1) Agents of corporate owners are themselves owners of the firm and have been elected
by all the corporate owners to represent them in decision-making and management of
the firm.
2) Capital markets are for investors who want a safe temporary place to deposit funds
where they can earn interest and for borrowers who have a short-term need for funds.
3) The magnification of risk and return introduced through the use of fixed-cost
financing, such as debt and preferred stock is called financial leverage.
4) The cost of equity for Tangshan Mining would be 18.00 percent if the expected
return on U.S. Treasury Bills is 5.00 percent, the market risk premium is 10.00 percent,
and the firm’s beta is 1.3.
5) If the expected return were above the required return, investors would buy an asset,
driving its price up and its expected return down.
6) The effective rate of interest differs from the nominal rate of interest in that it reflects
the impact of compounding frequency.
7) Future value is the value of a future amount at the present time, found by applying
compound interest over a specified period of time.
8) Since Treasury bills are issued in bearer form, they are considered to be virtually
risk-free.
9) The statement of cash flows allows the financial manager and other interested parties
to analyze a firm’s past and possibly future profitability.
10) Total asset turnover commonly measures the liquidity of a firm’s total assets.
11) When the required return is constant but different from the coupon rate, the price of
a bond as it approaches its maturity date will ________.
A) remain constant
B) increase
C) decrease
D) approach par
12) If a corporate bond is issued with a coupon rate that varies directly with the
required return, the price of the bond will ________.
A) equal the face value
B) be less than the face value
C) be greater than the face value
D) be greater than or less than the face value depending on how interest rates vary
13) A firm’s operating cash flow (OCF) is defined as ________.
A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation
14) Consider the following options data:
(a)Determine the amount of profit or loss associated with each option, ignoring
brokerage fees.
(b)Differentiate a warrant from a right.
15) Commercial paper is issued in multiples of ________.
A) $1,000 or more
B) $10,000 or more
C) $100,000 or more
D) $1,000,000 or more
16) ________ float results from the delay between the time when a customer deducts a
payment from the checking account ledger and the time when the vendor actually
receives the funds in a spendable form.
A) Mail
B) Processing
C) Collection
D) Disbursement
17) Under which of the following legal forms of organization is ownership readily
transferable?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
18) An increase in the Treasury Bill rate ________.
A) has no effect on the required rate of return of a common stock
B) increases the required rate of return of a common stock
C) doubles the required rate of return of a common stock
D) increases the beta of a common stock
19) A(n) ________ in current assets increases net working capital, thereby ________
the risk of insolvency.
A) decrease; increasing
B) increase; increasing
C) increase; reducing
D) decrease; reducing
20) An important aspect of a firm’s reorganization plan is the recapitalization of the
firm’s capital structure. The goal of restructuring a firm’s debt includes ________.
A) decreasing the times interest earned ratio
B) paying off existing debts
C) exchanging equity for debts
D) reducing the fixed-payment obligations
21) A downward-sloping yield curve that indicates generally cheaper long-term
borrowing costs than short-term borrowing costs is called ________.
A) normal yield curve
B) inverted yield curve
C) flat yield curve
D) linear yield curve
22) During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed
assets of $400,000, an increase in net current assets of $100,000, an increase in
spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a
tax rate of 30%. Based on this information, NICO’s free cash flow is ________.
A) -$630,000
B) -$50,000
C) $650,000
D) -$30,000
23) Revolving credit agreements are ________.
A) guaranteed loans that specify the maximum amount that a firm can owe the bank at
any point in time
B) non-guaranteed loans that specify the maximum amount that a firm can owe the
bank at any one time
C) credit arrangements made in cooperation with suppliers that allows a firm to roll
over accounts payable each month
D) short-term, unsecured promissory notes issued by a firm with a high credit standing
24) Which of the following is a reason for a firm for repurchasing its shares?
A) to diminish the shareholder value by increasing the number of shares outstanding
and thereby raising earnings per share
B) to help encourage a friendly takeover by increasing the number of publicly traded
shares
C) to make shares available for stock option plans
D) to make shares available for cash dividends
25) A firm is evaluating two independent projects utilizing the internal rate of return
technique. Project X has an initial investment of $80,000 and cash inflows at the end of
each of the next five years of $25,000. Project Z has an initial investment of $120,000
and cash inflows at the end of each of the next four years of $40,000. The firm should
________.
A) accept both the projects because they have equal IRR
B) accept Project Y because its IRR is higher than Project Z
C) accept Project Z because its IRR is higher than Project X
D) reject both the projects because they have negative IRR
26) The purpose of the restrictive debt covenant that prohibits the sale of accounts
receivable is to ________.
A) assure the lender that additional borrowing is constrained
B) limit the amount of fixed-payment obligations
C) limit the realization of current assets to cash
D) limit the payment of annual cash dividends
27) The stockholders’ annual report must include ________.
A) common-size financial statements
B) an income statement
C) an advance tax statement
D) the margin of safety report
28) ________ consider proposed fixed-asset outlays, research and development
activities, marketing and product development actions, capital structure, and major
sources of financing.
A) Short-term financial plans
B) Long-term financial plans
C) Pro forma statements
D) Cash budgeting