1) Investors should recognize that betas are calculated using historical data and that past
performance relative to the market average may not accurately predict future
performance.
2) If a market is truly efficient, investors should not waste their time trying to find and
capitalize on mispriced securities.
3) The Gordon model is based on the premise that the value of a share of stock is equal
to sum of all future dividends it is expected to provide over an infinite time horizon.
4) A firm’s flotation cost can be calculated by weighting the cost of each source of
financing by its relative proportion in a firm’s target capital structure.
5) Since the purchaser of a convertible security is given an opportunity to become a
common stockholder, convertibles can normally be sold with higher interest rates than
nonconvertibles.
6) Although several economic and political factors can influence foreign exchange rate
movements, by far the most important explanation for long-term changes in exchange
rates is fiscal policy that a country adopts.
7) Standard debt provisions specify certain record keeping and general business
practices that must be ensured by the bond issuer.
8) In general, with an amortized loan, the payment amount grows over the life of the
loan, the principal portion of each payment grows over the life of the loan, and the
interest portion declines over the life of the loan.
9) In a Chapter 7 liquidation bankruptcy proceeding, the order of priority of satisfying
claims is secured creditors, unsecured creditors, and then equity holders.
10) Rapidly growing firms pay high dividends to shareholders.
11) A financial lease is often referred as a capital lease.
12) The future value of $200 received today and deposited for three years in an account
which pays semiannual interest of 8 percent is ________.
A) $253.00
B) $252.00
C) $158.00
D) $134.66
13) Which asset would the risk-averse financial manager prefer? (See below.)
A) Asset A
B) Asset B
C) Asset C
D) Asset D
14) Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a)The firm earns 10 percent annually on its current assets.
(b)The firm earns 20 percent annually on its fixed assets.
(c)The firm pays 13 percent annually on current liabilities.
(d)The firm pays 17 percent annually on long-term funds.
(e)The firm’s monthly current, fixed, and total asset requirements for the previous year
are summarized in the table below:
The firm’s initial ratio of current to total assets is ________. (See Table 15.1)
A) 1:3.2
B) 3:1
C) 2:3
D) 3:2.3
15) ________ rate of interest creates equilibrium between the supply of savings and the
demand for investment funds.
A) Nominal
B) Real
C) Risk-free
D) Inflationary
16) To be truly marketable, a security must ________.
A) be highly rated by a credit rating agency
B) have the characteristics of a callable bond
C) be readily convertible into cash
D) have a maturity of 10 years or more
17) A ________ is achieved by acquiring a company in the same general industry, but
neither in the same line of business nor a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
18) What is the profitability index of a project that has an initial cash outflow of $600,
an inflow of $250 for the next 3 years and a cost of capital of 10 percent?
A) 0.667
B) 2.036
C) 1.036
D) 2.739
19) Which of the following legal forms of organization is most expensive to organize?
A) sole proprietorships
B) partnerships
C) corporations
D) limited partnership
20) Financial leverage measures the effect of fixed financial costs on the relationship
between ________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) EBIT and preference dividend
21) The option to develop follow-on projects, expand markets, expand or retool plants,
and so on that
would not be possible without implementation of the project that is being evaluated is
called ________.
A) growth option
B) timing option
C) flexibility option
D) abandonment option
22) Aunt Tilly’s Feeds, Inc. is considering obtaining funding through advances against
receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment
is made on an average of 30 days. Western National Bank will advance funds under a
pledging arrangement for 13 percent annual interest. On average, 75 percent of credit
sales will be accepted as collateral. Commodity Finance offers factoring on a
nonrecourse basis for a 1 percent factoring commission, charging 1.5 percent per month
on advances and requiring a 15 percent factor’s reserve. Under this plan, the firm would
factor all accounts and close its credit and collections department, saving $10,000 per
year.
(a)What is the effective interest rate and the average amount of funds available under
pledging and under factoring?
(b)Which plan do you recommend? Why?
23) A(n) ________ is issued with no or very low coupon and sells significantly below
its par value.
A) income bond
B) zero or low coupon bond
C) mortgage bond
D) subordinated debenture
24) A stock split has ________.
A) little effect on a firm’s capital structure
B) no effect on a firm’s capital structure
C) a measurable effect on a firm’s capital structure
D) a detrimental effect on a firm’s capital structure
25) A conventional cash flow pattern associated with capital investment projects
consists of an initial ________.
A) outflow followed by a broken cash series
B) inflow followed by a broken series of outlay
C) outflow followed by a series of inflows
D) outflow followed by a series of outflows
26) In a voluntary settlement, one group of creditors having claims of $1,000,000 will
be immediately paid 95 cents on a dollar. The remainder of the creditors will postpone
payment an additional 60 days. This is an example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation