1) Interest rate risk is the chance that changes in interest rates will adversely affect the
value of an investment.
2) When a bond’s value differs from par, its yield to maturity will differ from its coupon
interest rate.
3) Money markets involve the trading of securities with maturities of one year or less.
4) The cost of preferred stock is typically higher than the cost of long-term debt (bonds)
because the cost of long-term debt (interest) is tax deductible.
5) The conservative funding strategy is a strategy by which a firm finances at least its
seasonal requirements, and possibly some of its permanent requirements, with
short-term funds and the balance of its permanent requirements with long-term funds.
6) Whenever the percentage change in EBIT resulting from a given percentage change
in sales is greater than the percentage change in sales, operating leverage exists.
7) The cost of common stock equity may be measured using either the constant-growth
valuation model or the capital asset pricing model.
8) The overriding objective of the capital structure decision should be to choose the
level of debt that results in the largest possible share price.
9) Any Ba rated bond or lower would be considered speculative or “junk.”
10) Under an aggressive funding strategy, a firm funds its seasonal requirements with
short-term debt and its permanent requirements with long-term debt.
11) When a bond’s required return is greater than its coupon interest rate, the bond value
will be less than its par value.
12) The Federal Deposit Insurance Corporation (FDIC) ________.
A) is an agency, created by the Glass-Steagall Act ,that monitors banks on a regular
basis to ensure that they were safe and sound
B) is an agency that monitors business combinations between commercial banks,
investment banks, and insurance companies
C) guarantees individuals will not lose any money held at any type of financial
institution that fails
D) guarantees individuals will not lose any money, up to a specified amount, held at any
type of financial institution that fails
13) The primary risk of mortgage-backed securities is ________.
A) that the prices of have high volatality
B) that the prices of housing will increase
C) that the government will not be able to meet the guarantees on the cash flows
D) that homeowners may not be able to, or choose not to, repay their loans
14) Which of the following is a nongovernmental issue?
A) eurodollar deposit
B) Treasury bill
C) Treasury bond
D) gilt fund
15) A ________ is an unsigned check drawn on one of a firm’s bank accounts and
deposited into its account at another bank.
A) direct send
B) wire transfer
C) depository transfer check
D) preauthorized check
16) A firm has had the following earnings history over the last five years:
If the firm’s dividend policy was to pay $0.25 per share each period except when
earnings exceed $1.50, an extra dividend equal to 50 percent of the earnings above
$1.50 would be paid, the annual dividends for 2012 and 2015 were ________.
A) $0.25 and $1.25, respectively
B) $0.25 and $0.75, respectively
C) $0 and $0.25, respectively
D) $0.25 and $0.25, respectively
17) The sale of a unit of a firm to existing management is often achieved through
________.
A) a limited partnership
B) a leveraged buyout
C) an employee stock option
D) a cash exchange
18) Beginning with a zero-leverage company, as debt is substituted for equity in the
capital structure ________.
A) the overall cost of capital first rises, reaches a maximum, and then declines
B) the overall cost of capital declines
C) the overall cost of capital first declines, reaches a minimum, and then rises
D) the overall cost of capital rises
19) The return expected from an asset is fully defined by its ________.
A) risk and cash flow
B) cash flow and timing
C) discount rate
D) beta
20) The ________ of a business firm is measured by its ability to satisfy its short-term
obligations as they come due.
A) activity
B) liquidity
C) debt
D) profitability
21) The College Copy Shop is in process of purchasing a high-tech copier. In its search,
it has gathered the following information about two possible copiers A and B.
(a)Compute expected rate of return for each copier.
(b)Compute variance and standard deviation of rate of return for each copier.
(c)Which copier should they purchase?
22) 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 3, the annual incremental after-tax cash flow from operations for year 3 is
________. (See Table 11.2)
A) $45,000
B) $75,150
C) $90,150
D) $93,800
23) A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend
of $400,000. The firm’s dividend payout ratio is ________.
A) 2.5 percent
B) 2.0 percent
C) 4.0 percent
D) 40 percent
24) A firm has to pay a dividend of $1.20 per share till perpetuity, a zero growth rate of
dividends, and a required return of 10 percent. The value of the firm’s preferred stock is
________.
A) $120
B) $10
C) $12
D) $100
25) The net value of fixed assets is also called its ________.
A) market value
B) par value
C) book value
D) intrinsic value
26) A firm has just ended the calendar year making a sale in the amount of $200,000 of
merchandise purchased during the year at a total cost of $150,500. Although the firm
paid in full for the merchandise during the year, it has yet to collect at year end from the
customer. One possible problem this firm may face is ________.
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage
27) Which of the following is true of equity?
A) equityholders do not have voting rights
B) It does not mature, so repayment is not required
C) It is a temporary form of financing for a firm
D) Equity financing is obtained from creditors
28) Which of the following is an advantage of NPV?
A) It measures the risk exposure
B) It takes into account the time value of investors’ money
C) It is highly sensitive to the discount rates
D) It measures how quickly a firm can breakeven
29) A firm in a merger transaction that attempts to merge or takeover another company
is called the ________.
A) target company
B) holding company
C) acquiring company
D) consolidated company
30) Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the maximum
rate of taxation on dividends received by shareholders was set at ________.
A) 18%
B) 20%
C) 25%
D) 15%
31) An increase in accounts receivable turnover for a firm due to an increase in
collection efforts will ________.
A) decrease the firm’s marginal investments in accounts receivable
B) increase the firm’s marginal investments in accounts receivable
C) decrease the firm’s collection expense
D) increase the firm’s bad debt expense