1) An increase in accrued expenses results in a cash outflow on the statement of cash
flows.
2) Accounting income is based on verifiably completed transactions.
3) The rate on Eurodollar certificates of deposit is usually lower than domestic
certificates of deposit.
4) Use of financial leverage must consider risk, not just maximizing profit.
5) Transaction exposure associated with changes in the exchange rate between countries
can be hedged with a currency futures contract.
6) It is easier for small firms to obtain financing through bank loans than through the
commercial paper market.
7) The first Nobel Prizes given to finance professors were for their contributions to
capital structure theory and portfolio theories of risk and return.
8) In Germany, restrictions limiting labor layoffs have encouraged companies to reduce
investment there. Thus, in the long run, these labor protection laws actually can be
expected to result in higher unemployment in Germany.
9) Convertible securities are attractive because of their downside protection
characteristics, as well as their upside potential.
10) Preferred stock generally carries a higher interest rate than debt.
11) Even though the firm may pay a lower interest rate on a private placement, it will
pay higher out-of-pocket costs than a public offering.
12) The discount rate that equates a future stream of expected dividends to the current
price is a good approximation of the cost of common stock.
13)
Refer to the figure above. The firm’s debt to total assets ratio is ____.
A.56.1%
B.26.7%
C.33.33%
D.55.6%
14) All of the following are motivation for firms to issue warrants except for which
one?
A.May allow the firm to issue debt at a lower rate when warrants are included
B.Used as a sweetener during merger negotiations
C.Is more desirable than convertible securities for creating new common stock
D.All of these options are motivations
15) The Internet has affected the financial markets by
A.creating more competition between markets
B.pushing the cost of trading down
C.forcing brokerage companies to consolidate
D.All of the options
16) A highly automated plant would generally have
A.more variable than fixed costs
B.more fixed than variable costs
C.all fixed costs
D.all variable costs
17) XYZ’s receivables turnover is 4x. The accounts receivable at year-end are
$600,000. The average collection period is 90 days. What was the sales figure for the
year assuming all sales are on credit?
A.$60,000
B.$6,000,000
C.$2,400,000
D.None of the options
18) Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has
offered a trade discount of 2/10, net 30 . Slipshod can borrow the funds from either of
two banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart
Bank offers a discounted loan for 20 days at a cost of $375.
a) What is the cost of failing to take the discount?
b) What is the effective interest rate on each of the loans?
c) Should Slipshod take the cash discount?
d) Which bank loan should Slipshod use?
19) Luke believes that he can invest $5,000 per year for his retirement in 30 years. How
much will he have available for retirement if he can earn 8% on his investment and
begins investing one year from now?
A.$566,400
B.$681,550
C.$150,000
D.$162,000
20) An increasing proportion of shares in the U.S. are owned by
A.individual investors
B.corporations (Treasury stock)
C.institutions
D.governments
21) Bond refunding typically occurs when
A.interest rates in the market are sufficiently less than the coupon rate on the old bond
B.interest rates in the market have risen over the coupon rates on the old bond
C.the price of the old bond is less than par
D.a related sinking fund has accumulated enough money to retire the bond issue
22) If a preferred stock is of the cumulative type,
A.dividends must be paid on an equal basis with common stock, so long as earnings
permit
B.dividends cannot be passed if they are earned
C.the cumulative voting rule applies in the exercise of the voting privilege
D.unpaid dividends of one period must be carried forward and paid in subsequent
periods before anything can be paid to common stockholders
23) Multinational corporations may take several forms. An exporter could be described
as
A.a MNC that produces a product within its own borders, but sells in a foreign market
B.the least risky political arrangement
C.a MNC willing to commit itself to long-term foreign investment
D.More than one of the options
24) The primary purpose of a stock split is to
A.indicate the firm’s desire to retain funds
B.increase the investor’s overall wealth
C.reduce the threat of a takeover by creating more shares
D.bring the stock price to a lower trading range
25) A 10-year bond pays 5% on a face value of $1,000. If similar bonds are currently
yielding 10%, what is the market value of the bond? Use annual analysis.
