1) In general, a firm’s theoretical optimal capital structure is that which balances the tax
benefits of debt financing against the increase probability of bankruptcy that result from
its use.
2) Primary motives for merging include growth or diversification, synergy, fund raising,
increased managerial skill or technology, tax considerations, increased ownership
liquidity, and defense against takeovers.
3) Under MACRS depreciation, the depreciable value of an asset is equal to the asset’s
purchase price minus any installation costs.
4) A fixed-rate loan is a loan whose rate of interest is established at a fixed increment
above the prime rate and is allowed to vary above the prime rate only when the prime
rate varies until maturity.
5) Accounting exposure is the risk resulting from the effects of changes in foreign
exchange rates on the translated value of a firm’s financial statement accounts
denominated in a given foreign currency.
6) A U.S. parent company’s foreign equity accounts are translated into dollars using the
historical rate or average rate based on the company’s discretion.
7) The Sarbanes-Oxley Act of 2002 established the Public Company Accounting
Oversight Board (PCAOB) which is a not-for-profit corporation that oversees auditors
of public corporations.
8) In the case of annuity cash inflows, the payback period can be found by dividing the
initial investment by the annual cash inflow.
9) When a firm stretches accounts payable without hurting its credit rating, the cost of
giving up a cash discount is ________.
A) reduced
B) increased
C) unaffected
D) increased or decreased depending on the opening accounts payable balance
10) Return on total assets (ROA) measures the overall effectiveness of management in
generating profits with its available assets.
11) A firm’s operating breakeven point is the point at which ________.
A) total operating costs equal total fixed costs
B) total operating costs are zero
C) EBIT is less than sales
D) EBIT is zero
12) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
The return on equity for Dana Dairy Products for 2013 was ________. (See Table 3.2)
A) 0.6 percent
B) 5.6 percent
C) 0.9 percent
D) 50 percent
13) Short-term loans that businesses obtain from banks and through commercial paper
are ________.
A) negotiated and secured
B) negotiated and unsecured
C) spontaneous and secured
D) spontaneous and unsecured
14) If a firm gives up the cash discount on goods purchased on credit, the firm should
pay the bill ________.
A) as per its will
B) on the last day of the discount date
C) after the credit period
D) on the last day of the credit period
15) The payment of cash dividends to corporate stockholders is decided by the
________.
A) creditors
B) stockholders
C) SEC
D) board of directors
16) The ________ ratio indicates the efficiency with which a firm uses its assets to
generate sales.
A) inventory turnover
B) total asset turnover
C) quick
D) current asset turnover
17) The three basic ratios used in the DuPont system of analysis are ________.
A) net profit margin, total asset turnover, and return on investment
B) net profit margin, total asset turnover, and return on equity
C) net profit margin, total asset turnover, and equity multiplier
D) net profit margin, financial leverage multiplier, and return on equity
18) Which of the following is an attribute of a banker’s acceptance?
A) It is an unsecured note of issuer with large denominations
B) It has a maturity of 1 day to 3 years
C) Its risk and return is higher than U.S. Treasury issues
D) It is issued by a corporation with a high credit standing
19) Information on the accounting policies, procedures, calculations, and transactions
underlying entries in the financial statements can be found on ________.
A) the notes to the financial statements
B) the statement of retained earnings
C) the proxy statement
D) the management discussion and analysis(MD&A)
20) What annual rate of return would Jia need to earn if she deposits $20,000 per year
into an account beginning one year from today in order to have a total of $1,000,000 in
30 years?
A) 2.3%
B) 3.3%
C) 1.3%
D) 4.3%
21) Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is
the average tax rate for Jennings, Inc.?
A) 34 percent
B) 46 percent
C) 25 percent
D) 40 percent
22) A proxy battle is the attempt by ________.
A) the creditors of a bankrupt corporation to seize assets of the corporation
B) the management to dismiss the board of directors for their incapability to manage the
operations
C) a nonmanagement group to unseat the existing management and gain control of the
firm
D) the employees to form trade unions to influence decisions on behalf of members
23) A ________ results from the combination of firms in the same line of business.
A) congeneric merger
B) conglomerate diversification
C) horizontal merger
D) hostile takeover
24) Which of the following line items of the statement of cash flows must be obtained
from the income statement ?
A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks
25) Net profit after taxes is ________.
A) gross profits minus operating expenses
B) sales revenue minus cost of goods sold
C) EBITDA minus interest
D) EBIT minus interest and taxes
26) Bessey Aviation has just sold an issue of 30-day commercial paper with a face value
of $5,000,000. The firm has just received $4,958,000. What is the effective annual
interest rate on the commercial paper?
27) Table 13.1
What is the degree of financial leverage at a base level EBIT of $120,000 for both
financing plans? The firm has a 40 percent tax rate. (See Table 13.1)
28) Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is
considering replacing an existing piece of equipment with a more sophisticated
machine. The following information is given.
The firm pays 40 percent taxes on ordinary income and capital gains.
Given the information in Table 11.4, compute the incremental annual cash flows.
29) Table 13.1
Assuming a 40 percent tax rate, what is the financial breakeven point for each plan?
(See Table 13.1)
30) Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of
the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate
and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the
required rate of return is 9 percent?
31) ZhenYee Electronics, Inc. is considering the acquisition of Datamatic, Inc. at a cash
price of $5,000,000. Datamatic, Inc. has short-term liabilities of $1,500,000. As a result
of acquiring Datamatic, Inc., ZhenYee Electronics would also acquire rights to one
major patent which would provide an estimated cash inflow of $1,800,000 per year for
the next eight years. The firm has a cost of capital of 12 percent. Would you
recommend the cash acquisition?
32) Identify each expense or revenue as a cash flow from operating activities (O), a
cash flow from investment activities (I), or a cash flow from financing activities (F).
Administrative expenses
Rent payment
Interest on a note payable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long-term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets
33) Table 12.4
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The
following are the data about the two projects.
Which project do you recommend? (See Table 12.4)