1) A prospectus is another term for a firm’s annual report showing the firm’s prospects
for the coming year.
2) Increased collection expenditures should reduce the investment in accounts
receivable and bad debt expenses, increasing profits.
3) Historical weights are the present value of market price based on the actual historical
capital structure proportions.
4) Because managing inventory is just like managing any other investment, decisions
about the level of inventory should be guided by the effect of inventory levels on sales.
5) A firm that wants to expand or extend its operations in existing or new product areas
may avoid many of the risks associated with the design, manufacture, and sale of
additional or new product and remove a potential competitor by acquiring a suitable
going concern.
6) The bird-in-the-hand argument espousing the importance of dividends or dividend
relevance suggests that investors view current dividends as less risky than future
dividends or capital gains.
7) Holding all other factors constant, a firm that is subject to a greater level of business
risk should employ more operating leverage than an otherwise equivalent firm that is
subject to a lesser level of business risk.
8) Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving
up the cash discount, assuming payment would be made on the last day of the credit
period, would be ________. If the firm were able to stretch its accounts payable to 60
days without damaging its credit rating, the cost of giving up the cash discount would
only be ________.
A) 72.99%; 18.81%
B) 72.99%; 18.25%
C) 75.25%; 21.90%
D) 75.26%; 25.09%
9) Which of the following is a motive for using convertible securities in a firm’s
financing mix?
A) a form of long-term financing
B) opportunity bondholders to share in the firm’s future success
C) a method of raising permanent cheap funds for long time
D) an eventual shift in the capital structure to a more levered position
10) Which of the following is one of the five C’s of credit?
A) coordination
B) cost
C) character
D) control
11) ________ are popular vehicle used to finance mergers and takeovers.
A) Income bonds
B) Junk bonds
C) Floating rate bonds
D) Convertible debentures
12) Which of the following assists companies in raising capital, advise firms on major
transactions such as mergers or financial restructuring, and engage in trading and
market making activities?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
13) Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 3 percent cash discount for payment within 10 days. The
firm’s current average collection period is 90 days, sales are 400 films per year, selling
price is $25,000 per film, variable cost per film is $18,750, and the average cost per
film is $21,000. The firm expects that the change in credit terms will result in a minor
increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm’s required return on equal-risk investments is 20
percent. (Assume a 360-day year.)
What is the cost of marginal investment in accounts receivable under the proposed
plan? (See Table 15.7)
A) $313,460
B) $276,500
C) $246,875
D) $368,314
14) At year end, Tangshan China Company balance sheet showed total assets of $60
million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares
of common stock outstanding. If Tangshan could sell its assets for $52.5 million,
Tangshan’s liquidation value per share of common stock is ________.
A) $15
B) $7.50
C) $52.50
D) $75
15) In defending against hostile takeover attempts, a company will approve
anti-takeover amendments to the corporate charter that constrain the firm’s ability to
transfer managerial control of the firm as a result of a merger. This is called the
________ strategy.
A) golden parachute
B) greenmail
C) poison pill
D) shark repellent
16) How much would Sophie have in her account at the end of 10 years if she deposit
$2,000 into the account today if she earned 8 percent interest and interest is
compounded continuously?
A) $4,317
B) $4,134
C) $4,451
D) $4,521
17) Compared to a line of credit, a revolving credit agreement will be ________ for a
firm.
A) a lower cost, higher risk method of short-term borrowing
B) a lower cost, lower risk method of short-term borrowing
C) a higher cost, higher risk method of short-term borrowing
D) a higher cost, lower risk method of short-term borrowing
18) A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are
independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with
their returns.
A ranking of the projects on the basis of their returns from the best to the worst
according to their acceptability to the firm would be ________.
A) 4, 1, 2 or 5, and 3
B) 4, 1, and 2
C) 3, 2 or 5, 1, and 4
D) 4, 1, 5, and 3
19) Which of the following is a cash outflow?
A) an increase in accounts payable
B) a decrease in notes receivable
C) an increase in accounts receivable
D) an increase in accrued liabilities