1) The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This
results in a real rate of interest of 4% on the bond.
2) In case of unequal-lived, mutually exclusive projects, the use of net present value to
select the better project results in an incorrect decision.
3) Factoring accounts receivable is not a form of secured short-term borrowing. It
entails the sale of accounts receivable at a discount to obtain the required short-term
funds.
4) A firm’s capital structure can significantly affect the firm’s value by affecting its risk
and return.
5) Common stock dividends paid to stockholders is equal to the earnings available for
common stockholders divided by the number of shares of common stock outstanding.
6) A firm with limited funds for investment in capital assets must ration those funds by
allocating them to projects that will maximize share value.
7) By calling the additional dividend an extra dividend, a firm avoids setting
expectations that the dividend increase will be permanent.
8) The accept-reject approach involves the ranking of capital expenditure projects on
the basis of some predetermined measure, such as the rate of return.
9) Renewal options are provisions normally included in an operating lease that grant the
lessee the right to re-lease assets at the expiration of the lease.
10) Call options are sold with the expectation that the market price of the underlying
security will fall while put options are sold with the expectation that the market price of
the underlying security will rise.
11) Contingent securities such as common stocks and bonds affect the reporting of a
firm’s earnings per share (EPS).
12) In U.S., during the past 75 years, on an average the return on large-company stocks
has exceeded the return on small-company stocks.
13) The basic inputs to an effective financial analysis are the firm’s income statement
and the balance sheet.
14) The tax liability of a corporation with ordinary income of $1,500,000 is ________.
Range of taxable incomeMarginal rate
$ 0to$50,00015%
50,000 to 75,00025
75,000 to 100,00034
100,000 to 335,00039
335,000to10,000,00034
10,000,000 to15,000,00035
A) $498,250
B) $510,000
C) $585,000
D) $690,000
15) MNCs have lower long-term financing costs in international capital markets than in
domestic markets because ________.
A) the cost of equity is less than the cost of debt in international capital markets
B) they have access to the international bond and equity markets
C) the cost of equity is more than the cost of debt in international capital markets
D) the international capital markets have less volatility and hence low risk
16) The value of a bond is the present value of the ________.
A) dividends and maturity value
B) interest and dividend payments
C) maturity value
D) interest payments and maturity value
17) The basic strategies for determining the appropriate financing mix are ________.
A) seasonal and permanent funding
B) short-term and long-term financing
C) aggressive and conservative funding
D) current and non-current liabilities
18) The tax treatment regarding the sale of existing assets that are sold for their book
value results in ________.
A) an ordinary tax benefit
B) no tax benefit or liability
C) recaptured depreciation taxed as ordinary income
D) a capital gain tax liability and recaptured depreciation taxed as ordinary income
19) A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or
half a year. What is the effective rate of interest on this loan if the interest is paid in
advance?
A) 4.7 percent
B) 9.4 percent
C) 9.9 percent
D) 10.3 percent
20) On ________, the stated interest rate is adjusted periodically within stated limits in
response to changes in specified money or capital market rates.
A) a floating rate bond
B) a zero coupon bond
C) a mortgage bond
D) an equipment trust certificate
21) Julian was given a gold coin originally purchased for $1 by his great-grandfather 50
years ago. Today the coin is worth $450. The rate of return realized on the sale of this
coin is approximately equal to ________.
A) 7.5%
B) 13%
C) 9%
D) 18%
22) Given a financial manager’s preference for faster receipt of cash flows, ________.
A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a
noncash expense
D) the manager is not concerned with depreciable life, because once purchased,
depreciation is considered a sunk cost
23) Which of the following is a measure of profit maximization to shareholders?
A) the timing of returns
B) earnings per share
C) current assets
D) market risk premium
24) A financial manager is interested in the cash inflows and outflows of a firm, rather
than the accounting data, in order to ________.
A) ensure profitability
B) maintain healthy public relations
C) ensure timely payment of taxes
D) maintain an optimum solvency level
25) Current liabilities can be viewed as ________.
A) debts that mature in a period of one year or less
B) liabilities which represent a firm’s long-term financing
C) sources of cash inflows from the operating activities of a firm
D) funds used to finance the noncurrent assets’ portion of a firm
26) The ________ the coefficient of variation, the ________ the risk.
A) lower; lower
B) higher; lower
C) lower; higher
D) more stable; higher
27) A firm has determined its cost of each source of capital and optimal capital
structure, which is composed of the following sources and current market value
proportions:
Other things remaining constant, if the firm were to shift toward a capital structure with
________ the weighted average cost of capital will be higher.
A) 45% long-term debt, 40% common stock, and 15% preferred stock
B) 60% long-term debt, 20% common stock, and 20% preferred stock
C) 20% long-term debt, 60% common stock, and 20% preferred stock
D) 60% long-term debt, 30% common stock, and 10% preferred stock
28) If the net present value of the target company is ________.
A) lesser than zero, the merger is acceptable
B) greater than zero, the merger is acceptable
C) greater than zero, the merger is rejected
D) equal to zero, the merger is acceptable