1) A strike price is a price at which the holder of a call option can buy a specified
amount of stock at any time prior to the option’s expiration date.
2) Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
3) All dividend income received by a corporation is exempted from taxation.
4) In applying risk-adjusted discount rates to project selection, projects falling above
the SML would have a positive NPV and those falling below the SML would have a
negative NPV.
5) Companies involved in international capital budgeting projects can minimize
political risks by structuring the investment as a joint venture and selecting a
well-connected local partner.
6) Convertibles can be used as a form of deferred common stock financing.
7) The president’s letter, the first component of the stockholders’ report, is the primary
communication from management to a firm’s employees.
8) As any investor can create a portfolio of assets that will eliminate all, or virtually all,
nondiversifiable risk, the only relevant risk is diversifiable risk.
9) When maintaining appropriate inventory level, a purchasing manager should
________.
A) keep the inventory level low, to ensure that the firm’s money is not being unwisely
invested in excess resources
B) ensure that all orders could be filled quickly, eliminating the need for back orders
due to stockouts
C) implement the production plan to acquire the desired amount of finished goods
available on time at a low cost
D) maintain adequate amount of inventory on hand at desired times and at a favorable
price
10) Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent
coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest.
Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue
paying semiannual interest. The market required return for each bond is 10 percent.
When using present value to determine the prices of the bonds, Danno will find that
________.
A) there is no difference in price
B) the price of F is greater than H
C) the price of H is greater than F
D) he needs more information before determining the prices
11) Under FASB Standard No. 13, which of the following element should be present to
qualify as a capital lease?
A) The lease does not transfer ownership of the property to the lessee by the end of the
lease
B) The lease contains an option to purchase the property at a “bargain” price
C) The lease term is less than 50 percent of the economic life of the property
D) At the beginning of the lease, the present value of the lease payment is equal to 50
percent or more of the fair market value of the leased property less any investment tax
credit received by the lessor
12) ________ are especially interested in the average payment period, since it provides
them with a sense of the bill-paying patterns of the firm.
A) Employees
B) Stockholders
C) Lenders and suppliers
D) Auditors
13) The cost of borrowing through the sale of commercial paper is typically ________
the prime bank loan rate.
A) lower than
B) the same as
C) unrelated to
D) higher than
14) A firm has directly placed an issue of commercial paper that has a maturity of 60
days. The issue sold for $980,000 and has an annual interest rate of 12.24 percent. The
value of the commercial paper at maturity is ________ (assume 360 days in a year).
A) $19,992
B) $980,000
C) $1,000,000
D) $960,008
15) In capital budgeting for a multinational company, the starting discount rate to which
risks stemming from foreign exchange and political factors can be added, and from
which benefits reflecting the parent’s lower capital costs may be subtracted is
________.
A) the cost of capital of the parent (multinational) company
B) the risk-free rate of the parent company, adjusted for risk relevant to the foreign
subsidiary
C) the local cost of equity capital applicable to the local business and financial
environments within which a subsidiary operates
D) the weighted average cost of capital applicable to all foreign subsidiaries combined
16) ________ involves the strategic use of mailing points and bank accounts to
lengthen mail and clearing floats.
A) A direct send
B) Concentration banking
C) A lockbox
D) Controlled disbursing
17) ________ are established to evaluate a customer’s creditworthiness and to
determine the minimum requirements for extending credit to a customer.
A) Lines of credit
B) Credit limits
C) Collection agencies
D) Credit standards
18) The priority of claims established by Chapter 7 of the Bankruptcy Reform Act of
1978 gives priority to ________.
A) unpaid employee benefit plan contributions over unsecured customer deposits
B) common stockholders over taxes
C) taxes over expenses of administering the bankruptcy
D) preferred stockholders over claims of secured creditors
19) Treasury stock refers to the ________.
A) sale of stock at a price greater than the par value
B) stock issued by the US government
C) repurchase of outstanding stock
D) authorization of additional shares of stock by the board of directors
20) The ________ is the rate of return required by the market suppliers of capital in
order to attract their funds to the firm.
A) yield to maturity
B) internal rate of return
C) cost of capital
D) modified internal rate of return
21) After satisfying obligations to creditors, the government, and preferred
stockholders, any remaining earnings will most likely be allocated to ________.
A) common shareholders as cash dividends
B) common shareholders as stock dividends
C) other firms requiring capital
D) pay future preferred dividends
22) Evaluate the following projects using the payback method assuming a rule of 3
years for payback.
A) Project A can be accepted because the payback period is 2.5 years but Project B
cannot be accepted because its payback period is longer than 3 years
B) Project B should be accepted because even though the payback period is 2.5 years
for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in
Project B
C) Project B should be accepted because you get more money paid back in the long run
D) Both projects can be accepted because the payback is less than 3 years
23) Without adjustment, inflation may tend to cause ________ firms to appear more
efficient and profitable than ________ firms.
A) larger; smaller
B) older; newer
C) smaller; larger
D) newer; older