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1) A capital expenditures analyst/manager is responsible for the evaluation and
recommendation of proposed asset investments.
2) Since its objective is to minimize inventory investment, a Just-in-Time (JIT) system
uses no, or very little, safety stocks.
3) Nonmanufacturing firms are more likely to have positive cash conversion cycles;
they generally carry smaller, faster-moving inventories and often sell their products for
cash.
4) Putable bonds give the bondholders an option to sell the bond at a price higher than
par value by the amount of one year interest payment when and if the firm takes
specified actions such as being acquired, acquiring another company, or issuing a large
amount of additional debt.
5) Dividend reinvestment plans (DRIPs) enable stockholders to use dividends received
on a firm's stock to acquire additional shareseven fractional sharesat little or no
transaction (brokerage) cost.
6) Table 9.2
A firm has determined its optimal structure which is composed of the following sources
and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The
dividend expected to be paid at the end of the coming year is $5. Its dividend payments
have been growing at a constant rate for the last five years. Five years ago, the dividend
was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2
per share and the firm must pay $1 per share in flotation costs. Additionally, the firm
has a marginal tax rate of 40 percent.
The firm's after-tax cost of debt is ________. (See Table 9.2)
A) 4.6 percent
B) 6 percent
C) 7 percent
D) 7.7 percent
7) ________ analysis involves comparison of current to past performance and the
evaluation of developing trends.
A) Time-series
B) Cross-sectional
C) Marginal
D) Break-even
8) The responsibility for managing day-to-day operations and carrying out corporate
policies belongs to the ________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
9) If the present value of a perpetual income stream is increasing, the discount rate must
be ________.
A) increasing
B) decreasing
C) changing unpredictably
D) increasing proportionally
10) When managing accounts receivable, a good strategy would be to ________.
A) send the accounts to a collection agency to extract payments
B) tighten the credit terms to force the customer to pay on time
C) offer cash discount without losing sales and imposing burden on customer
D) make frequent personal visits to the customer to remind him about his dues
11) A firm is analyzing two possible capital structures30 and 50 percent debt ratios. The
firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm
has a marginal tax rate of 40 percent on ordinary income. The number of common
shares outstanding for each of the capital structures would be ________.
A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares
B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares
C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares
D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares
12) Breakeven cash inflow refers to ________.
A) the minimum level of cash inflow necessary for a project to be acceptable, that is,
NPV greater than zero
B) the minimum level of cash inflow necessary for a project to be acceptable, that is,
NPV less than zero
C) the minimum level of cash inflow necessary for a project to be acceptable, that is,
IRR less than zero cost of capital
D) the minimum level of cash inflow necessary for a project to be acceptable, that is,
IRR equals zero
13) The total cost of a firm's inventory is found by summing the ________.
A) order cost and the marginal cost of a firm's inventory
B) order cost and the carrying cost of a firm's inventory
C) order cost and the actual cost of a firm's inventory
D) carrying cost and the marginal cost of a firm's inventory
14) If a firm's credit period is increased, the sales volume can be expected to ________,
the investment in accounts receivable can be expected to ________, and the bad debt
expenses can be expected to ________.
A) increase; decrease; decrease
B) increase; increase; decrease
C) increase; increase; increase
D) decrease; decrease; decrease
15) When making a cash acquisition of a going concern, the acquiring corporation
should ________.
A) adjust after-tax cash flows generated from new assets
B) recognize different accounting techniques
C) adjust the discount rate for risk differences
D) consider the problems of assimilating the acquired management
16) Aiyah, Inc. recently has had financial difficulty and is being liquidated by the
Federal Bankruptcy Court. The firm has a liquidation value of $1,000,000$400,000
from the fixed assets that served as collateral for the mortgage bonds and $600,000
from all other assets (all prior claims have been satisfied). The firm's current capital
structure is as follows:
The common stockholders will receive ________ in the liquidation.
A) $500,000
B) $333,333
C) $198,000
D) $0