A.Less than $900
B.More than $900 and less than $1,100
C.More than $1,100
D.Not enough information is given to tell
26) Jeff believes he will need a $60,000 annual income during retirement. If he can
achieve a 6% return during retirement and believes he will live 20 years after
retirement, how much does he need to save by the time he retires, assuming he’ll start
drawing his money out one year after his retirement?
A.$724,055
B.$1,600,000
C.$688,200
D.$209,320
27) The partnership form of an organization
A.avoids the double taxation of earnings and dividends found in the corporate form of
organization
B.usually provides limited liability to the partners
C.has unlimited life
D.simplifies decision making
28) In Stage II (the growth stage), sales and returns on assets will be growing at
increasing rates. Which of the following is true?
A.Earnings are now available for large dividends
B.Stock dividends are common
C.Acquisition of new assets will be stable
D.The payout ratio will be close to 50% by now
29) In calculating gross profits, a firm utilizing FIFO inventory accounting would
assume that
A.all sales were from current production
B.all sales were from beginning inventory
C.sales were from beginning inventory until it was depleted, and then would use sales
from current production
D.all sales were for cash
30) A firm may adopt capital rationing because
A.it is hesitant to use external sources of financing
B.it wishes to maximize profits
C.it is fearful of too much growth
D.All of the options
31) In calculating gross profits, a firm utilizing LIFO inventory accounting would
assume that
A.all sales were from current production
B.all sales were from beginning inventory
C.sales were from current production until current production was depleted, and then
would use sales from beginning inventory
D.all sales were for cash
32) Which of the following combinations of asset structures and financing patterns is
likely to create the most volatile earnings?
A.Illiquid assets and heavy short-term borrowing
B.Illiquid assets and heavy long-term borrowing
C.Liquid assets and heavy long-term borrowing
D.Liquid assets and heavy short-term borrowing
33) The Daily Planet has a wholly owned foreign subsidiary in Brazil. The subsidiary
earns 30 million reals per year before taxes in Brazil. The foreign income tax rate is
30%. The subsidiary repatriates the entire after-tax profits in the form of dividends to
the Daily Planet. The U.S. corporate tax rate is 40% of foreign earnings before taxes.
a) Compute after-tax cash flow to the Daily Planet from this investment (in reals). Use
the following table.
b) If the exchange rate is .56 ($/reals), what is the after-tax cash flow in dollars?
c) Depreciation related cash flow is 2 million reals per year for five years for another
Daily Planet investment in Brazil. The exchange rate is expected to be .59 ($/reals). The
Daily Planet applies a 15% discount rate to foreign cash flows. What is the present
value (in dollars) of the depreciation-related cash flow?
34) The risk premium is likely to be highest for
A.U.S. government bonds
B.corporate bonds
C.utility company stock
D.either corporate bonds or utility company stock
35) A quick ratio that is much smaller than the current ratio reflects
A.a small portion of current assets is in inventory
B.a large portion of current assets is in inventory
C.that the firm will have a high inventory turnover
D.that the firm will have a high return on assets
36) Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The
firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per
unit. What is the optimum order size?
A.327 units
B.655 units
C.447 units
D.207 units
37) All of the following are common examples of possible distortion in reported income
except
A.inflation
B.treatment of nonrecurring items
C.cash flow statements
D.reporting of revenue
Match the following with the items below:
1>planning horizon38) 2>capital rationing
3>net present value profile
4>normal recovery period
5>cash flow
6>internal rate of return (IRR)
7>payback period
8>modified accelerated cost recovery system depreciation (MACRS)
9>reinvestment assumption
A. Concerns the rate of return that can be earned on the cash flow generated by capital
budgeting projects.
B. Occurs when a corporation has more dollars of capital budgeting projects with
positive net present values than it has money allocated to invest in them.
