1) The nominal and effective rates are equivalent for annual compounding.
2) Because of their access to the international bond and equity markets, MNCs may
have lower long-term financing costs, thus resulting in differences between the capital
structures of these firms and those of purely domestic companies.
3) In selecting the best group of unequal-lived projects, if the projects are mutually
exclusive, the length of the projects lives is not critical.
4) The amount paid in by the original purchasers of common stock is shown by two
entries in the firm’s balance sheetcommon stock and paid-in capital in excess of par on
common stock.
5) The call option in a bond has a greater chance of being exercised (to the detriment of
the bondholder) if market interest rates have fallen since the bond was issued.
6) The functional currency is the currency in which a business entity primarily
generates and expends cash and in which its accounts are maintained.
7) The shareholder receiving a stock dividend receives a share of common stock of
equal value to their existing shares of common stock.
8) The cost of capital reflects the cost of funds over the long run measured at a given
point in time, based on the best information available.
9) The residual theory of dividends implies that if a firm’s available retained earnings
are in excess of its financing needs, it should distribute the earnings by paying
dividends to stockholders.
10) One major risk a firm assumes in an aggressive financing strategy is ________.
A) the possibility that collections will be slower than expected
B) the possibility that long-term funds may not be available when needed
C) the possibility that short-term funds may not be available when needed
D) the possibility that it will run out of cash
11) When common stock is repurchased and retired, the underlying motive is to
________.
A) delay taxes
B) boost the stock’s dividends
C) distribute the excess cash to the owners
D) reduce the retained earnings balance
12) Nominal rate of interest is equal to ________.
A) the real rate plus an inflationary expectation
B) the real rate plus a risk premium
C) the risk-free rate plus an inflationary expectation
D) the risk-free rate plus a risk premium
13) The present value of an ordinary annuity of $2,350 each year for eight years,
assuming an opportunity cost of 11 percent, is ________.
A) $ 1,020
B) $27,869
C) $18,800
D) $12,093
14) Combining two negatively correlated assets to reduce risk is known as ________.
A) diversification
B) valuation
C) securitization
D) risk aversion
15) NICO Corporation had net current assets of $2,000,000 at the end of 2015 and
$1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities
of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO’s net
current asset investment for 2014 was ________.
A) $700,000
B) -$300,000
C) $300,000
D) -$700,000
16) Foreign bonds are sold primarily in ________.
A) countries other than the country in which the issue is denominated
B) U.S by corporations based outside the United States
C) all major international markets except the domestic market
D) the country of the currency of issue
17) Other factors remaining constant, an increase in the average payment period will
________.
A) increase the average collection period
B) decrease the operating cycle
C) not affect the cash conversion cycle
D) not affect the operating cycle
18) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 3, the incremental depreciation expense for year 6 is ________. (See Table
11.2)
A) $15,750
B) $10,750
C) $23,000
D) $36,150
19) Many holders of convertible bonds will not convert when the firm’s common stock
price exceeds the conversion price because ________.
A) the common stock price may go up further and the firm cannot have any other
mechanism to stop the bondholders from taking undue advantage of the conversion
feature
B) they already have the market price benefit and may still receive fixed periodic
interest payments
C) of the dilution of EPS
D) interest payments are tax deductible and it will affect their earnings
20) Mr. R. owns 20,000 shares of ABC Corporation stock. The company is planning to
issue a stock dividend. Before the dividend Mr. R. owned 10 percent of the outstanding
stock, which had a market value of $200,000, or $10 per share. Upon receiving the 10
percent stock dividend the value of his shares is ________.
A) $220,000
B) $210,000
C) $200,000
D) $180,000
21) Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per
share. During the year he received dividends of $1.45 per share. The stock is currently
selling for $60 per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent