1) The claims of the equityholders on a firm’s assets have priority over the claims of
creditors because the equityholders are the owners of the firm.
2) The interest rate on a line of credit is normally stated as a fixed rate-the prime rate.
3) In computing the weighted average cost of capital, the historical weights are either
book value or market value weights based on actual capital structure proportions.
4) By purchasing shares through a firm’s dividend reinvestment plan (or DRIP),
shareholders typically can acquire shares at a value that is above the prevailing market
price.
5) Depreciation deductions, like any other business expenses, reduce the income that a
firm reports on its income statement.
6) Since the percentage-of-sales method assumes that all the form’s costs and expenses
are variable, it tends to understate profits when sales are increasing and overstate profits
when sales are decreasing.
7) In applying risk-adjusted discount rates to project selection, projects falling above
the SML would have a negative NPV and those falling below the SML would have a
positive NPV.
8) When more units of a foreign currency are required to buy one dollar, the currency is
said to have appreciated with respect to the dollar.
9) An operating lease is often referred as a capital lease.
10) Total security risk is attributable to firm-specific events, such as strikes, lawsuits,
regulatory actions, or the loss of a key account.
11) In capital budgeting, the preferred approaches in assessing whether a project is
acceptable are those that integrate time value procedures, risk and return considerations,
and valuation concepts.
12) The annualized net present value approach used to evaluate projects with unequal
lives converts the net present value of unequal-lived, mutually exclusive projects into
an equivalent annual amount.
13) Retained earnings represent the cumulative total of all earnings, net of dividends,
that have been retained and reinvested in the firm since its inception.
14) If a firm has unlimited funds to invest in capital assets, all independent projects that
meet its minimum investment criteria should be implemented.
15) Present and prospective shareholders are mainly concerned with a firm’s ________.
A) risk and return
B) profitability
C) leverage
D) liquidity
16) Equity capital can be raised through ________.
A) the money market
B) the NYSE bond market
C) the stock market
D) a private placement with an insurance company
17) ________ float is the delay between the receipt of a check and the actual deposit of
it into a firm’s account.
A) Disbursement
B) Deposit
C) Processing
D) Clearing
18) A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total
variable costs of $1,275,000. The firm’s operating breakeven point in dollars is
________.
A) $150,000
B) $176,471
C) $1,000,000
D) $1,425,000
19) MACRS RATE
Under MACRS, an asset which originally cost $100,000 is being depreciated using a
10-year normal recovery period. The depreciation expense in year 5 is ________.
A) $10,000
B) $12,000
C) $21,000
D) $ 9,000
20) ________ is the risk of being unable to cover financial obligations of a firm.
A) Systematic risk
B) Business risk
C) Financial risk
D) Diversifiable risk
21) Which of the following is true of a primary market?
A) It is an organized market in which all financial derivatives are traded
B) It is regulated by The Sarbanes-Oxley Act
C) It is a market where smaller, unlisted securities are traded
D) It is the only market in which the issuer is directly involved in the transaction
22) Which of the following is usually a right of a preferred stockholder?
A) right to convert shares to common stock on demand
B) preemptive right to participate in the issuance of new common shares
C) right to receive dividend payments before any dividends are paid to common
stockholders
D) right to sue company in bankruptcy proceedings if promised preferred dividends are
not paid
23) A lease under which a lessor acts as an equity participant, supplying only about 20
percent of the cost of the asset, while a lender supplies the balance is called
a(n)________.
A) operating lease
B) leveraged lease
C) sale-leaseback arrangement
D) direct lease
24) Joe Manufacturing uses 2,400 units of a product per year on a continuous basis. The
product carrying costs are $60 per year and ordering costs are $250 per order. It takes
20 days to receive a shipment after an order is placed and the firm requires a safety
stock of 8 days of usage in inventory.
(a)Calculate the economic order quantity (round up to the nearest whole unit.)
(b)Calculate the total cost per year to order and carry this item.
(c)Its supplier has notified Joe that if Joe increases its order quantity by 58 units they
will give it a discount. Calculate the dollar discount that the suppliers will have to give
Joe Manufacturing to result in a net benefit to the company.
25) By concentrating on cash flows within a firm, the financial manager should be able
to ________.
A) prepare tax returns
B) control the share price
C) avoid insolvency
D) maintain public relations
26) Reliable Auto Parts has 5,000 shares of common stock outstanding. The company
also has the following amounts in revenue and expense accounts.
Calculate
(a)gross profits.
(b)operating profits.
(c)net profits before taxes.
(d)net profits after taxes (assume a 40 percent tax rate).
(e)earnings available to common stockholders.
(f)earnings per share.
27) FASB Standard No. 52 mandates that U.S.-based companies must translate their
foreign-currency-denominated assets and liabilities into dollars using the ________.
A) historical rate
B) current rate
C) average rate
D) rate prescribed by the SEC
28) Which of the following is true of current ratio?
A) The more predictable a firm’s cash flows, the higher the acceptable current ratio
B) A higher current ratio indicates a higher return on equity
C) The more predictable a firm’s current ratio, the higher the current liabilities
D) A higher current ratio indicates a greater degree of liquidity
29) A multinational company has two subsidiaries, one in U.K (local currency, Pound
Sterling) and the other in Germany (local currency, Euro). Proforma statements of
operations indicate the following short-term financial needs for each subsidiary (in
equivalent U.S. dollars): U.K: $25 million excess cash to be invested (lent); Germany:
$10 million funds to be raised (borrowed)
The following financial data is also available:
(a)Determine the effective rates of interest for Irish pound and Deutsche mark in both
the Euromarket and the domestic market.
(b)Where should the funds be invested?
(c)Where should the funds be raised?
30) To expand its operation, the International Tools Inc. (ITI) has applied for a
$3,500,000 loan from the International Bank. According to ITI’s financial manager, the
company can only afford a maximum yearly loan payment of $1,000,000. The bank has
offered ITI, 1) a 3-year loan with a 10 percent interest rate, 2) a 4-year loan with a 11
percent interest rate, or 3) a 5-year loan with a 12 percent interest rate.
(a)Compute the loan payment under each option.
(b)Which option should the company choose?
31) The cost of debt financing results from ________.
A) the decreased probability of bankruptcy caused by debt obligations
B) the riskreturn trade-off associated with ownership of a firm
C) the costs associated with lenders having less information about a firm’s prospects
than investors and managers
D) the agency costs of the lenders’ monitoring and controlling a firm’s actions