1) Since the issuer of zero (or low) coupon bonds can annually deduct the current year’s
interest accrual without having to actually pay the interest until the bond matures (or is
called), its cash flow each year is increased by the amount of the tax shield provided by
the interest deduction.
2) The interest paid by the issuer of commercial paper is determined by the size of the
discount and the length of time to maturity.
3) Foreign direct investment is the transfer of capital, managerial, and technical assets
to a foreign country.
4) Exchange rate risk hedging tools include forward contracts, options, interest rate
swaps, currency swaps, and hybrid securities.
5) The money market is a financial relationship created by a number of institutions and
arrangements that allows suppliers and demanders of long-term funds to make
transactions.
6) The required total financing figures in the cash budget refer to the monthly changes
in borrowing.
7) The risk of the conservative funding requirements is low because of its high level of
net working capital, and the fact that the strategy does not require a firm to use any of
its limited short-term borrowing capacity.
8) The capital asset pricing model is used to calculate the effect of increase in prices of
capital assets due to inflation.
9) Which of the following is an example of a firm’s stakeholder?
A) suppliers
B) Federal reserve
C) media
D) competitors
10) The 2002 Sarbanes-Oxley Act was designed to ________.
A) limit the compensation that could be paid to corporate CEOs
B) eliminate the many disclosure and conflict-of-interest problems of corporations
C) provide uniform international accounting standards
D) provide the guidelines to minimize the tax
11) A firm currently has outstanding a 5 percent, $1,000 convertible bond. The bond is
convertible into 25 shares of common stock and callable at $1,050. The current market
price of the firm’s stock is $41 per share. The bond holder will ________.
A) allow the call to be exercised
B) convert the bond into stock
C) sell the bond on the secondary market
D) do nothing and wait until the stock price goes up further
12) The consequences of missing a financial lease payment are ________ those of
missing an interest or principal payment on debt.
A) less severe than
B) the same as
C) more severe than
D) unrelated to
13) At the end of May, the firm has an ending cash balance of ________. (See Table
4.3)
A) $9,000
B) $16,750
C) $14,250
D) $12,000
14) A debt instrument indicating that a corporation has borrowed a certain amount of
money and promises to repay it in the future under clearly defined terms is called a(n)
________.
A) common stock
B) corporate bond
C) indenture
D) preferred stock
15) ________ rate of interest is the actual rate charged by the supplier and paid by the
demander of funds.
A) Nominal
B) Real
C) Risk-free
D) Inflationary
16) In a revolving credit agreement, the firm pays interest on ________.
A) the full line of credit
B) the unused portion of the line of credit
C) the amount actually borrowed and compensating balance
D) the amount actually borrowed and commitment fees on any unused portion of the
loan
17) A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net
30. The firm paid for these goods on the 5th day after the date of sale. The firm must
pay ________ for the goods.
A) $990
B) $900
C) $1,000
D) $1,100
18) Table 15.2
The company earns 5 percent on current assets and 15 percent on fixed assets. The
firm’s current liabilities cost 7 percent to maintain and the average annual cost of
long-term funds is 20 percent.
The firm’s initial net working capital is ________. (See Table 15.2)
A) $15,000
B) $13,000
C) $5,000
D) $10,000
19) The ________ is used by financial managers as a structure for dissecting a firm’s
financial statements to assess its financial condition.
A) statement of cash flows
B) DuPont system of analysis
C) break-even analysis
D) technical analysis
20) A merger transaction is not supported by the target firm’s management, forcing the
acquiring company to try to gain control of the firm by buying shares in the
marketplace. This is an example of ________.
A) financial merger
B) hostile takeover
C) congeneric formation
D) strategic merger
21) ________ leverage is concerned with the relationship between sales revenue and
earnings per share.
A) Financial
B) Operating
C) Variable
D) Total
22) The key inputs to the valuation process include ________.
A) returns and risk
B) cash flow, cash flow timing, and risk
C) cash flows and discount rate
D) returns, discount rate, and risk
23) Assume Julian has a choice between two deposit accounts. Account A has an annual
percentage rate of 7.55 percent but with interest compounded monthly. Account B has
an annual percentage rate of 7.45 percent with interest compounded continuously.
Which account provides the highest effective annual return?
A) Account A
B) Account B
C) Both provide the same effective annual return
D) We don’t have sufficient information to make a choice