When interest rates are high, people prefer investments that return cash quickly.
Accelerated debt is an anti-takeover strategy in which the target’s debt must be paid off
in the event it is taken over.
Profitable firms can go out of business.
The government uses the tax system to collect revenue and to incentivize people to act
in ways it deems beneficial.
The double entry system of accounting breaks every entry into two parts each affecting
a different account.
Ordering costs are a function of the amount of inventory held.
Bondholders are rewarded by receiving interest and a share of the company’s profits.
Control obtained through the solicitation of proxies is never sufficient to achieve a
takeover.
Since preferred stock has a fixed dividend payment similar to the interest on bonds,
preferred dividends are tax deductible under the U.S. tax code.
Firms prefer not paying dividends if it avoids selling new stock, because retained
earnings cost less than new equity.
Under a pledging agreement, the borrower offers its receivables as collateral for a loan.
An expansion of inventory produces cash inflows from additional sales that are partially
offset by additional carrying costs.
Cost (of goods sold) includes only items that are closely related to production.
A bottom-up plan is one that puts together the requests and forecasts of lower and
middle management without judgment by top-level executives. Bottom-up plans have a
tendency to overstate achievable performance.
An analytical technique called ____ can be used to help determine how much leverage
a firm should use.
A.DFL-EPS analysis
B.EBIT-EPS analysis
C.DOL-EPS analysis
D.DOL-EBIT analysis
The wave of merger activity that resulted in largely horizontal mergers in the mining
metals production, and food products industries was:
A.Wave 1, 1897-1904.
B.Wave 2, 1916-1929.
C.Wave 3, 1965-1969.
D.Wave 4, 1981-1989.
Which of the following would cause a decrease in cash?
A.An increase in the Average Collection Period from 15 days to 30 days
B.Selling off fixed assets for more than book value
C.An increase in accrued salaries expense
D.Paying suppliers in 60 days versus 45 days
If a government is going to €support€ its own currency, it will ____.
A.sell more of its currency on the foreign exchange market
B.try to import more foreign goods
C.try to export less to foreign nations
D.buy more of its currency on the foreign exchange market
A firm’s credit policy:
A.represents an investing decision.
B.has no impact on a firm’s ACP.
C.affects the level of a firm’s bad debts.
D.a and c
E.All of the above
In a field warehouse arrangement for a loan against inventory:
A.the inventory is held in a public warehouse and must be transported to a firm’s plant.
B.the inventory is kept on the firm’s premises but is under the control of the warehouse
manager.
C.the inventory is kept by the firm but is identified by a serial number for the lender’s
protection.
D.the borrower pledges inventory as collateral for a loan without specifying the exact
items involved.
The clientele effect maintains that many investors choose stocks at least in part for
dividend policy, so any change in payments is disruptive, because it represents:
A.uncertainty in the treatment of capital gains.
B.something new about which they are uncertain.
C.risk, to which investors are generally averse.
D.change away from something they like about the firm.
The money that a business spends in the course of business can be divided into two
categories:
A.inventory and expenses.
B.capital improvements and new ventures.
C.short- and long-term funds.
D.research and development.
Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend
next year. The 5-year old firm has a beta of 1.25 and current earnings of $0.90 per
share. The current Treasury bill rate is 6.1% and the market risk premium is 8.8%.
Determine Haulsee’s cost of equity from retained earnings if the firm’s tax rate is 40%.
A.9.48%
B.17.1%
C.14.9%
D.Cannot determine from the above information
In general, which of the securities below has the highest expected return on investment?
A.U.S government bonds
B.Corporate bonds
C.Preferred stock
D.Common stock
Long Life Insurance Inc. just paid a dividend of $1.50, and projects supernormal
growth at of 12% for the next three years. After that growth is expected to slow down to
a normal 4% and go on at that rate for the foreseeable future. Similar stocks are earning
a return of 10%. How much would you pay for a share of Long Live today?
A.$37.70
B.$32.08
C.$26.00
D.$28.28
To be accepted, projects that are unusually risky should have to earn IRRs that are ____
those earned by a firm’s typical projects.
A.equal to
B.higher than
C.lower than
D.similar to
Johnston Corp has 10,000 bonds outstanding that were issued for 30 years ten years ago
at a par value of $1,000 and a coupon rate of 12%. Similar bonds are now selling to
yield 9%. It issued 40,000 shares of 6% preferred stock at a $100 par value eight years
ago. Those preferred shares are now selling to yield 10%, and are subject to an 8%
flotation cost. There are currently 2,500,000 of common stock outstanding selling for
$11.60 a share. Johnston’s cost of equity is 14% Develop Johnston’s market value based
capital structure, and calculate its WACC. Assume equity capital comes from retained
earnings, and the marginal tax rate is 40%.
A company buys product from a supplier in an economically unstable foreign country.
The supplier’s product is excellent, and the firm offers unusually favorable credit terms
under which payment isn’t required until 90 days after goods are received.
Unfortunately the exchange rate for the country’s currency varies as much as 25% in a
few months€ time. Explain why the company’s CFO might be reluctant to take
advantage of these terrific credit terms. Assume forward contracts on the currency are
not available.
Describe the difference between fixed and floating exchange rate systems.
When a ratio calls for a balance sheet figure, should we use beginning, ending, or
average values?
Define sunk costs and explain their role in capital budgeting.
The tax treatment of capital gains is a big political issue. Republicans generally favor
lower rates on capital gains while Democrats do not. Why is the issue so politically
sensitive?
George Franks can buy shares of Ace Rocket Launcher for $45.00. George expects
dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the
stock for $58.00 in two years. Should George buy any ARL? George feels that 18
percent is the appropriate required rate of return.
Smart Motors’ return on sales is 3 percent and its total asset turnover is 2.2. What is
Smart’s ROA?
Explain the different types of activities presented in the statement of cash flows.