1) Dividends paid to stockholders is tax deductible.
2) An efficient portfolio is a portfolio that maximizes return for a given level of risk or
minimizes risk for a given level of return.
3) A firm’s credit standard is a procedure for ranking an applicant’s overall credit
strength, derived as a weighted average of scores on key financial and credit
characteristics.
4) In capital budgeting, the preferred approaches in assessing whether a project is
acceptable are those that integrate time value of money, risk and return considerations,
and valuation concepts to select capital expenditures that are consistent with the firm’s
goal of maximizing owners’ wealth.
5) In a limited partnership, all partners’ liabilities are limited to their investment in the
partnership.
6) A financial lease is a cancelable contractual arrangement whereby the lessee agrees
to make periodic payments to the lessor, often for five or fewer years, for an asset’s
services.
7) A preferred stockholder is sometimes referred to as a residual owner, since in essence
he or she receives what is leftthe residualafter all other claims on the firm’s income and
assets have been satisfied.
8) Subsidiary companies are corporations having no voting control on holding
companies.
9) In the case of short-term financing, the forces of supply and demand are among the
main factors determining exchange rates in Eurocurrency markets.
10) One of the limitations of breakeven analysis is its short-term time horizon. A large
outlay in the current financial period could significantly raise the firm’s breakeven
point, while the benefits may occur over a period of years.
11) The residual theory of dividends, as espoused by Modigliani and Miller, suggests
that dividends represent an earnings residual rather than an active decision variable that
affects firm value; this means that a firm’s decision to pay dividends or not will not
have any impact on a firm’s share price.
12) Should Tangshan Mining company accept a new project if its maximum payback is
3.5 years and its initial after-tax cost is $5,000,000 and it is expected to provide
after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000
in year 3, and $1,800,000 in year 4?
A) Yes, since the payback period of the project is less than the maximum acceptable
payback period
B) No, since the payback period of the project is more than the maximum acceptable
payback period
C) Yes, since the risk exposure of the project is less than the maximum acceptable risk
exposure
D) No, since the risk exposure of the project is more than the maximum acceptable risk
exposure
13) ________ is a major South American trading bloc that includes countries that
account for more than half of total Latin American GDP.
A) The group of five
B) Mercosur
C) Latin and South American Free Trade Area (LASTA)
D) The group of seven
14) The Public Company Accounting Oversight Board (PCAOB) ________.
A) is a not-for-profit corporation that oversees auditors of public corporations
B) is a not-for-profit corporation that oversees managers of public corporations
C) is a for-profit corporation that oversees auditors of public corporations
D) is a for-profit corporation that oversees managers of public corporations
15) ________ is the risk of being unable to cover operating costs of a firm.
A) Systematic risk
B) Business risk
C) Financial risk
D) Diversifiable risk
16) In the month of August, a firm had total cash receipts of $10,000, total cash
disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of
$3,000, and a beginning cash balance of $500. The ending cash balance for August
totals ________.
A) $1,500
B) $5,500
C) $2,500
D) $3,500
17) Entertainer’s Aid plans five annual colossal concerts, each in a different nation’s
capital. The concerts will raise funds for an endowment which would provide the World
Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be
given at the end of the fifth year. The rate of interest is expected to be 9 percent in all
future periods. How much must Entertainer’s Aid deposit each year to accumulate to the
required amount?
A) $5,569,749
B) $3,333,333
C) $1,830,275
D) $8,568,980
18) Which of the following is a current liability?
A) accounts receivable
B) cash
C) notes payable
D) inventory
19) Investment decisions generally refer to the items that appear on the ________.
A) left-hand side of the balance sheet, and financing decisions relate to the items on the
right-hand side
B) right-hand side of the balance sheet, and financing decisions relate to the items on
the left-hand side
C) right-hand side of the balance sheet, and financing decisions relate to the items on
the income statement
D) left-hand side of the balance sheet, and financing decisions relate to the items on the
income statement
20) At the time of issuance, the issuer of a convertible security normally establishes a
conversion price ________.
A) below the current book value of the firm’s stock
B) equal to the current market price of the firm’s stock
C) above the current market price of the firm’s stock
D) above the current book value of the firm’s stock
21) A security experiencing little or no loss in value over time is said to have a
________.
A) safety of return
B) safety of principal
C) safety of maturity
D) risk of payments
22) Using the modified DuPont formula allows the analyst to break Dana Dairy
Products return on equity into 3 components: the net profit margin, the total asset
turnover, and a measure of leverage (the financial leverage multiplier). Which of the
following mathematical expressions represents the modified DuPont formula relative to
Dana Dairy Products’ 2013 performance? (See Table 3.2)
A) 5.6(ROE) = 2.5(ROA) 2.22(Financial leverage multiplier)
B) 5.6(ROE) = 3.3(ROA) 1.70(Financial leverage multiplier)
C) 4.0(ROE) = 2.5(ROA) 2.00(Financial leverage multiplier)
D) 2.5(ROE) = 5.6(ROA) 2.22(Financial leverage multiplier)
23) Colonial Furniture’s net profits before taxes for 2015 totaled $354,000. The
company’s total retained earnings were $338,000 for 2014 year-end and $389,000 for
2015 year-end. Colonial is subject to a 26 percent tax rate. What was the cash dividend
declared by Colonial Furniture in 2015?
24) Nico is the new assistant branch manager of a larger Florida-based bank and the
branch manager has asked him a question to test his knowledge. The question he asked
is which rate should the bank advertise on monthly-compounded loans, the nominal
annual percentage rate or the effective annual percentage rate? Which rate should the
bank advertise on quarterly-compounded savings accounts? Explain. As a consumer,
which would you prefer to see and why?
25)
26) A firm’s current structure is as follows:
*Secured by fixed assets.
Suggest a recapitalized capital structure that would reduce the debt/equity ratio (several
solutions are feasible). Calculate the d/e ratio for the pre-reorganization capital structure
and the post-reorganization capital structure.
27) Dottie has decided to set up an account that will pay her granddaughter (Lexi)
$5,000 a year indefinitely. How much should Dottie deposit in an account paying 8
percent annual interest?
28) Table 11.1
Fine Press is considering replacing the existing press with a more efficient press. The
new press costs $55,000 and requires $5,000 in installation costs. The old press was
purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net
of any removal costs today. Both presses are depreciated under the MACRS 5-year
recovery schedule. The firm is in 40 percent marginal tax rate.
Calculate the initial investment of the new asset. (See Table 11.1)