1) Holding all other factors constant, a firm that is subject to a greater level of business
risk should employ more financial leverage than an otherwise equivalent firm that is
subject to a lesser level of business risk.
2) Spontaneous liabilities such as accounts payable and notes payable represent a
source of financing that arise from the normal course of business.
3) A sole proprietor has unlimited liability; his or her total investment in the business,
but not his or her personal assets, can be taken to satisfy creditors.
4) The Securities Act of 1933 focuses on regulating the sale of securities in the primary
market, whereas the 1934 Act deals with the regulations governing the transactions in
the secondary market.
5) As a bond approaches maturity, the price of the bond will approach its par value
until, the bond is worth its face value at maturity.
6) Average age of inventory can be calculated as 365 divided by inventory turnover.
7) Micro political risk is the risk faced by all foreign firms in a host country related to
political change, revolution, and the adoption of new policies by the government of host
country.
8) A firm has an outstanding bond with a $1,000 par value that is convertible into 50
shares of common stock. The bond’s conversion ratio is ________.
A) 20
B) 25
C) 50
D) 100
9) 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 net fixed assets amount is ________. (See Table 4.5)
A) $500,000
B) $575,000
C) $600,000
D) $650,000
10) Which of the following increases the chances of business failures?
A) increasing provision for doubtful accounts
B) current ratio of 2:1
C) liabilities that exceed market value of assets
D) book value of assets that exceed liabilities
11) In theory, a firm should maintain financial leverage consistent with a capital
structure that ________.
A) meets the industry standards
B) meets the investor expectations
C) maximizes the owner’s wealth
D) maximizes dividends
12) Generally the least expensive source of long-term capital is ________.
A) retained earnings
B) preferred stock
C) long-term debt
D) common stock
13) A firm has determined its cost of each source of capital and optimal capital
structure, which is composed of the following sources and target market value
proportions:
The weighted average cost of capital is ________.
A) 6 percent
B) 10.7 percent
C) 11 percent
D) 15 percent
14) Which of the following proposed projects should be accepted for the upcoming year
since only $6 million is available for the next year’s capital budget. What is the total
NPV of the projects that should be accepted?
A) A, B, & F; total cost = $5.5 million; Total NPV = $1.57
B) F, B, & D; total cost = $6 million; Total NPV = $1.72
C) E, F, & D; total cost = $5.5 million; Total NPV = $1.45
D) A, E, & F; total cost = $5 million; Total NPV = $1.3
15) Higher financial leverage causes ________ to increase more for a given increase in
________.
A) EBIT; sales
B) EPS; sales
C) EPS; EBIT
D) EBIT; EPS
16) If expected return is less than required return on an asset, rational investors will
________.
A) buy the asset, which will drive the price up and cause expected return to reach the
level of the required return
B) sell the asset, which will drive the price down and cause the expected return to reach
the level of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach
the level of the required return
D) buy the asset, since price is expected to increase
17) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par
value and an 8 percent annual dividend. The firm also has 5,000 shares of common
stock outstanding. If the stock is cumulative and the board of directors has passed the
preferred dividend for the prior two years, how much must the preferred stockholders
be paid prior to paying dividends to common stockholders at the end of third year?
A) $8,000
B) $16,000
C) $24,000
D) $25,000
18) A firm has the following accounts and financial data for 2014:
The firm’s earnings available to common shareholders for 2014 is ________.
A) -$224.25
B) $195.40
C) $302.40
D) $516.60
19) Which of the following is a fixed cost?
A) inventory
B) rent
C) delivery costs
D) direct labor