1) A decrease in bonds payable results in a cash outflow on the statement of cash flows.
2) Maximizing the earnings of the firm is the goal of financial management.
3) Agency theory assumes that corporate managers act to increase the wealth of
corporate shareholders.
4) Conversion premiums are found by subtracting the current stock price from the
bond’s semiannual interest payment.
5) It is difficult to acquire a loan in U.S. dollars outside the United States.
6) Dividends may be relevant because they help resolve uncertainty about the firm and
its future.
7) The lender’s primary concern is whether the borrower’s capacity to generate
receivables is sufficient to liquidate the loan as it comes due.
8) Money markets refer to those markets dealing with short-term securities having a life
of one year or less.
9) A convertible bond has two separate sources of value: the bond investment value and
the bond conversion value.
10) The investments account includes marketable securities.
11) The interest factor for a future value (FVIF) is equal to (1 + i)n.
12) In most cases, asset lives are shorter under MACRS depreciation than they would
be with straight-line depreciation.
13) As the time horizon increases, the standard deviation for each forecast of cash flow
normally increases.
14) The Internet is responsible for many new business models.
15) A $1,000 par value convertible bond has a conversion ratio of 50. The bond
conversion price is $20.
16) Degree of operating leverage should be computed only over a profitable range of
operations.
17) At maturity (Stage IV), the firm will usually pay out about 15-25% of earnings in
dividends.
18) Homebuilding companies, like D.R. Horton Inc., realized significant losses in
2008-2009 .
19) A bondholder may have paper losses as large as 30-40% or more at some point
between the time of issue and redemption.
20) Financial intermediaries help eliminate inefficiencies such as indirect investment by
households.
21) The concept of being risk-averse means
A.for a given situation investors would prefer relative certainty to uncertainty
B.investors would usually prefer investments with high standard deviations and a
greater opportunity for gain
C.that the greater the risk, the higher the expected return must be
D.that for a given situation, investors would prefer relative certainty to uncertainty, and
the greater the risk, the higher the expected return must be
22) A call provision, which allows the corporation to force an early maturity on a bond
issue, usually contains all but which of the following characteristics?
A.Most bonds must be outstanding at least five years before being called
B.After the call date, the call premium tends to decline over time
C.The provision typically calls for debt conversion into common stock
D.The corporation will pay a premium over par for the bonds
23) Firm X needs to net $12,800,000 from the sale of common stock. Its investment
banker has informed the firm that the retail price will be $22 per share, and that the firm
will receive $18.50 per share. Out-of-pocket and underwriting costs are $250,000. How
many shares must be sold to achieve the desired net to the issuing firm?
A.581,526
B.654,545
C.659,091
D.705,406
24) Mountain Home Systems Inc. is a well-known and reputable supplier of integrated
circuits to manufacturers of telecommunications devices. The firm is currently debating
whether to expand its sales to car-telephone manufacturers. While the firm expects an
extra $3 million in sales if it enters this market, it also knows that 15% of its sales will
ultimately be uncollectible. In addition, collection costs will be 3% on all new sales,
and the firm’s production and selling costs are 80% of sales. Mountain Home’s tax rate
is 30%.
a) Calculate Mountain Home’s additional net income from the new sales.
b) If Mountain Home can turn its receivables over four times per year, what will its
additional investment in accounts receivable be and what will the firm earn as an
after-tax return on that investment?
c) Mountain Home management requires that any new project earn a minimum of 10%
return on investment. Should the firm enter the car-telephone manufacturer market?
25) In using the internal rate of return method, it is assumed that cash flows can be
reinvested at
A.the cost of equity
B.the cost of capital
C.the internal rate of return
D.the prevailing interest rate
26) The _________ assumes returns are reinvested at the cost of capital.
A.payback method
B.internal rate of return method
C.net present value method
D.capital rationing procedure
27) A high DOL means
A.there are high labor costs
B.there is high debt
C.there is a large amount of equity
D.there are high fixed costs
28) Capital markets do not include which of the following securities?
A.Common stock
B.Commercial paper
C.Government bonds
D.Preferred stock
29) You travel to Cancun Mexico for spring break. The current exchange rate is 13
pesos to the dollar. When you arrive, you convert $1,000 into how many pesos?
A.1,300
B.80
C.13,000
D.Not enough information is given to determine an answer
30) Which of the following is not a very common feature of preferred stock?
A.Cumulative dividends
B.Voting rights
C.Call feature
D.The conversion feature
31) Which of the following is not a factor influencing the selection of a marketable
security?
A.Yield
B.Maturity
C.Float
D.Safety
32) Davison Toaster Corp. sells its products for $150 per unit. It has the following
costs:
The break-even point is
A.less than 3,000 units
B.3,000 units
C.more than 3,500 units
D.Not enough information has been provided to determine the break-even point
33) Conversion price is usually set _______ the prevailing market price of the common
stock at the time the bond issue is sold.
A.at
B.below
C.above
D.one half
34) The marginal principle of retained earnings means that each potential project to be
financed by retained earnings must
A.provide a higher rate of return than the stockholders can achieve after paying taxes on
the distributed dividends
B.yield a return equal to or greater than the marginal cost of capital
C.provide enough return to pay the corporation’s marginal tax rate
D.have an internal rate of return greater than the corporate growth rate of dividends
35) Companies that are mostly influenced by seasonal sales have to make a choice
between
A.level production and inventory buildup
B.seasonal production and an uneven workforce
C.a stable workforce and a fluctuating workforce
D.All of the options
36) Which of the following yield curves would be characteristic during a period of high
economic growth?
