1) A functional currency is the currency of the parent company’s country.
2) A firm can retain more of its earnings if it can convince its stockholders that it will
earn at least their required return on the reinvested funds.
3) Annualized net present value approach is the most efficient technique for dealing
with projects of unequal lives.
4) The use of a dollar breakeven point is important when a firm has more than one
product, especially when each product is selling at a different price.
5) Preemptive rights allow existing shareholders to maintain voting control and protect
themselves against the dilution of their ownership.
6) Because a business firm can be viewed as a portfolio of assets, it is important that the
firm maintains a diversified portfolio of assets.
7) Bankruptcy is business failure that occurs when a firm’s liabilities exceed the fair
market value of its assets.
8) An operating lease is when the present value of all its payments included as an asset
and corresponding liability on a firm’s balance sheet.
9) In analyzing an applicant’s creditworthiness, a credit manager typically gives primary
attention to two of the five C’s of creditcollateral and conditionsince they represent the
most basic requirements for extending credit to an applicant.
10) A foreign bond is a bond issued by a foreign corporation or government and is
denominated in the investor’s home currency and sold in the investor’s home market.
11) Everything else being equal, the higher the interest rate, the higher the future value.
12) A corporate treasurer’s focus tends to be more external, while the controller’s focus
is more internal.
13) Informational content of dividends throws light with respect to future earnings. In
other words, investors view a change in dividends, up or down, as a signal that
management expects future earnings to change in the same direction.
14) A stock purchase warrant permits a firm to raise additional funds at some point in
the future by selling common stock and thereby shifting the firm’s capital structure to a
less highly levered position.
15) The ________ market is where securities are initially issued and the ________
market is where pre-owned securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
16) Ratios provide a ________ measure of a company’s performance and condition.
A) definitive
B) gross
C) relative
D) absolute
17) A firm has an issue of preferred stock outstanding that has a par value of $100 and a
4% dividend. If the current market price of the preferred stock is $50, the yield on the
preferred stock is ________.
A) 4.00%
B) 6.00%
C) 8.00%
D) 12.00%
18) A firm has had the indicated earnings per share over the last three years:
(a)If the firm’s dividend policy was based on a constant payout ratio of 50 percent,
determine the annual dividend for each year.
(b)If the firm’s dividend policy was based on a fixed dollar payout policy of 50 cents
per share plus an extra dividend equal to 75 percent of earnings per share above $1.00,
determine the annual dividend for each year.
19) The future value of $100 received today and deposited at 6 percent for four years is
________.
A) $126
B) $ 79
C) $124
D) $116
20) The negative implications for the operation of a foreign-based subsidiary due to
joint venture laws and restrictions can result in ________.
A) high degree of leverage
B) deficit in balance-of-payment position for the home country
C) difficulties obtaining the remission of profits
D) manipulation of tax rules
21) Ashley’s Delivery Service is analyzing the credit terms of each of three suppliers, A,
B, and C.
(a)Determine the approximate cost of giving up the cash discount (assume a 360-day
year).
(b)Assuming the firm needs short-term financing, recommend whether or not the firm
should give up the cash discount or borrow from the bank at 10 percent annual interest.
Evaluate each supplier separately.
22) The inexpensive nature of long-term debt in a firm’s capital structure is due to the
fact that ________.
A) the debt holders are the true owners of the firm
B) equity capital has a fixed return
C) long-term debt has a fixed return and a maturity date
D) dividend payments are tax-deductible
23) Cross-sectional ratio analysis is used to ________.
A) correct expected problems in operations
B) isolate the causes of problems
C) provide conclusive evidence of the existence of a problem
D) measure relative performance of a firm with its peers
24) A firm has just ended its calendar year making a sale in the amount of $150,000 of
merchandise purchased during the year at a total cost of $112,500. Although the firm
paid in full for the merchandise during the year, it is yet to collect at year end from the
customer. The net profit and cash flow from this sale for the year are ________.
A) $0 and $150,000, respectively
B) $37,500 and -$150,000, respectively
C) $37,500 and -$112,500, respectively
D) $150,000 and $112,500, respectively
25) A corporation raises $500,000 in long-term debt to acquire additional plant capacity.
This is considered as ________.
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively
26) Tangshan Mining has 100,000 shares outstanding and just declared a 2-for-1 stock
split. Before the announcement, the firm’s shares were trading at $50.00 per share. After
the stock split, the firm’s shares should trade at ________ per share.
A) $100.00
B) $25.00
C) $50.00
D) $75.00
27) Maxi, Inc. is evaluating the acquisition of Mini, Inc., which had a loss carryforward
of $2.75 million which resulted from earlier operations. Maxi can purchase Mini for
$3.5 million and liquidate the assets for $1.25 million. Maxi expects earnings before
taxes in the three years following the acquisition to be as follows:
(These earnings are assumed to fall within the limit legally allowed for application of a
tax loss carryforward resulting from the proposed acquisition.) Maxi has a 40 percent
tax rate and a cost of capital of 10 percent. The total present value of tax advantage of
the acquisition in the following three years is ________.
A) $440,374
B) $842,374
C) $1.1 million
D) $2.75 million
28) A firm with a cash conversion cycle of 175 days can stretch its average payment
period from 30 days to 45 days. This will result in a/an ________.
A) decrease of 30 days in the cash conversion cycle
B) increase of 15 days in the cash conversion cycle
C) decrease of 15 days in the cash conversion cycle
D) increase of 30 days in the cash conversion cycle
29) The lower risk nature of long-term debt in a firm’s capital structure is due to the fact
that ________.
A) the debt holders are the true owners of the firm
B) equity capital has a fixed return
C) creditors have a higher position in the priority of claims
D) dividend payments are tax-deductible
30) Business combinations are used by firms to externally expand in order to increase
________.
A) provision for doubtful accounts
B) common stock outstanding
C) production capacity
D) financial leverage
31) In general, most corporate capital gains are taxed at ________ tax rate.
A) the average
B) the regular corporate
C) the historic
D) a 30 percent
32) Which of the following is true of the impact of cash flows on net working capital?
A) The higher the cash inflows lower is the net working capital
B) The lower the cash outflows lower is the net working capital
C) The more predictable the cash inflows of a firm, the more current assets a firm needs
D) The more predictable the cash inflows of a firm, the easier is the working capital
management
33) The price of a bond with a fixed coupon rate and the required return have a
relationship that is best described as ________.
A) perfect positive correlation
B) constant
C) direct
D) inverse