1) A market risk-return function is a graphical presentation of the discount rates
associated with each level of project risk.
2) It would be correct to define operating cash flow (OCF) as net operating profit after
taxes plus depreciation.
3) The increase in bad debts associated with tightening credit standards raises bad debt
expenses and has a negative impact on profits.
4) A financial institution is an intermediary that channels the savings of individuals,
businesses, and governments into loans or investments.
5) A functional currency is the currency of the host country in which a subsidiary
primarily generates and expends cash and in which its accounts are maintained.
6) With subordinated debentures, payment of interest by a firm is required only when
earnings are available.
7) The Glass-Steagall Act was imposed to allow commercial and investment banks to
combine and work together.
8) Financial risk is the risk to a firm of being unable to cover operating costs.
9) A trust receipt inventory loan is an arrangement in which the lender receives control
of the pledged inventory collateral, which is stored by a designated agent.
10) A detachable stock purchase warrant means that the bondholders may sell the
warrant without selling the security to which it is attached.
11) In a bond indenture, the term ‘security interest” refers to collateral pledged against
the bond.
12) Current ratio provides a firm’s ability to meet its long-term obligations.
13) In comparison to convertibles, the exercise of a warrant shifts the firm’s capital
structure to a less highly levered position.
14) The excess cash balance is the amount available for investment by a firm if the
desired minimum cash balance is less than the period’s ending cash.
15) The lower a bond’s default risk, the higher is the interest rate.
16) Profit maximization as the goal of the firm is not ideal because ________.
A) profits are only accounting measures
B) cash flows are more representative of financial strength
C) profit maximization does not consider risk
D) profits today are less desirable than profits earned in future years
17) From a firm’s point-of-view, which of the following is true of issuance of
convertible bonds?
A) It acts as a permanent source of cheap funds
B) It results in a non-tax-deductible interest payments
C) It is an immediate sale of common stock
D) It decreases financial leverage upon conversion
18) The first step in the capital budgeting process is ________.
A) review and analysis
B) implementation
C) decision making
D) proposal generation
19) Modigliani and Miller argue that when a firm has no acceptable investment
opportunities, it should ________.
A) preserve the funds and not declare dividends
B) distribute the surplus funds to the owners
C) lower its cost of capital
D) retain the funds until an acceptable project arises
20) Corporate ethics policies typically apply to ________ in dealing with ________.
A) employee actions; customers and creditors
B) employee actions; customers, vendors, and regulators
C) management actions; all corporate constituents
D) employee actions; all corporate constituents
21) The Solar Inc. has daily cash receipts of $90,000. A recent analysis of its collections
indicated that customers’ payments were in the mail for an average of 4 days. Once
received,the payments are processed in one and a half days. After payments are
deposited, it takes an average of two and a half days for these receipts to clear the
banking system. If the firm’s opportunity cost is 11%, would it be economically
advisable for the firm to pay an annual fee of $8,000 to reduce collection float by 2
days?
A) Yes, because it would only cost $8000 to save $19,800, netting the company $11,800
B) Yes, because it would only cost $8000 to save $59,400, netting the company $51,400
C) No, because it would cost $8000 to save $880, netting the company -$7,120
D) Yes, because it would only cost $8000 to save $9,900, netting the company $1,900
22) Which of the following explains the general shape of the yield curve of a bond?
A) Expectations theory
B) Perfect market theory
C) Capital asset pricing theory
D) Securities market theory
23) A firm’s credit terms cover ________.
A) credit standards
B) lines of credit
C) cash discount period
D) credit scoring
24) If a pro forma balance sheet dated at the end of May was prepared from the
information presented, the marketable securities would total ________. (See Table 4.3)
A) $9,000
B) $9,500
C) $12,000
D) $16,750
25) Tangshan Mining Company, with a cost of capital of 10 percent, is considering
investing in project A, with an initial investment of $1,000,000. Project A is expected to
provide equal cash inflows over its 15 year useful life. Based on this information, the
breakeven cash inflow for the project is ________.
A) $1,000,000
B) $131,474
C) $100,000
D) $66,667
26) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon
bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive
(ignoring issuance costs) when the bonds are first sold?
A) $11,212
B) $12,393
C) $15,505
D) $18,880