1) Operating leverage is present when a firm has fixed operating costs.
2) The cost of capital is a dynamic concept and it is affected by economic and
firm-specific factors such as business risk and financial risk.
3) The required return can be affected by changes in the risk free rate, even if the risk
premium remains constant.
4) Market ratios only measure the risk.
5) The entire process resulting from a check issue and mail by a payer company to a
payee company (i.e., mail float, processing float, and clearing float) is disbursement
float to the payer company and is collection float to the payee company.
6) In a tender offer share repurchase, a firm announces the price it is willing to pay to
buy back shares and the quantity of shares it wishes to repurchase.
7) An approach for assessing risk that uses a number of possible return estimates to
obtain a sense of the variability among outcomes is called scenario analysis.
8) In an inefficient market, stock prices adjust quickly to new public information.
9) Earnings per share results from dividing earnings available for common stockholders
by the number of shares of common stock authorized.
10) The NPV of a project is the difference between an investment’s net operating profit
after taxes and the cost of funds used to finance the investment, which is found by
multiplying the dollar amount of the funds used to finance the investment by the firm’s
weighted average cost of capital.
11) Tax loss carryforward benefits can be used in mergers.
12) A Eurobond is a bond issued by an international borrower and sold to investors in
countries with currencies other than the country in which the bond is denominated.
13) The turnover of accounts receivable can be calculated by dividing 365 days by
average collection period.
14) A flat yield curve indicates generally cheaper long-term borrowing costs than
short-term borrowing costs.
15) The basic motive for capital expenditure is to ________.
A) expand operations
B) replace current assets
C) renew current assets
D) improve leverage
16) Which of the following is true of efficient-market hypothesis?
A) Securities are typically in disequilibrium, meaning they are fairly priced and their
expected returns are more than their required returns
B) Insider trading scandals have proven that stocks are not fully and fairly priced; as a
result, it would be worthwhile for investors should spend time searching for mispriced
(over- or under-valued) stocks
C) At any point in time, security prices fully reflect all internal information available
about the firm and its securities, and these prices are insensitive to new information
D) Since stocks are fully and fairly priced, it follows that investors should not waste
their time trying to find and capitalize on miss-priced (undervalued or overvalued)
securities
17) A foreign bond is issued by a(n) ________.
A) foreign corporation or government and is denominated in the investor’s home
currency and sold in the investor’s home market
B) corporation or government and is denominated in the investor’s foreign currency and
sold in the foreign market
C) international borrower and sold to investors in countries with currencies other than
the local currency
D) international borrower and sold to investors in countries with currencies in which the
bond is denominated
18) The firm has a negative net cash flow in the month(s) of ________. (See Table 4.3)
A) January, February, and March
B) February and March
C) January and February
D) February
19) The capital impairment restrictions are established to ________.
A) reduce dividends equal to or below the current earnings level
B) constrain the firm to paying dividends which do not require additional borrowing
C) provide sufficient safety to equity holders
D) provide a sufficient equity base to protect creditors’ claims
20) A firm has a cash conversion cycle of 120 days, an average collection period of 25
days, and an average payment period of 50 days. The firm’s average age of inventory is
________ days.
A) 45
B) 95
C) 125
D) 145
21) A risk of the ________ financing strategy is unpredictable interest expense.
A) aggressive
B) conservative
C) permanent
D) seasonal
22) A negative cash conversion cycle ________.
A) means that the operating cycle exceeds the average inventory period
B) means that the average payment period exceeds the operating cycle
C) indicates that a firm is shortening its average payment period and lengthening its
average collection period
D) indicates that a firm is shortening its average age of inventory and average payment
period
23) Relevant cash flows for a project are best described as ________.
A) incidental cash flows
B) incremental cash flows
C) sunk cash flows
D) contingent cash flows
24) Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 3 percent cash discount for payment within 10 days. The
firm’s current average collection period is 90 days, sales are 400 films per year, selling
price is $25,000 per film, variable cost per film is $18,750, and the average cost per
film is $21,000. The firm expects that the change in credit terms will result in a minor
increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm’s required return on equal-risk investments is 20
percent. (Assume a 360-day year.)
What is the firm’s marginal profit contribution from sales under the proposed plan of
initiating the cash discount? (See Table 15.7)
A) $22,500
B) $40,000
C) $62,500
D) $100,000
25) What is the yield to maturity, to the nearest percent, for the following bond: current
price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight
years to maturity?
A) 11 percent
B) 12 percent
C) 13 percent
D) 14 percent
26) Which of the following is true of securities analysts?
A) They raise initial external equity finance privately for firms
B) They are primarily involved in underwriting of securities
C) They find prospective buyers for new stocks or bonds issue
D) They use a variety of models and techniques to value stocks
27) The future value of a $2,000 annuity due deposited at 8 percent compounded
annually for each of the next 10 years is ________.
A) $28,974
B) $31,291
C) $14,494
D) $13,420
28) Which of the following is an example of carrying cost?
A) insurance of goods in transit
B) transportation cost
C) insurance cost
D) cost of inventory
29) A firm with highly unpredictable sales revenue would best choose ________
funding strategy to minimize risk.
A) the aggressive
B) the conservative
C) the trade-off
D) a seasonal
30) The cost of new common stock financing is higher than the cost of retained
earnings due to ________.
A) flotation costs and underpricing
B) flotation costs and overpricing
C) flotation costs and commission costs
D) commission costs and overpricing
31) Federal agency issues ________.
A) are obligations of U.S. treasury
B) generate slightly higher returns than corporate bonds
C) generate slightly higher returns than U.S. Treasury issues
D) don’t have strong secondary market
32) A firm is evaluating a proposal which has an initial investment of $50,000 and has
cash flows of $15,000 per year for five years. The payback period of the project is
________.
A) 1.5 years
B) 2 years
C) 3.3 years
D) 4 years
33) Which of the following is true of international equity markets?
A) In the international equity market, corporations cannot raise capital through IPOs,
instead they can raise capital by trading in the secondary market
B) In the international equity market, corporations can easily manipulate the price of
the shares since it is not regulated by any regulatory bodies
C) In the international equity market, corporations can only sell blocks of shares to
institutional investors from European Union
D) In the international equity market, corporations can sell blocks of shares to investors
in a number of different countries simultaneously