1) Holding all other factors constant, a firm that is subject to a greater level of business
risk should employ less financial leverage than an otherwise equivalent firm that is
subject to a lesser level of business risk.
2) A floating inventory lien is a lender’s claim on the borrower’s general inventory as
collateral for a secured loan.
3) Under no circumstances, adding assets to a portfolio would result in greater risk than
that of the riskiest asset included in the portfolio.
4) Countries that experience high inflation rates will see their currencies decline in
value relative to the currencies of countries with lower inflation rates.
5) Publicly owned corporations with more than $5 million assets are required by the
Securities and Exchange Commission (SEC) and individual state securities
commissions to provide their stockholders with an annual stockholders’ report.
6) Although more expensive than a line of credit, a revolving credit agreement can be
less risky from the borrower’s viewpoint.
7) Commercial finance companies usually charge a higher interest on secured
short-term loans than commercial banks because the finance companies generally ends
up with higher-risk borrowers.
8) A major disadvantage of holding companies is the increased risk resulting from the
leverage effect.
9) If a lessee leases (under a financial lease) an asset that subsequently becomes
obsolete, it can require the lessor to replace it with an equally productive asset in real
term over the remaining term of the lease.
10) After the stock dividend is paid, the per share value of a stockholder’s stock will
remain the same as the value before the stock dividend and, thus, the market value of
his or her total holdings in the firm will remain unchanged.
11) Financial mergers involve merging firms in order to achieve various economies of
scale by eliminating redundant functions, increasing market share, and improving raw
material sourcing and finished product distribution.
12) The interest rate risk associated with Treasury bonds is much higher than with bills.
13) The relationship between operating and financial leverage is additive rather than
multiplicative.
14) The outright sale of accounts receivable at a discount in order to obtain funds is
called pledging accounts receivable.
15) Greenmail is a takeover defense under which a target firm repurchases a large block
of stock at a premium from one or more shareholders in order to end a hostile takeover
attempt by those shareholders.
16) The security market line (SML) reflects the required return in the marketplace for
each level of nondiversifiable risk (beta).
17) Table 6.1
Assume the below information to answer the following question(s).
Based on the table 6.1, on this trading day, the number of Ford bonds which changed
hands was ________.
A) 5,100
B) 51,000
C) 510,000
D) 5,100,000
18) In the capital asset pricing model, the general risk preferences of investors in the
marketplace are reflected by ________.
A) the risk-free rate
B) the level of the security market line
C) the slope of the security market line
D) the difference between the beta and the risk-free rate
19) A firm in a merger transaction that is being pursued as a takeover potential is called
the ________.
A) acquiring company
B) target company
C) holding company
D) consolidated company
20) The weakness of the judgmental approach to preparing a pro forma balance sheet is
________.
A) the assumption that the values of certain accounts can be forced to take on desired
levels
B) the assumption that the firm faces linear total revenue and total operating cost
functions
C) the assumption that the firm’s past financial condition is an accurate predictor of its
future
D) ease of calculation and preparation
21) Which of the following are the three basic ways of lending unsecured, short-term
funds by commercial banks?
A) mortgage-backed securities, T-bonds, and commercial paper
B) single-payment note, lines of credit, and revolving credit agreements
C) T-bills, municipal bonds, and commercial paper
D) commercial paper, real estate bonds, and corporate bonds
22) In the month of August, a firm had total cash receipts of $10,000, total cash
disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of
$3,000, and a beginning cash balance of $500. At the end of August, the firm ________.
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500
23) ________ measures the return earned on the common stockholders’ investment in
the firm.
A) Net profit margin
B) Price/earnings ratio
C) Return on equity
D) Return on total assets
24) Markepta, Inc. is considering the acquisition of Management Theories, Inc. at a
cash price of $1.5 million. Crimson Services, Inc. has short-term liabilities of $500,000.
As a result of acquiring Crimson Services, Inc., Markepta, Inc. would acquire the
copyrights of a national best-seller which would provide an estimated cash flow of
$300,000 for the next five years. The firm has a cost of capital of 20 percent. The
approximate net present value of this acquisition is ________.
A) $500,000
B) $480,800
C) -$102,700.55
D) -$1,102,816.36
25) A firm has issued 10 percent preferred stock, which sold for $100 per share par
value. The cost of issuing and selling the stock was $2 per share. The firm’s marginal
tax rate is 40 percent. The cost of the preferred stock is ________.
A) 3.9 percent
B) 6.1 percent
C) 9.8 percent
D) 10.2 percent
26) A corporation has $5,000,000 of 8 percent preferred stock outstanding and a 40
percent tax rate. The after-tax cost of the preferred stock is ________.
A) $400,000
B) $240,000
C) $666,667
D) $160,000
27) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
Dana Dairy Products’ gross profit margin was inferior to the industry standard. This
may have resulted from ________. (See Table 3.2)
A) a high sales price
B) the high cost of goods sold
C) excessive selling and administrative expenses
D) excessive interest expense
28) A firm has an outstanding bond with a $1,000 par value that is convertible into 50
shares of common stock. The bond’s conversion price per share is ________.
A) $20
B) $25
C) $50
D) $100
29) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent
annual coupon interest rate. The issue has ten years remaining to the maturity date.
Bonds of similar risk are currently selling to yield a 12 percent rate of return. The
current value of each Hewitt bond is ________.
A) $791.00
B) $1,000
C) $1,052.24
D) $1,113.00
30) An appropriate collateral for a secured short-term loan is ________.
A) fixed assets
B) accounts receivables
C) common stock in a privately-held corporation
D) bank over-draft
31) Which of the following creates a secured short-term loan with accounts receivable?
A) lines of credit
B) commercial paper
C) pledge of accounts receivable
D) factoring of accounts receivable
32) A(n) ________ distribution shows all possible outcomes and associated
probabilities for a given event.
A) discrete
B) lognormal
C) exponential
D) probability
33) A firm had the following accounts and financial data for 2014:
The firm’s net profit after taxes for 2014 is ________.
A) -$206.40
B) $213.80
C) $320.40
D) $206.25