1) Under a line of credit agreement, a bank may require an annual cleanup, which
means that the borrower must pay off all its outstanding debts to all its operational
creditors for a certain number of days during the year.
2) The cost of marginal investment in accounts receivable can be calculated by finding
the difference between the average investment in accounts receivable before and after
the introduction of the changes in credit standards.
3) A stock purchase warrant gives the holder the right to purchase a certain number of
shares of common stock at a specified price over a certain period of time.
4) A lessor is the receiver of the services of the assets under a lease whereas a lessee is
the owner of the assets that are being leased.
5) One advantage of factoring accounts receivable is the ability it gives a firm to turn
accounts receivable immediately into cash without having to worry about repayment.
6) Under the basic MACRS procedures, the depreciable value of an asset is its full cost,
including outlays for installation.
7) Both operating and financial leverage result in the magnification of return as well as
risk.
8) In an efficient market, stock prices adjust quickly to new public information.
9) The cost of preferred stock is ________.
A) lower than the cost of long-term debt
B) higher than the cost of common stock
C) higher than the cost of long-term debt and lower than the cost of common stock
D) lower than the cost of convertible long-term debt and higher than the cost of
common stock
10) Nico bought 500 shares of a stock for $24.00 per share on January 1, 2013. He
received a dividend of $2.50 per share at the end of 2013 and $4.00 per share at the end
of 2014. At the end of 2015, Nico collected a dividend of $3.00 per share and sold his
stock for $20.00 per share. What is Nico’s realized total rate of return?
A) -12.5%
B) 12.5%
C) -20.7%
D) 20.7%
11) A firm with a low net profit margin can improve its return on total assets by
________.
A) increasing its debt ratio
B) increasing its total asset turnover
C) decreasing its fixed asset turnover
D) decreasing its total asset turnover
12) Which of the following is true of a horizontal merger?
A) The key benefit of this merger stems from the merged firm’s increased control over
the acquisition of raw materials or the distribution of finished goods
B) The key benefit of this form of merger is its ability to reduce risk by merging firms
that have different patterns of sales and earnings
C) This form of merger results when two firms in the same line of business are merged
D) This form of merger occurs when a firm acquires a supplier or a customer
13) A(n) ________ yield curve reflects higher expected future rates of interest.
A) upward-sloping
B) flat
C) downward-sloping
D) linear
14) An attempt to gain control of a target firm by buying sufficient shares of it in the
marketplace is known as a ________ and is typically accomplished through a
________.
A) friendly takeover; leveraged buyout
B) leveraged buyout; consolidation
C) friendly takeover; consolidation
D) hostile takeover; tender offer
15) Which of the following is true of a repurchase agreement?
A) It results from a bank guarantee of a business transaction; sold at discount from
maturity value
B) It provides a return slightly below that obtainable through outright purchase of
similar marketable securities
C) It is issued by professional portfolio management companies
D) Its maturity period lies between 1 to 10 years
16) In an aggressive financing strategy, a firm anticipating a large increase in sales for
the coming period should finance the increase in working capital with ________.
A) the sale of common stock
B) the sale of a bond issue
C) a line of credit
D) a long-term note from the bank
17) ________ is an arrangement initiated by a debtor firm to negotiate with the
creditors about a plan for sustaining or liquidating the firm.
A) Golden parachute
B) Greenmail
C) A filing of Chapter Seven of the Bankruptcy Reform Act of 1978
D) A voluntary settlement
18) A generous philanthropist plans to make a one-time endowment to a renowned heart
research center which would provide the facility with $250,000 per year into perpetuity.
The rate of interest is expected to be 8 percent for all future time periods. How large
must the endowment be?
A) $2,314,814
B) $2,000,000
C) $3,125,000
D) $3,000,000
19) Which of the following is true of a credit applicant’s character?
A) It reflects a credit applicant’s ability to repay his debt obligation
B) It reflects a credit applicant’s past payment history
C) It reflects the level of liquid assets available with a credit applicant
D) It reflects any unique conditions surrounding a credit applicant’s transaction
20) Modigliani and Miller suggest that the value of a firm is not affected by the firm’s
dividend policy, due to ________.
A) the relevance of dividends
B) the clientele effect
C) the informational content
D) the optimal capital structure
21) ________ is the potential use of fixed costs to magnify the effect of changes in sales
on the firm’s earnings per share.
A) Investing leverage
B) Total leverage
C) Operating leverage
D) Financial leverage
22) Dwyer Corporation is determining whether to lease or purchase new equipment.
The firm is in the 38% tax bracket, and its after-tax cost of debt is currently 7%. The
terms of the lease and the purchase are:
Lease: Annual end-of-year lease payments of $31,500 are required over the 3-year life
of the lease. All maintenance costs will be paid by the lessor; insurance and other costs
will be borne by the lessee. The lessee will exercise its option to purchase the
equipment for $6,000 at the termination of the lease.
Purchase: The equipment, costing $77,000, can be financed entirely with a 12% loan
requiring annual end-of-year payments of $32,059 for 3 years. The firm will depreciate
the equipment under MACRS using a 3-year recovery period (33% in year 1, 45% in
year 2, 15% in year 3 and 7% in year 4). The firm will pay $2,000 per year for a service
contract that covers maintenance costs; insurance and other costs will be borne by the
firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period.
Calculate the present value of the cash outflow for both the lease and purchasing and
recommend one alternative.
A) The present value of the cash outflow for the lease is $56,151 and for purchasing is
$56,775, therefore Dwyer should choose the lease
B) The present value of the cash outflow for the lease is $56,151 and for purchasing is
$56,775, therefore Dwyer should choose purchase
C) The present value of the cash outflow for the lease is $64,590 and for purchasing is
$65,398, therefore Dwyer should choose the lease
D) The present value of the cash outflow for the lease is $51,178 and for purchasing is
$51,703, therefore Dwyer should choose the lease
23) An upward-sloping yield curve that indicates cheaper short-term borrowing costs
than long-term borrowing costs is called as ________.
A) normal yield curve
B) inverted yield curve
C) flat yield curve
D) lognormal yield curve
24) A putable bond gives the bondholder ________.
A) the right to sell the bond back to the corporation at a discount
B) the right to sell the bond back to the corporation at a stated premium
C) the right to redeem the bond back to the corporation at the current market value
D) the right to redeem the bond back to the corporation at par
25) Table 3.1
Information (2013 values)
1> Sales totaled $110,000
2> The gross profit margin was 25 percent.
3> Inventory turnover was 3.0.
4> There are 360 days in the year.
5> The average collection period was 65 days.
6> The current ratio was 2.40.
7> The total asset turnover was 1.13.
8> The debt ratio was 53.8 percent.
Total assets for CEE in 2013 were ________. (See Table 3.1)
A) $ 45,895
B) $124,300
C) $ 58,603
D) $ 97,345
26) Julian’s Sports Equipment must decide whether to obtain $1,000,000 of financing
by selling common stock at its current price of $40 per share or selling convertible
bonds. The firm currently has 250,000 shares of common stock outstanding.
Convertible bonds can be sold for their $1,000 par value and would be convertible at
$45. The firm expects its earnings available to common stockholders to be $700,000
each year over the next several years.
(a)Calculate the number of shares the firm would need to sell to raise the $1,000,000.
(b)Calculate the earnings per share resulting from the sale of common stock.
(c)Calculate the number of shares outstanding once all bonds have been converted.
(d)Calculate the earnings per share associated with the bond financing after conversion.
(e)Which of the financing alternatives would you recommend the company adopt?
Why?
27) A lottery administrator has just completed the state’s most recent $50 million lottery.
Receipts from lottery sales were $50 million and the payout will be $5 million at the
end of each year for 10 years. The expenses of running the lottery were $800,000. The
state can earn an annual compound rate of 8 percent on any funds invested.
(a)Calculate the gross profit to the state from this lottery.
(b)Calculate the net profit to the state from this lottery (no taxes).
28) Table 9.2
A firm has determined its optimal structure which is composed of the following sources
and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The
dividend expected to be paid at the end of the coming year is $5. Its dividend payments
have been growing at a constant rate for the last five years. Five years ago, the dividend
was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2
per share and the firm must pay $1 per share in flotation costs. Additionally, the firm
has a marginal tax rate of 40 percent.
Assuming the firm plans to pay out all of its earnings as dividends, the weighted
average cost of capital is ________. (See Table 9.2)
A) 10.44 percent
B) 10.9 percent
C) 11.6 percent
D) 12.1 percent