1) Regular dividend policy is a dividend policy based on the payment of a certain fixed
percentage of earnings to owners in each dividend period.
2) Because dividends are taxed at the same rate as capital gains under the 2003 Tax Act,
a firm’s strategy of paying low or no dividends primarily offers tax advantages to
wealthy stockholders through tax deferral.
3) Dilution of ownership occurs when a new stock issue results in each present
stockholder having a larger number of shares and, thus, a claim to a larger part of the
firm’s earnings than previously.
4) The creation of international joint ventures has increased significantly beginning in
the 1980s.
5) Stock purchase warrants are instruments that give their holder the right to purchase a
certain number of shares of the firm’s common stock at the market price over a certain
period of time.
6) The risk of a portfolio containing international stocks generally does not contain less
nondiversifiable risk than one that contains only domestic stocks.
7) A poison pill is a takeover defense in which a target firm finds an acquirer more to its
liking than the initial hostile acquirer and prompts the two to compete to take over the
firm.
8) Nominal rate of interest is equal to the sum of the real rate of interest plus an
inflation premium plus a risk premium.
9) MACRS RATE
An asset was purchased three years ago for $100,000 and can be sold for $40,000 today.
The asset has been depreciated using the MACRS 5-year recovery period and the firm
pays 40 percent taxes on both ordinary income and capital gain.
(a)Compute recaptured depreciation and capital gain (loss), if any.
(b)Find the firm’s tax liability.
10) The key variables in the owner wealth maximization process are ________.
A) market risk premium and risk
B) cash flows and risk
C) risk-free rate and share price
D) total assets and risk
11) The three basic types of leverage are ________.
A) operating, production, and financial
B) operating, production, and total
C) production, financial, and total
D) operating, financial, and total
12) ________ generally reflect(s) the anticipated financial impact of planned long-term
actions.
A) A cash budget
B) Strategic financial plans
C) Operating financial plans
D) A pro forma income statement
13) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table
11.2)
A) $21,000
B) $42,000
C) $47,850
D) $50,850
14) The reason why maximizing share value and maximizing EPS do not give the same
optimal capital structure is because ________.
A) EPS maximization does not consider risk
B) share value maximization does not consider risk
C) EPS maximization considers cash flows
D) EPS maximization does consider risk
15) A(n) ________ replaces the existing operating management of an insolvent firm
with a selected creditor committee.
A) composition
B) creditor control
C) extension
D) liquidation
16) As a key participant in financial transactions, individuals are ________.
A) net demanders of funds because they save more money than they borrow
B) net users of funds because they save less money than they borrow
C) net suppliers of funds because they save more money than they borrow
D) net purchasers of funds because they save more money than they borrow
17) The cash flows from operating activities section of the statement of cash flows
includes ________.
A) principal received
B) cost of raw materials
C) dividends paid
D) stock repurchases
18) Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal
annual end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on
his investments, how much must he deposit at the end of each year?
A) $ 14,900
B) $ 50,000
C) $117,453
D) $ 17,460
19) Theory and empirical evidence indicate that the capital structures of multinational
companies ________.
A) are basically the same as those of domestic firms
B) differ, but all multinationals are similar no matter the domicile country
C) not only differ from domestic firms, but also differ based upon the country in which
they are domiciled
D) differ only because of their operating structure and the country in which they are
domiciled has no impact on capital structure
20) Champion Breweries must choose between two asset purchases. The annual rate of
return and related probabilities given below summarize the firm’s analysis.
For each asset, compute
(a)the expected rate of return.
(b)the standard deviation of the expected return.
(c)the coefficient of variation of the return.
(d)Which asset should Champion select?
21) If a firm’s fixed operating costs decrease, the firm’s ________.
A) operating breakeven point will decrease
B) operating breakeven point will increase
C) sale price per unit will decrease
D) sale price per unit will increase
22) Table 8.3
Consider the following two securities X and Y.
Using the data from Table 8.3, what is the portfolio expected return and the portfolio
beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A) 12.5%, 0.975
B) 12.5%, 1.975
C) 15.0%, 0.975
D) 15.0%, 1.975
23) Which of the following is true of long-term funds?
A) They provide an easy way to reduce financing costs because they are relatively
cheaper than short-term funds
B) They are a type of investment fund which invests in money market investments of
high quality and low risk
C) They are the sources that supply the financing necessary to support a firm’s capital
budgeting activities
D) They are the funds available to a business on the basis of inventory held and require
detailed inventory tracking