1) Debt capital is less risky than equity capital because a firm is legally obligated to pay
interest to bondholders but they are not legally obligated to pay dividends to preferred
or common stockholders.
2) Standard deviation measures the dispersion of an investment’s return around the
expected return.
3) Generally, firms that are subject to high degrees of operating uncertainty, relatively
short production cycles, or both, tend to use shorter planning horizons.
4) A merger occurs when two or more firms are combined to form a completely new
corporation.
5) The levels of fixed-cost assets and funds that management selects affect the
variability of returns.
6) Pyramiding is an arrangement among holding companies wherein one company
controls others, thereby causing an even greater magnification of earnings and losses.
7) Independent projects are those whose cash flows compete with one another and
therefore more than one project needs to be accepted in order to implement the capital
budgeting decision.
8) Unlike creditors, equityholders are owners of the firm.
9) Hedging strategies are techniques used to offset or protect against risk and include
borrowing or lending in different currencies.
10) Net working capital is the difference between a firm’s total assets and its total
liabilities.
11) Optimal capital structure is the capital structure at which the weighted average cost
of capital is minimized, thereby maximizing a firm’s value.
12) The profit maximization goal ignores the timing of returns, does not directly
consider cash flows, and ignores risk.
13) The more seasonal and uncertain a firm’s cash flows, the greater the number of
intervals and the shorter time intervals.
14) Pro forma financial statements are used for ________.
A) cash budgeting
B) preparing financial statements
C) profit planning
D) auditing
15) Stock purchase warrants are instruments that give their holders ________.
A) the obligation to purchase a certain number of shares of the issuer’s common stock at
a specified price over a certain period of time
B) the right to purchase a certain number of shares of the issuer’s common stock at a
specified price over a certain period of time
C) the obligation to sell a certain number of shares of the issuer’s preferred stock at a
specified price over a certain period of time
D) the right to sell a certain number of shares of the issuer’s preferred stock at a
specified price over a certain period of time
16) Tangshan Mining has 100,000 shares outstanding and just declared a 20% stock
dividend. Before the announcement, the firm’s shares were trading at $50.00 per share.
After the stock dividend, the firm’s shares should trade at ________ per share.
A) $42.00
B) $41.67
C) $46.33
D) $50.00
17) 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 2, the annual incremental after-tax cash flow from operations for year 2 is
________. (See Table 11.2)
A) $18,000
B) $24,000
C) $56,000
D) $84,000
18) If a firm uses an aggressive financing strategy, ________.
A) it increases return and increases risk
B) it increases return and decreases risk
C) it decreases return and increases risk
D) it decreases return and decreases risk
19) The federal regulatory body governing the sale and listing of securities is called the
________.
A) IRS
B) FASB
C) GAAP
D) SEC
20) Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement
capital investment proposal. The proposed asset costs $50,000 and has installation costs
of $3,000. The asset will be depreciated using a five-year recovery schedule. The
existing equipment, which originally cost $25,000 and will be sold for $10,000, has
been depreciated using an MACRS five-year recovery schedule and three years of
depreciation has already been taken. The new equipment is expected to result in
incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax
rate.
The cash flow pattern for the capital investment proposal is ________. (See Table 11.3)
A) a mixed stream and conventional
B) a mixed stream and nonconventional
C) a perpetuity and conventional
D) an annuity and nonconventional
21) A generous benefactor to a local ballet plans to make a one-time endowment that
would provide the ballet with $150,000 per year into perpetuity. The rate of interest is
expected to be 5 percent for all future time periods. How large must the endowment be?
A) $ 300,000
B) $3,000,000
C) $ 750,000
D) $1,428,571
22) The creation of a high-debt, private corporation with improved cash flow and value
is the goal in ________.
A) a spin-off
B) a divestiture
C) a conglomerate merger
D) a leveraged buyout
23) A firm has outstanding warrants that are exercisable at $53 per share and entitle
holders to purchase two shares of common stock. The common stock is currently selling
for $55 per share. The theoretical value of the warrant is ________.
A) $1
B) $2
C) $3
D) $4
24) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of
$34,000, and preferred dividends of $5,000. What was the firm’s net profit after taxes?
A) $66,000
B) $49,000
C) $44,000
D) $83,000
25) Cash disbursements include ________.
A) amortization expense
B) rent payments
C) depreciation expense
D) depletion
26) Since retained earnings are viewed as a fully subscribed issue of additional common
stock, the cost of retained earnings is ________.
A) less than the cost of new common stock equity
B) equal to the cost of new common stock equity
C) greater than the cost of new common stock equity
D) not related to the cost of new common stock equity
27) Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to
prepare a pro forma balance sheet for cash and profit planning purposes for the coming
year ended December 31, 2015. Using the percent-of-sales method and the following
financial data, prepare the pro forma balance sheet in order to answer the following
multiple choice questions.
(a)The firm estimates sales of $1,000,000.
(b)The firm maintains a cash balance of $25,000.
(c)Accounts receivable represents 15 percent of sales.
(d)Inventory represents 35 percent of sales.
(e)A new piece of mining equipment costing $150,000 will be purchased in 2010.
Total depreciation for 2010 will be $75,000.
(f)Accounts payable represents 10 percent of sales.
(g)There will be no change in notes payable, accruals, and common stock.
(h)The firm plans to retire a long term note of $100,000.
(i)Dividends of $45,000 will be paid in 2015.
(j)The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2014
The external funds requirement results primarily from ________. (See Table 4.5)
A) the payment of dividends
B) the retirement of debt and purchase of new fixed assets
C) low profit margin
D) high cost of sales
28) A firm with a total asset turnover that is lower than industry standard but with a
current ratio that meets industry standard must have excessive ________.
A) fixed assets
B) inventory
C) accounts receivable
D) debt
29) Which of the following is true of a dividend payout?
A) When a firm announces that it will increase its dividend, the share price usually
decreases on that news
B) Dividend payments send a positive signal to investors in the marketplace that
management believes that the stock is overvalued
C) When a firm pays out dividends the share price will fall
D) Dividend payouts have no impact on the share price of a stock in an efficient market
30) A firm has a current capital structure consisting of $400,000 of 12 percent annual
interest debt and 50,000 shares of common stock. The firm’s tax rate is 40 percent on
ordinary income. If the EBIT is expected to be $200,000, two EBIT-EPS coordinates
for the firm’s existing capital structure are ________.
A) ($36,000, $0) and ($200,000, $3.04)
B) ($48,000, $0) and ($200,000, $1.82)
C) ($0, $48,000) and ($200,000, $1.82)
D) ($152,000, $3.50) and ($150,000, $1.82)
31) ________ is the potential use of fixed financial charges to magnify the effects of
changes in earnings before interest and taxes on a firm’s earnings per share.
A) Financial leverage
B) Operating leverage
C) Total leverage
D) Degree of operating leverage
32) A firm undertakes a merger in order to eliminate redundant functions or increase
market share. This is an example of ________.
A) financial merger
B) divestiture
C) spin-off
D) strategic merger