1) The cash conversion cycle of a firm is the length of time from the beginning of the
production
process to the collection of cash from the sale of finished products.
2) A bond will sell at a premium when its required return rises above its coupon interest
rate.
3) Assuming that economic conditions remain stable, any management action that
would cause current and prospective stockholders to raise their dividend expectations
should decrease a firm’s value.
4) A firm’s free cash flow (FCF) equals the sum of operating cash flows, financing cash
flows, and investing cash flows.
5) The CAPM uses standard deviation to relate an asset’s risk relative to the market to
the asset’s required return.
6) Subordination means that subsequent creditors agree to wait until all claims of the
senior debt are satisfied.
7) The possibility that the issuer of a bond will not pay the contractual interest or
principal payments as scheduled is called maturity risk.
8) A leveraged lease is a lease under which the lessee sells an asset for cash to a
prospective lessor and then leases back the same asset, making fixed periodic payments
for its use.
9) A given change in inflationary expectations will be fully reflected in a corresponding
change in the returns of all assets and will be reflected graphically in a parallel shift of
the SML.
10) Operating leverage may be defined as the potential use of fixed operating costs to
magnify the effects of changes in sales on a firm’s earnings before interest and taxes
(EBIT).
11) The operating cycle is the recurring transition of a firm’s working capital from cash
to inventories and inventories to receivables and back to cash.
12) The repurchase of shares reduces the number of outstanding shares.
13) A shift toward more fixed costs increases business risk, which in turn causes
earnings before interest and taxes to increase by less for a given increase in sales.
14) One of the major reasons for not attaching a warrant is that investors require the
issuing firm to pay a higher interest rate if a warrant is attached than if it is not.
15) At the quarterly meeting of Tangshan Mining Corporation, held on September 10th,
the directors declared a $1.00 per share dividend for the firm’s 100,000 shares of
common stock outstanding. The net effect of declaring and paying this dividend would
be to ________.
A) decrease total assets by $100,000 and increase stockholders equity by $100,000
B) decrease total assets by $100,000 and decrease stockholders equity by $100,000
C) increase total assets by $100,000 and increase stockholders equity by $100,000
D) increase total assets by $100,000 and decrease stockholders equity by $100,000
16) A $60,000 outlay for a new machine with a usable life of 15 years is called
________.
A) capital expenditure
B) financing expenditure
C) replacement expenditure
D) operating expenditure
17) Bond indentures include restrictive covenants.These provisions protect the
bondholders against ________.
A) increase in inflation rate
B) increase in borrower’s risk
C) decrease in liquidity risk
D) maturity risk
18) A firm has had the following earnings history over the last five years:
If the firm’s dividend policy was based on a constant payout ratio of 50 percent for all
of the years with earnings over $1.50 per share and a zero payout otherwise, the annual
dividends for 2012 and 2015 were ________.
A) $0.50 and $1.25, respectively
B) $0 and $2.00, respectively
C) $0 and $1.25, respectively
D) $0 and $0.88, respectively
19) A firm has the balance sheet accounts, Common Stock and Paid-in Capital in
Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000
common shares outstanding. If the firm had a par value of $1, the stock originally sold
for ________.
A) $24/share
B) $25/share
C) $26/share
D) $30/share
20) Stock dividends are ________.
A) taxable at a higher level than dividend taxes
B) taxable at a lower level than dividend taxes
C) non taxable
D) are taxable only to the shareholders
21) Because the degree of total leverage is multiplicative and not additive, when a firm
has very high operating leverage it can moderate its total risk by ________.
A) increasing sales
B) using a higher level of financial leverage
C) increasing EBIT
D) using a lower level of financial leverage
22) A firm is considering relaxing credit standards, which will result in annual sales
increasing from $1.5 million to $1.75 million, the cost of annual sales increasing from
$1,000,000 to $1,125,000, and the average collection period increasing from 40 to 55
days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of
sales. The firm’s required return on investments is 20 percent. The firm’s cost of
marginal investment in accounts receivable is ________. (Assume a 360-day year.)
A) $5,556
B) $9,944
C) $12,153
D) $152,778
23) Rational buyers and sellers use their assessment of an asset’s risk and return to
determine its value. Relative to this concept, which of the following is true?
A) To a buyer the asset’s value represents the minimum price that he or she would pay
to acquire it
B) To a seller the asset’s value represents the maximum sale price
C) To a buyer the asset’s value represents the maximum price that he or she would pay
to acquire it
D) To a seller the asset’s value represents the price at which he acquired the asset
24) A firm has actual sales in November of $1,000 and projected sales in December and
January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for
cash, collects 40 percent of its sales one month following the sale, and collects the
balance two months following the sale. The firm’s total cash receipts in November is
________.
A) $1,000
B) $100
C) $700
D) $400