1) If the risk-free rate decreases due to a shift in government policy, the required return
goes up.
2) Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based
on this information, the effective annual rate of interest on the commercial paper would
be about 10 percent.
3) In general, with an amortized loan, the payment amount remains constant over the
life of the loan, the principal portion of each payment grows over the life of the loan,
and the interest portion of each payment declines over the life of the loan.
4) When a firm initiates or increases a cash discount, the net effect on the accounts
receivable investment is difficult to determine because the nondiscount takers paying
earlier will reduce the accounts receivable investment, while the new customer accounts
will increase this investment.
5) The CAPM is based on an assumed efficient market in which there are many small
investors, each having the same information and expectations with respect to securities;
there are no restrictions on investment, no taxes, and no transactions costs; and all
investors are rational, view securities similarly, and are risk-averse, preferring higher
returns and lower risk.
6) The primary motive for capital expenditures is to refurbish fixed assets.
7) The par value on a common stock is used as a basis for determining its fixed
dividend.
8) An increase in accounts receivable turnover due to an increase in collection efforts
will decrease a firm’s marginal investment in accounts receivable.
9) To achieve the goal of profit maximization for each alternative being considered, a
financial manager would select the one that is expected to result in the highest return.
10) For a risk-seeking manager, no change in return would be required for an increase
in risk.
11) In a bond indenture, subordination is the stipulation that subsequent creditors agree
to wait until all claims of the senior debt are satisfied.
12) Average payment period can be calculated as accounts payable divided by average
purchases per day.
13) Behavioral approaches for dealing with risk include scenario analysis and
simulation.
14) For conventional projects, both NPV and IRR techniques will always generate the
same accept-reject decision.
15) In case of an overhanging issue, if a firm were to call the issue, the bondholders
would accept the call price rather than converting their bonds.
16) If a firm increases its current assets relative to total assets, ________.
A) it increases return and reduces risk
B) it increases return and increases risk
C) it reduces return and reduces risk
D) it reduces return and increases risk
17) An advantage of a convertible security is that it provides deferred common stock
financing. The purpose of deferring the sale of common stock is to ________.
A) increase the leverage of the firm
B) dilute the ownership interest
C) minimize dilution in earnings per share
D) time the sale of common stock when the price per share is increasing
18) Which of the following capital budgeting techniques ignores the time value of
money?
A) payback period approach
B) net present value
C) internal rate of return
D) profitability index
19) A significant portion of the return on a zero coupon bond is in the form of
________.
A) interest and gain in value
B) interest
C) gain in value
D) tax reduction
20) Gordon and Lintner, recognizing that dividends affect stock prices, suggest that
positive effects of dividend increases are attributable ________.
A) directly to the dividend policy
B) directly to the optimal capital structure
C) not to the informational content but to the consistency in the payment of dividends
D) to the informational content of the dividends with respect to future earnings
21) The preemptive right gives shareholders the right ________.
A) to caste one vote for each share owned at the annual meeting of the company
B) to give up their vote to another party if they do not attend the annual meeting
C) to maintain their proportionate ownership in the corporation when new common
stock is issued
D) to sell their share of stock at a premium in the event of liquidation
22) The inexpensive nature of long-term debt in a firm’s capital structure is due to the
fact that ________.
A) the equity holders are the true owners of the firm
B) equity capital has a fixed return
C) creditors have a higher position in the priority of claims
D) dividend payments are tax-deductible
23) The ________ feature allows bondholders to change each bond into stated number
of shares of stock.
A) call
B) conversion
C) put
D) swap
24) In order to recognize the interrelationship between financing and investments, a
firm should use ________ when evaluating an investment.
A) the least costly source of financing
B) the most costly source of financing
C) the weighted average cost of all financing sources
D) the current opportunity cost
25) A type of lease in which the lessor acquires or purchases the asset in order to lease
to a given lessee is known as ________.
A) a mortgage
B) a direct lease
C) a sale-leaseback arrangement
D) a leveraged lease
26) ________ bonds are characterized by interest payments that are required only when
earnings are available.
A) Floating rate
B) Income
C) Mortgage
D) Junk