1) The liquidity preference theory suggests that for any given issuer, long-term interest
rates tend to be higher than short-term rates due to the lower liquidity and higher
responsiveness to general interest rate movements of longer-term securities; this causes
the yield curve to be upward-sloping.
2) Any bond rated Aaa through Caa according to Moody’s, would be considered
investment grade debt.
3) Total leverage is concerned with the relationship between a firm’s sales revenue and
its common stock earnings per share.
4) One of the components of a cash conversion cycle is the average collection period.
5) Net profit margin measures the percentage of each sales dollar remaining after all
costs and expenses, including interest, taxes, and common stock dividends, have been
deducted.
6) A public offering is the sale of a new security issuetypically debt or preferred
stockdirectly to an investor or group of investors.
7) One weakness of payback period approach is its failure to recognize cash flows that
occur after the payback period.
8) In general, projects with similar-sized investments and lower cash inflows in the
early years tend to be preferred at higher discount rates.
9) Purchase options are provisions frequently included in both operating and financial
leases that allow the lessee to purchase the leased asset at maturity.
10) Small business investment companies (SBICs) are corporations chartered by the
federal government that can borrow at attractive rates from the U.S. Treasury and use
the funds to make venture capital investments in private companies.
11) The liquidity preference theory suggests that short-term interest rates should be
lower than long-term interest rates.
12) The capital budgeting process consists of four distinct but interrelated steps:
proposal generation, review and analysis, decision making, and termination.
13) National entry control systems are comprehensive rules, regulations, and
immigration policies introduced by xenophobic host governments to regulate inflows of
foreign workers.
14) In computing after-tax operating cash flows, both operating costs and financing
costs must be deducted from any cash inflows received.
15) Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days.
Based on this information, the effective annual rate of interest on the commercial paper
would be ________ (assume 360 days in a year).
A) 6.13%
B) 6.20%
C) 6.32%
D) 6.08%
16) The call privilege is generally not exercised until the conversion value of a security
is ________ the call price.
A) 5 to 10 percent below
B) equal to
C) 10 to 15 percent above
D) 50 percent above
17) A ________ ratio is commonly used to assess owners’ appraisal of the share value.
A) debt
B) price/earnings
C) return on equity
D) return on total assets
18) Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to
prepare a pro forma balance sheet for cash and profit planning purposes for the coming
year ended December 31, 2015. Using the percent-of-sales method and the following
financial data, prepare the pro forma balance sheet in order to answer the following
multiple choice questions.
(a)The firm estimates sales of $1,000,000.
(b)The firm maintains a cash balance of $25,000.
(c)Accounts receivable represents 15 percent of sales.
(d)Inventory represents 35 percent of sales.
(e)A new piece of mining equipment costing $150,000 will be purchased in 2010.
Total depreciation for 2010 will be $75,000.
(f)Accounts payable represents 10 percent of sales.
(g)There will be no change in notes payable, accruals, and common stock.
(h)The firm plans to retire a long term note of $100,000.
(i)Dividends of $45,000 will be paid in 2015.
(j)The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2014
The pro forma current liabilities amount is ________. (See Table 4.5)
A) $400,000
B) $450,000
C) $475,000
D) $500,000
19) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of
$1,500,000, and common stockholders’ investment of $750,000 has a return on equity
of ________.
A) 20 percent
B) 15 percent
C) 3 percent
D) 4 percent
20) Disadvantages of holding companies include ________.
A) high dollar investment
B) acquisition of significantly lesser amount of assets
C) legal responsibility for subsidiaries
D) double taxation
21) ________ are obligations of the U.S. Treasury with common maturities of one to
seven years.
A) Treasury notes
B) Treasury bills
C) Federal agency issues
D) Banker’s acceptances
22) Delaying the payment of accounts payable in order to improve cash management is
known as ________.
A) ACH transfers
B) stretching payables
C) credit scoring
D) lockbox system
23) When a call is made on a convertible security, the holder of the security will most
likely ________.
A) not take any action
B) allow the call to be exercised and accept the call premium if the conversion value is
10% above the call price
C) convert the security into common stock if the conversion value is 10% above the call
price
D) sell the security in the secondary market
24) ________ is a treaty that has governed world trade throughout most of the post
World War II era.
A) NAFTA
B) GATT
C) WTO
D) CAFTA
25) A ________ is normally initiated by a firm that needs funds for operations. Here,
lessors acquire leased assets by purchasing assets already owned by the lessee and
leasing them back.
A) direct lease
B) leveraged lease
C) sale-leaseback
D) mortgage