prime
rate by a banker.
13) The stock repurchase can be viewed as a cash dividend.
14) The difference between the return on the market portfolio of assets and the risk-free
rate of return represents the premium the investor must receive for taking the average
amount of risk associated with holding the market portfolio of assets.
15) Paying a stock dividend ________.
A) decreases the retained earnings account
B) has no effect on the retained earnings account
C) increases the retained earnings account
D) reorganizes the income
16) A merger of a paper manufacturer and a logging company is an example of
________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
17) ________ is a noncash charge.
A) Labor expense
B) Depreciation
C) Salaries
D) Rent
18) Lenders recognize that by having an interest in collateral they can reduce losses if
the borrowing firm defaults, ________.
A) and the presence of collateral reduces the risk of default
B) but the presence of collateral has no impact on the risk of default
C) therefore lenders prefer to lend to customers from whom they are able to demand
collateral
D) therefore lenders will impose a higher interest rate on unsecured long-term
borrowing
19) Which of the following instruments demonstrates the safety of principal
characteristic common to marketable securities?
A) common stock
B) derivatives
C) options
D) Treasury bonds
20) Table 15.3
Ace’s Business Forms pays 8 percent on short-term funds and 10 percent on long-term
funds. Determine its annual financing costs using the trade-off strategy described: Ace’s
Business Forms has seasonal financing requirements ranging from zero to $50,000 per
month. Based on this range, the firm has decided to finance $25,000 per month of the
seasonal funds with long-term debt and the rest of the seasonal funds with short-term
debt. The permanent funds requirement will be financed with long-term funds. (See
Table 15.3)
21) A(n) ________ is a paid individual, corporation, or a commercial bank trust
department that acts as a third party to a bond indenture.
A) trustee
B) investment banker
C) bond issuer
D) bond rating agency
22) The net effect of a stock repurchase is ________.
A) similar to an interest payment
B) similar to a cash dividend
C) similar to a stock split
D) similar to a reverse stock split
23) In the EBIT-EPS approach to capital structure, risk is represented by ________.
A) the slope of the capital market line
B) shifts in the cost of debt capital
C) the slope of the capital structure line
D) shifts in the times-interest-earned ratio
24) ________ measures the overall effectiveness of management in generating profits
with its available assets.
A) Total asset turnover
B) Price/earnings ratio
C) Return on equity
D) Return on total assets
25) In the ABC system of inventory management, the ________ method or system is
appropriate for managing B items.
A) basic economic order quantity
B) materials requirement planning
C) two-bin
D) just-in-time
26) Loans on which the interest is paid in advance are often called ________.
A) premium loans
B) long-term loans
C) term deposits
D) discount loans
27) The cost of a long-term debt generally ________ that of a short-term debt.
A) is less than
B) is equal to
C) is greater than
D) is less than or equal to
28) The actual ratio of exchange in a stock-exchange acquisition is the ratio of the
________.
A) amount paid per share of the target company to the per share book value of the
acquiring firm
B) book value per share of the target company to the per share market price of the
acquiring firm
C) market value per share of the target company to the earnings per share of the
acquiring firm
D) amount paid per share of the target company to the per share market price of the
acquiring firm
29) Managerial finance ________.
A) involves tasks such as budgeting, financial forecasting, cash management, and funds
procurement
B) involves the design and delivery of advice and financial products
C) recognizes funds on an accrual basis
D) devotes the majority of its attention to the collection and presentation of financial
data
30) Tangshan Mining is considering issuing preferred stock. The preferred stock would
have a par value of $75 and a 5.50 percent dividend. What is the cost of preferred stock
for Tangshan if flotation costs would amount to 5.5 percent of par value?
A) 5.50%
B) 5.27%
C) 7.73%
D) 5.82%
31) The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.
A) $178,571
B) $285,000
C) $350,000
D) $219,298
32) Gross profit is ________.
A) operating profits minus depreciation
B) operating profits minus cost of goods sold
C) sales revenue minus operating expenses
D) sales revenue minus cost of goods sold