1) Unlike business bankruptcy and business failure, divestiture is often undertaken for
positive motives in a manner that is consistent with the firm’s strategic goals.
2) The World Trade Organization is an international body established to police world
trading practices and to mediate disputes among member countries.
3) The steeper the slope of the security market line, the greater the degree of risk
aversion.
4) An A rated bond should provide investors with a higher yield than an otherwise
identical B rated bond.
5) Holding companies are corporations that have voting control of one or more other
corporations and the companies they control are referred to as subsidiaries.
6) If a project’s payback period is greater than the maximum acceptable payback period,
we would reject it.
7) Bonds which sell at less than face value are priced at a ________, while bonds which
sell at greater than face value sell at a ________.
A) par; premium
B) discount; par
C) discount; premium
D) coupon; premium
8) Wealth maximization as the goal of a firm implies enhancing the wealth of
________.
A) the auditors
B) the creditors
C) the federal reserve
D) the firm’s stockholders
9) The tax treatment regarding the sale of existing assets that are sold for less than the
book value results in ________.
A) an ordinary tax benefit
B) a capital loss tax benefit
C) recaptured depreciation taxed as ordinary income
D) a capital gain tax liability and recaptured depreciation taxed as ordinary income
10) Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an
interest rate of 13 percent. The original principal amount was ________.
A) $24,450
B) $15,000
C) $3,100
D) $20,175
11) A weakness of the percent-of-sales method of preparing a pro forma income
statement is ________.
A) that it forecasts income and then expresses the various income statement items as
percentages of projected income
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) the difficulty faced in calculation and preparation of such statements
12) A firm which uses the aggressive financing strategy plans to purchase a major fixed
asset financed with a loan. The most likely consequence of this action is ________.
A) a decrease in the current ratio
B) an increase in net working capital
C) a decrease in the risk of insolvency
D) an increase in long-term debt
13) Which of the following is true of cash discount?
A) It increases bad debts because after availing discounts all customers may not pay
B) It decreases the investment in accounts receivable and increases the per unit profit
C) It helps to speed up collections without putting pressure on customers
D) It reduces sales because the customers feel that the products are of inferior quality
14) Book value per share is the ratio of ________.
A) common stock equity to number of outstanding common shares
B) retained earnings to number of outstanding common shares
C) fixed assets to number of outstanding common shares
D) total liabilities to number of outstanding common shares
15) The ________ is the discount rate that equates the present value of the cash inflows
with the initial investment.
A) payback period
B) net present value
C) cost of capital
D) internal rate of return
16) Which of the following represents a way of coping with uncertainty in a cash
budget?
A) careful estimation of cash budgets outputs
B) developing a pro forma income statement to forecast sales and then express the
various income statement items as percentage of projected sales
C) always using the prior year’s data for estimates of the future
D) using scenario analysis, or “what if” approach, to analyze cash flows under a variety
of circumstances
17) Which of the following is the purest and most basic form of corporate ownership?
A) bond
B) notes
C) common stock
D) preferred stock
18) Table 9.1
A firm has determined its optimal capital structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A
flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share
par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the
stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The
dividend expected to be paid at the end of the coming year is $1.74. Its dividend
payments have been growing at a constant rate for the last four years. Four years ago,
the dividend was $1.50. It is expected that to sell, a new common stock issue must be
underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is
40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.1)
A) 7.8 percent
B) 10.6 percent
C) 11.2 percent
D) 12.7 percent
19) The true owner(s) of the corporation is (are) the ________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
20) Harry Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000
before local taxes, with all the after tax funds to be available to the parent in the form of
dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding
tax rate is 15 percent, and the firm’s U.S. tax rate is 35 percent. What are the funds
available to the parent MNC if no tax credits are allowed?
A) $624,752
B) $425,250
C) $406,088
D) $735,000
21) Using the DuPont system of analysis, holding other factors constant, an increase in
financial leverage will result in ________.
A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings
22) ________ leases are noncancellable and are generally used for leasing land,
buildings, and large pieces of fixed equipment.
A) Financial
B) Operating
C) Leveraged
D) Direct
23) A financial manager’s financing decisions determine ________.
A) both the mix and the type of assets found on the firm’s balance sheet
B) the most appropriate mix of short-term and long-term financing
C) both the mix and the type of assets and liabilities found on the firm’s balance sheet
D) the proportion of the firm’s earnings to be paid as dividend
24) Harry’s House of Hamburgers (HHH) wants to prepare a cash budget for months of
September through December. Using the following information, prepare the cash
budget schedule and interpret the results.
Sales were $50,000 in June and $60,000 in July. Sales have been forecasted to be
$65,000, $72,000, $63,000, $59,000, and $56,000 for months of August, September,
October, November, and December, respectively. In the past, 10 percent of sales were
on cash basis, and the collection were 50 percent in the first month, 30 percent in the
second month, and 10 percent in the third month following the sales.
Every four months (three times a year) $500 of dividends from investments are
expected. The first dividend payment was received in January.
Purchases are 60 percent of sales, 15 percent of which are paid in cash, 65 percent are
paid one month later, and the rest is paid two months after purchase.
$8,000 dividends are paid twice a year (in March and September).
The monthly rent is $2,000.
Taxes are $6,500 payable in December.
A new hamburger press will be purchased in October for $2,300.
$1,500 interest will be paid in November.
$1,000 loan payments are paid every month.
Wages and salaries are $1,000 plus 5 percent of sales in each month.
August’s ending cash balance is $3,000.
HHH would like to maintain a minimum cash balance of $10,000.
25) Table 12.4
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The
following are the data about the two projects.
Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)
26) Compute the depreciation values for an asset which costs $55,000 and requires
$5,000 in installation costs using MACRS 5-year recovery period.
27) Draw a graph of a typical Treasury yield curve and discuss why it usually takes that
shape.
28) A U.S-based MNC has a subsidiary in China where the local currency is the
Renminbi (RMB). The balance sheets and income statements of the subsidiary are
presented in the table below. On December 31, 2014, the exchange rate was 8.27
RMB/US$. Assume the local currency figures in the statement below remain the same
on December 31, 2015. Calculate the U.S. dollar translated figures for the two ending
time periods assuming that between December 31, 2014 and December 31, 2015, the
Chinese government revalues (appreciates) the RMB by 20 percent.
Translation of Income Statement
Translation of Balance Sheet