A.Upward sloping
B.Downward sloping
C.Horizontal
D.Humped
37) Simulation models allow the planner to
A.reduce the standard deviations of projects
B.test possible changes in each variable
C.deal with the uncertainty in forecasting outcomes
D.test possible changes in each variable and deal with the uncertainty in forecasting
outcomes
38) Which of the following is NOT a potential benefit of a merger?
A.An improved financing posture
B.A portfolio effect
C.Dilution of earnings per share
D.A tax loss carryforward
39) The value of a country’s currency may increase by
A.continuous excessive government spending
B.a stock market rally in that country
C.an increase in that country’s money supply
D.More than one of the options
40) The price of preferred stock may react strongly to a change in Kp because
A.preferred stock may be cumulative
B.preferred stock dividends have to be paid before common stock dividends
C.there is no maturity date
D.corporate recipients of preferred stock dividends may receive a partial tax exemption
41) When global capital markets collectively react to international events, like Russia’s
default on its sovereign debt, it is common to find
A.that there is no impact on multinational companies’ ability to raise capital
B.an impact on the ability to raise capital
C.that Wall Street firms are so diversified that they are not affected by this event
D.All of these options are true
42) A factory that relies on highly technical machinery may choose to reduce its overall
leverage position by
A.selling its machinery
B.increasing its accounts receivable
C.utilizing a higher level of equity
D.decreasing their variable costs per unit
43) A conservatively financed firm would
A.use long-term financing for all fixed assets and short-term financing for all other
assets
B.finance a portion of permanent assets and short-term assets with short-term debt
C.use equity to finance fixed assets, use long-term debt to finance permanent assets,
and use short-term debt to finance fluctuating current assets
D.use long-term financing for permanent current assets, fixed assets, and a portion of
the short-term fluctuating assets, and use short-term financing for all other short-term
assets
44) One of the first considerations in cash management is
A.to have as much cash as possible on hand
B.synchronization of cash inflows and cash outflows
C.profitability
D.to put any excess cash into accounts receivable
45) A firm has beginning inventory of 450 units at a cost of $10 each. Production during
the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods
sold (assume FIFO)?
A.$7,500
B.$8,000
C.$7,900
D.$8,100
46) GS Cookie Co. forecasts cash receipts for January and February of $18,000 and
$20,000, respectively. Cash Payments of $6,000 and $8,000 are expected in these two
months. GS Cookie’s cash balance at the beginning of January was $5,000, a level that
it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance
outstanding on its line of credit at the local bank. Based on its cash budget, how much
of the line of credit can GS Cookie repay in January and February?
A.$15,000
B.$9,000
C.$4,000
D.None. GS Cookie must increase its borrowings
47) Stock valuation models are dependent upon
A.expected dividends, future dividend growth, and an appropriate discount rate
B.past dividends, flotation costs, and bond yields
C.historical dividends, historical growth, and an appropriate discount rate
D.All of these options
48) Which of the following statements about secondary offerings is false?
A.Secondary offerings may occur when holders of large blocks of stock wish to sell too
many shares for normal channels to handle
B.Secondary offerings occur after an IPO
C.Secondary offerings occur when an investment banker underwrites the sale of stock
for existing stockholders, rather than for the company
D.There is a trend away from the use of secondary offerings
49) Which of the following is considered an advantage (for the corporation) of going
public?
A.The president becomes more of a “public relations person”
B.Extensive and time-consuming reporting requirements
C.Increased liquidity for the corporation’s shareholders
D.The cost of flotation
50) Which of the following statements about the “payback method” is true?
A.The payback method considers cash flows after the payback has been reached
B.The payback method does not consider the time value of money
C.The payback method uses discounted cash-flow techniques
D.The payback method generally leads to the same decision as other investment
selection methods
51) Use of the economic order quantity
A.determines the reorder point
B.provides the lowest overall inventory costs
C.determines the safety stock
D.All of the options
52) The prime rate
A.is the rate a bank charges its risky customers
B.has been quite volatile during the past two decades, moving several percentage points
in a 12-month period
C.is usually lower than Treasury bill rates
D.None of these options
53) The internal rate of return assumes that funds are reinvested at the
A.cost of capital
B.yield on the investment
C.minimal acceptable rate to the corporation
D.yield to maturity
54) Which stock exchange is considered the most liquid?
A.NASDAQ
B.AMEX
C.CBOT
D.NYSE
55) Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a
two-step buyout. Garfunkel has 1,500,000 shares of common stock currently
outstanding, and the market price is currently at $25 per share. The first step of the
buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28
per share. The second step would be to exchange each remaining share of Garfunkel
common stock for $5 in cash and a newly issued share of Simon Manufacturing
convertible preferred stock, valued at $31.00 per share.
Simon Manufacturing’s investment banker has suggested, as an alternative, a
single-stage buyout at $32.50 per share for all of Garfunkel’s common stock.
a) What is the total cost of the two-step buyout?
b) What is the total cost of the single-step proposal?
c) If it wants to minimize the total cost of the acquisition, what should Simon
Manufacturing do?
56) If average daily remittances are $6 million, and “extended disbursement float” adds
two days to the disbursement schedule, how much should the firm be willing to pay for
a cash management system if the firm earns 7% on excess funds?
A.$500,000
B.$1,500,000
C.$0
D.$840,000
57)
Refer to the figure above. What is Megaframe Computer’s total asset turnover?
A.4.50x
B.3.6x
C.2x
D.1.94x
58) Which of the following is a characteristic of leveraged buyouts?
A.Buyouts are usually financed by debt
B.Some corporate assets are often sold after the buy-out is completed
C.Funds for the buy-out are raised through securities markets
D.All the options are characteristics
59) A rights offer made to existing shareholders with the sole purpose of making it more
difficult for another firm to acquire the company is called
A.a preemptive right
B.a poison pill
C.ex-rights
D.rights-on