C. Has defined asset lives of 3 to 39 years for different categories of assets.
D. Equals cash inflows minus cash expenses.
E. A discounted cash flow method for evaluating capital budgeting projects where the
present value of the cash inflows are equal to the present value of the cash outflows.
F. The time it takes to depreciate an asset under the accelerated cost recovery system.
G. The length of time it takes to conceive, develop, and complete a project and to
recover the cost of the project on a discounted cash flow basis.
H. Indicates the length of time required to recoup an initial investment.
I. A graphical presentation of the potential net present values of a project at different
discount rates.
39) Which of the following type of merger decreases competition?
A.A horizontal merger
B.A vertical merger
C.A cash purchase
D.A stock-for-stock exchange
40) The Swiss franc is selling for $.9412 and the British pound is selling for $1.5119.
The cross rate between the franc and the pound (the number of Swiss francs that would
buy one British pound) is approximately:
A..161
B.1.61
C..0322
D.3.22
41) The overall weighted average cost of capital is used instead of costs for specific
sources of funds because
A.use of the cost for specific sources of capital would make investment decisions
inconsistent
B.a project with the highest return would always be accepted under the specific cost
criteria
C.investments funded by low-cost debt would have an advantage over other
investments
D.use of the cost for specific sources of capital would make investment decisions
inconsistent, and investments funded by low-cost debt would have an advantage over
other investments
42) Which of the following terms is not specifically related to an unfriendly buyout?
A.Takeover tender offer
B.White knight
C.Saturday night special
D.Synergy
43) Which one of these conditions qualifies a lease as a “capital lease?”
A.The lease contains a bargain purchase price at the end of the lease
B.The lease must have a value of at least $10 million
C.The lease must have a life of 10 years
D.All of these options
44) To minimize exposure to political risk, a multinational firm may establish a joint
venture with a local entrepreneur, establish a joint venture with a group of
multinationals, or
A.purchase an insurance policy from the Foreign Credit Insurance Association (FCIA)
B.hedge in the Eurodollar market
C.purchase an insurance policy from the Overseas Private Investment Corporation
(OPIC)
D.Any combination of the options
45) Increasing interest expense will have what effect on EBIT?
A.Increase it
B.Decrease it
C.It will have no effect
D.There is not enough information to tell
46) Which of the following is NOT true about IPOs?
A.They are good deals for investors who buy them at a public offering and then sell
them quickly afterward
B.They have average first-day returns of 40% in the U.S
C.They are initially underpriced in every country where stocks are publicly traded
D.After the first day of trading, they usually underperform the market for several years
47) Which company is a leader in rating bonds?
A.Goldman Sachs
B.Bloomberg
C.ValueLine
D.Moody’s Investor Service
48) Earnings per share is
A.operating profit divided by number of shares outstanding
B.net income divided by number of shares outstanding
C.net income divided by stockholders’ equity
D.net income minus preferred dividends divided by number of shares outstanding
49) Sara would like to evaluate the performance of her portfolio over the past 10 years.
What compound annual rate of return has she achieved if she invested $12,000 10 years
ago and now has $25,000?
A.Between 8% and 9%
B.Between 10% and 11%
C.Between 9% and 10%
D.Between 7% and 8%
50) Security markets provide liquidity
A.by allowing corporations to raise funds by selling new issues
B.by creating a market in which owners may easily turn an investment into cash
through its sale
C.by allowing corporations to raise funds by selling new issues and by creating a
market in which owners may easily turn an investment into cash through its sale
D.None of these options are correct
51) Assume the company has issued 15,000 bonds with a coupon rate of 10% and a face
value of $1,000 per bond, and the company has a marginal tax rate of 40%. Calculate
the annual after-tax cost of the interest expense.
52) Using the expectations hypothesis for the term structure of interest rates, calculate
the expected yields for securities with maturities of two and three years on the basis of
the following data: