1) The marginal tax rate paid on a firm’s ordinary income can be calculated by dividing
its taxes by its net income.
2) The book value of an asset is equal to its installed cost of asset minus the
accumulated depreciation.
3) Time value of money should be ignored in capital budgeting techniques to make
accurate decisions.
4) Financial managers perform different tasks developing a financial plan or budget,
extending credit to customers, evaluating proposed large expenditures, and raising
money to fund a firm’s operations.
5) Total security risk is the sum of a security’s nondiversifiable and diversifiable risk.
6) A firm that is unable to pay its bills as they come due is said to be insolvent.
7) A floating inventory lien is most attractive when the firm has a stable level of
inventory that consists of a diversified group of relatively inexpensive merchandise.
8) Federal agency issues are obligations of the U.S. Treasury and are readily accepted
as low-risk securities.
9) On average in U.S., during the past 75 years, the return on large-company stocks has
exceeded the return on long-term corporate bonds.
10) The market value of a convertible security is likely to be less than its straight value
or conversion value.
11) The higher the risk of a project, the higher its risk-adjusted discount rate and thus
the lower the net present value for a given stream of cash inflows.
12) The Euromarket is the international financial market that provides for borrowing
and lending currencies outside their country of origin.
13) In a voluntary settlement, each creditor will be paid 20 cents on a dollar in 120
days. The remaining 80 cents on a dollar will be paid within an additional 60 days. This
is an example of ________.
A) a composition
B) a combination of a composition and extension
C) an extension
D) a liquidation
14) An increase in the average payment period will ________ the operating cycle and
________ the cash conversion cycle.
A) increase; decrease
B) decrease; decrease
C) decrease; not affect
D) not affect; decrease
15) The ________ method of developing a pro forma balance sheet estimates values of
certain balance sheet accounts while external financing is used as a balancing, or plug,
figure.
A) percent-of-sales
B) accrual
C) judgmental
D) cash
16) Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a)The firm earns 10 percent annually on its current assets.
(b)The firm earns 20 percent annually on its fixed assets.
(c)The firm pays 13 percent annually on current liabilities.
(d)The firm pays 17 percent annually on long-term funds.
(e)The firm’s monthly current, fixed, and total asset requirements for the previous year
are summarized in the table below:
The firm’s monthly permanent funds requirement is ________. (See Table 15.1)
A) $100,000
B) $57,500
C) $140,000
D) $157,500
17) Frankline Coin, Inc. is considering two capital structures. The key information
follows. Assume a 40 percent tax rate and expected EBIT of $50,000.
(a)Calculate two EBIT-EPS coordinates for each of the structures.
(b)Indicate over what EBIT range, if any, each structure is preferred.
18) The priority of claims established by Chapter 7 of the Bankruptcy Reform Act of
1978 gives priority to claims of ________.
A) unsecured creditors over claims of secured creditors
B) preferred stockholders over claims of unsecured creditors
C) wages payable over claims of unsecured creditors
D) farmers in grain storage over expenses of administering the bankruptcy
19) A company’s ________ are the procedures followed to collect accounts receivable
when they come due.
A) collection policies
B) credit scorings
C) credit policies
D) credit analysis
20) The future value of an ordinary annuity of $2,000 each year for 10 years, deposited
at 12 percent, is ________.
A) $35,098
B) $20,000
C) $39,310
D) $11,300
21) The option buyer who expects a stock price to decline will purchase ________.
A) a call
B) a warrant
C) a put
D) a convertible bond
22) A firm is evaluating two mutually exclusive projects that have unequal lives. The
firm must evaluate the projects using the annualized net present value approach and
recommend which project they should select. The firm’s cost of capital has been
determined to be 14 percent, and the projects have the following initial investments and
cash flows:
A) Choose Project R because its ANPV is $6459
B) Choose Project S because its ANPV is $6459
C) Choose Project R because its ANPV is $18,274
D) Choose Project S because its ANPV is $10,637
23) Behavioral approaches ________.
A) are used to explicitly recognize project risk
B) are used to get a feel for project risk
C) are not used by rational financial managers
D) are used to quantify the risk