1) The operating breakeven point can be found by solving for the sales level that just
covers total fixed and variable costs.
2) From a bond issuer’s perspective, the IRR on a bond’s cash flows is its cost to
maturity; from the investor’s perspective, the IRR on a bond’s cash flows is the yield to
maturity (YTM).
3) Reverse stock splits are initiated when a stock is selling at a very low price to appear
respectable.
4) Financing decisions deal with the left-hand side of the firm’s balance sheet.
5) If a project’s payback period is greater than the maximum acceptable payback period,
we would accept it.
6) Average payment period can be calculated as accounts payable divided by average
sales per day.
7) Which of the following is a difference between debt and equity capital?
A) Debt capital does not require periodic payments, whereas equity capital requires
period payments
B) Debt capital requires a fixed rate of return, whereas equity capital requires returns in
proportion to profits
C) Debt capital does not provides a tax shield, whereas equity capital provides a tax
shield
D) Debt capital affects operating leverage, whereas equity capital affects financial
leverage
8) A political risk that might affect all foreign firms in a host country is termed a
________ risk; a political risk that might affect only an individual firm or specific
industry in a host country is termed a ________ risk.
A) macro political; micro political
B) micro political; macro political
C) micro political; foreign exchange
D) foreign exchange; micro political
9) In comparing an ordinary annuity and an annuity due, which of the following is true?
A) The future value of an annuity due is always greater than the future value of an
otherwise identical ordinary annuity
B) The future value of an ordinary annuity is always greater than the future value of an
otherwise identical annuity due
C) The future value of an annuity due is always less than the future value of an
otherwise identical ordinary annuity, since one less payment is received with an annuity
due
D) All things being equal, one would prefer to receive an ordinary annuity compared to
an annuity due
10) Earnings before interest and taxes (EBIT) is a descriptive label for ________.
A) operating profits
B) net profits before taxes
C) earnings per share
D) gross profits
11) Beijing Berings is considering purchasing a small firm in the same line of business.
The purchase would be financed by the sale of common stock or a bond issue. The
financial manager needs to evaluate how the two alternative financing plans will affect
the earnings potential of the firm. Total financing required is $4.5 million. The firm
currently has $20,000,000 of 12 percent bonds and 600,000 common shares
outstanding. The firm can arrange financing of the $4.5 million through a 14 percent
bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent
tax rate.
(a)What is the degree of financial leverage for each plan at $7,000,000 of EBIT?
(b)What is the financial breakeven point for each plan?
12) A ________ permits a firm’s capital structure to be changed without increasing the
total financing.
A) put option
B) call option
C) conversion feature
D) repurchase agreement
13) Earnings available for common stockholders is calculated as net profits ________.
A) before taxes minus preferred dividends
B) after taxes minus preferred dividends
C) after taxes minus common dividends
D) before taxes minus common dividends
14) Using the capital asset pricing model, the cost of common stock equity is the return
required by investors as compensation for ________.
A) the specific risk of a firm
B) a firm’s unsystematic risk
C) price volatility of the stock
D) a firm’s nondiversifiable risk
15) A firm that has a large percentage of ________ investors may pay out a lower
percentage of its earnings as dividends.
A) wealthy
B) domestic
C) middle-income
D) international
16) A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent.
If the loan is for $100,000, how much interest in dollars will the firm pay? (Assume a
360-day year.)
A) $10,000
B) $30,000
C) $3,333
D) $1,000
17) Terrel Manufacturing expects stable sales through the summer months of June, July,
and August of $500,000 per month. The firm will make purchases of $350,000 per
month during these months. Wages and salaries are estimated at $60,000 per month plus
7 percent of sales. The firm must make a principal and interest payment on an
outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing
$75,000 in July. The second quarter tax payment of $20,000 is also due in June. All
sales are for cash.
(a)Construct a cash budget for June, July, and August, assuming the firm has a
beginning cash balance of $100,000 in June.
(b)The sales projections may not be accurate due to the lack of experience by a
newly-hired sales manager. If the sales manager believes the most optimistic
and pessimistic estimates of sales are $600,000 and $400,000, respectively, what
are the monthly net cash flows and required financing or excess cash balances?
18) The combination of two or more companies that results in one of the corporations
having a voting control of one or more of the other companies is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) holding company
19) An effective ethics program ________.
A) can weaken corporate value
B) has no effect on a corporation’s value
C) can enhance a corporation’s value
D) will result in high employee attrition rate
20) Cash flows that result from debt and equity financing transactions, including
incurrence and repayment of debt, cash inflows from the sale of stock, and cash
outflows to pay cash dividends or repurchase stock are called cash flow from
________.
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities
21) Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision techniques, because ________.
A) it explicitly considers the time value of money
B) it can be viewed as a measure of risk exposure due to its focus on liquidity
C) the determination of the required payback period is an objectively determined
criteria
D) it considers the timing of cash flows and therefore the time value of money
22) In the most emerging/developing countries (including China) over the past 30 years,
foreign direct investment (FDI) came overwhelmingly in the form or mergers and
acquisitions rather than through establishments.
23) Mary will receive $12,000 per year for the next 10 years as royalty for her work on
a finance book. What is the present value of her royalty income if the opportunity cost
is 12 percent?
A) $120,000
B) $ 67,800
C) $ 38,640
D) $ 72,560
24) A large portion of the commercial paper is issued by ________.
A) commercial finance companies
B) government agencies
C) venture capitalists
D) small manufacturing firms