1) A sophisticated capital budgeting technique that can be computed by solving for the
discount rate that equates the present value of a project’s inflows to the present value of
its outflows is called internal rate of return.
2) A company’s bonds will experience more trading activity (in terms of the number of
bonds traded on a given day) compared to its stock.
3) The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk
and return.
4) Business firms are permitted to systematically charge a portion of the market value
of fixed assets as depreciation against annual revenues.
5) The value of a bond that pays semiannual interest is greater than that on an otherwise
equivalent annual coupon interest paying bond.
6) The goal of working capital management is to ________.
A) achieve a balance between short-term and long-term liabilities so that they add to the
achievement of a firm’s overall goals
B) achieve a balance between a firm’s non-current assets and non-current liabilities
C) achieve a balance between profitability and risk that contributes positively to a firm’s
value
D) achieve a balance between short-term and long-term assets so that they add to the
achievement of a firm’s overall goals
7) Net working capital is defined as ________.
A) total assets minus total liabilities
B) total liabilities minus total assets
C) current liabilities minus current assets
D) current assets minus current liabilities
8) The statement of cash flows ________.
A) shows the financial position of a firm at a given point of time
B) summarizes all the purchase and sale of fixed assets and raw materials
C) provides insight into a firm’s operating, investment, and financing cash flows
D) classifies a firm’s cash flows as operating, investing, financing, and other activities
9) The ________ is a weighted average of the cost of funds which reflects the
interrelationship of financing decisions.
A) internal rate of return
B) sunk cost
C) cost of capital
D) risk-free rate
10) When the required return is constant and equal to the coupon rate, the price of a
bond as it approaches its maturity date will ________.
A) remain at par
B) increase
C) decrease
D) change depending on whether it is a discount or premium bond
11) Which of the following is true of stakeholders?
A) They are the owners of a firm
B) They are groups to whom a firm has financial obligations
C) They are groups having a direct economic link to a firm
D) They include only the bondholders, common stockholders, and preferred
stockholders
12) P/E ratio measures the ________.
A) market value of the stock to earnings per share
B) intrinsic value of the stock to earnings per share
C) book value of the stock to earnings per share
D) market price of the stock to retained earnings
13) Tangshan Mining borrowed $100,000 for one year under a revolving credit
agreement that authorized and guaranteed the firm access to $200,000. The revolving
credit agreement had a stated interest rate of 7.5 percent and charged the firm a 1
percent commitment fee on the unused portion of the agreement. Based on this
information, the effective annual interest rate on the loan is ________.
A) 7.5%
B) 8.0%
C) 8.5%
D) 9.0%
14) When the ratio of exchange in a merger is equal to one and both the acquiring and
the target companies have the same premerger earnings per share, the merged firm’s
earnings per share will initially ________.
A) decline
B) remain constant
C) increase
D) drop to zero
15) In the capital asset pricing model, the beta coefficient is a measure of ________.
A) unsystematic risk
B) non-aggregate risk
C) business-specific risk
D) nondiversifiable risk
16) Which of the following is an example of marketable securities?
A) U.S.Treasury bills
B) treasury stock
C) mortgage backed securities
D) loans
17) The present value of $100 to be received 10 years from today, assuming an
opportunity cost of 9 percent, is ________.
A) $236
B) $699
C) $ 42
D) $ 75
18) An annuity with an infinite life is called a(n) ________.
A) perpetuity
B) primia
C) option
D) deep discount
19) Current U.S. tax laws require the separation of financial statements of subsidiaries
and the operating results for some subsidiaries are excluded from the parent entirely for
some countries such as China and India.
20) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table
11.2)
A) $16,800
B) $26,400
C) $38,400
D) $60,000
21) When a firm initiates or increases a cash discount, sales are expected to ________,
the investment in accounts receivable is expected to ________, the bad debt expense is
expected to ________, and the profit per unit is expected to ________.
A) decrease; increase; increase; increase
B) decrease; decrease; increase; increase
C) increase; increase; decrease; decrease
D) increase; decrease; decrease; decrease
22) Cash flows that could be realized from the best alternative use of an owned asset
are called ________.
A) incremental costs
B) lost resale opportunities
C) opportunity costs
D) sunk costs