1) In CAPM, the total risk is defined as the sum of nondiversifiable and diversifiable
risk.
2) Federal agency issues are low-risk securities issued by government agencies but not
guaranteed by the U.S. Treasury.
3) Target weights are either book value or market value weights based on actual
historical capital structure proportions.
4) Contrary to convertibles, warrants provide for the injection of additional equity
capital into a firm immediately.
5) One of the key attributes that makes a firm a good candidate for an LBO is that it has
a relatively low level of debt and a high level of liquid assets that could be used as loan
collateral.
6) The cost of equity is greater than the cost of debt and increases with increasing
financial leverage, but generally less rapidly than the cost of debt.
7) By increasing collection expenditures, a firm can decrease bad debt losses up to a
point, beyond which bad debts cannot be economically reduced.
8) The treasurer typically manages a firm’s cash, investing surplus funds when available
and securing outside financing when needed.
9) The weighted average cost of capital refers to the cost of capital required for one
additional dollar of financing.
10) The cost of capital of each source of financing is the after-tax cost of obtaining the
financing using the historically based cost reflected by the existing financing on the
firm’s books.
11) The weighted average cost of capital represents the annual before-tax percentage
cost of the debt.
12) The key input to the short-term financial planning process is ________.
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
13) A yield curve that reflects relatively similar borrowing costs for both short-term and
long-term loans is called as ________.
A) normal yield curve
B) inverted yield curve
C) flat yield curve
D) lognormal curve
14) Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year
ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest
expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of
$150,000 during 2015. Hennesaw Lumber, Inc.’s income statement for the year ended
December 31, 2014 is shown below. From your preparation of the pro forma income
statement, answer the following multiple choice questions.
The pro forma cost of goods sold for 2015 is ________. (See Table 4.4)
A) $3,500,000
B) $3,750,000
C) $3,825,000
D) $4,000,000
15) Which of the following is the correct order in which corporations generally raise
funds to enhance the wealth of stockholders and to send positive signals to the market?
A) retained earnings, equity, debt
B) retained earnings, debt, equity
C) debt, retained earnings, equity
D) equity, retained earnings, debt
16) The primary economic principle used in managerial finance is ________.
A) purchase power parity
B) asset pricing theory
C) Porter’s theory of five forces
D) marginal cost-benefit analysis
17) Which of the following is true of a common stock?
A) It gives voting rights which permit determination of the amount of dividend
receivable
B) It gives claims on income and assets which are superior to the claims of creditors of
the firm
C) Dividends on common stock are fully tax-deductible
D) There is no fixed dividend payment obligation for the company
18) The market value of a warrant is ________ the theoretical value of the warrant.
A) below
B) equal to
C) above
D) less than or equal to
19) Which of the following strategies will help in minimizing political risk in
international capital budgeting decisions?
A) by hedging the cash flows using currency futures and options
B) structuring the financing of such investments as equity rather than as debt
C) structuring the financing of such investments as debt rather than as equity
D) financing the project, in whole or in part, in domestic currency
20) An investment banker has recommended a $100,000 portfolio containing assets B,
D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be
invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a
beta of 0.5. The beta of the portfolio is ________.
A) 1.25
B) 1.33
C) 1.45
D) 1.85
21) The present value of $200 to be received 10 years from today, assuming an
opportunity cost of 10 percent, is ________.
A) $ 50
B) $200
C) $518
D) $ 77
22) The ________ describes the relationship between nondiversifiable risk and the
required rate of return.
A) EBIT-EPS approach to capital structure
B) supply-demand function for assets
C) capital asset pricing model
D) Gordon model