1) The pecking order explanation of capital structure states that a hierarchy of financing
exists for firms, in which new external debt financing is employed first, followed by
retained earnings and finally by external equity financing.
2) Both theory and empirical evidence indicate that the capital structures of MNCs
differ from those of purely domestic firms.
3) In case of stock dividend, the shareholder’s proportion of ownership in a firm
remains the same, and as long as the firm’s earnings remain unchanged, so does his or
her share of total earnings.
4) Behavioral finance is a growing body of research that focuses on investor behavior
and its impact on investment decisions and stock prices.
5) Revolving credit agreements are guaranteed loans that specify the maximum amount
that a firm can owe the bank at any point in time.
6) Self-sustaining foreign entity operates independent of the parent multinational and
the current-rate method is the primary approach for translation of individual accounts.
7) The weighted average cost of capital (WACC) reflects the expected average future
cost of capital over the long run.
8) The major weakness of payback period in evaluating projects is that it cannot specify
the appropriate payback period in light of the wealth maximization goal.
9) A financial planning process begins with short-term, or operating, plans and budgets
that in turn guide the formulation of long-term, or strategic, financial plans.
10) The key benefit of a horizontal merger is its ability to reduce risk by merging firms
that have different seasonal or cyclic patterns of sales and earnings.
11) The relevant cash flows for a proposed capital expenditure are the incremental
after-tax cash outflows and resulting subsequent inflows.
12) ________ risk represents the portion of an asset’s risk that can be eliminated by
combining assets with less than perfect positive correlation.
A) Diversifiable
B) Market
C) Systematic
D) Economic
13) The cost to a firm of each type of capital is dependent upon ________.
A) the risk-free rate of bonds plus the business risk of the firm
B) the risk-free rate of each type of capital plus the business risk of the firm
C) the risk-free rate of each type of capital plus the financial risk of the firm
D) the risk-free rate of each type of capital plus the business risk and the financial risk
of the firm
14) The key input to any cash budget is ________.
A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws
15) The ‘stakeholders” in targeted takeover companies include the ________.
A) federal reserve bank
B) media
C) employees
D) state government
16) If General Talc Mines cannot raise the external financing required through
traditional credit channels, the firm may ________. (See Table 4.5)
A) increase sales
B) purchase additional fixed assets to raise productivity
C) sell common stock
D) factor accounts receivable
17) In defending against hostile takeover attempts, a company will include provisions in
the employment contracts of key executives that provide them with sizable
compensation if the firm is taken over. This is called the ________ strategy.
A) shark repellent
B) silver parachute
C) greenmail
D) golden parachute
18) The responsibilities of a debtor in possession include ________.
A) repurchase of equity from open market
B) change in operational activities
C) change in management
D) recommending a recapitalization plan
19) 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 initial outlay equals ________. (See Table 11.3)
A) $41,100
B) $44,100
C) $38,800
D) $38,960
20) In a ________ market, the buyer and seller are not brought together to trade
securities directly but instead have their orders executed on the ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
21) Consider the following projects, X and Y where the firm can only choose one.
Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y
also costs $600, and generates cash flows of $500 and $275 for the next 2 years,
respectively. Which investment should the firm choose if the cost of capital is 25
percent?
A) Project X, since it has a higher NPV than Project Y
B) Project Y, since it has a higher NPV than Project X
C) neither, since both the projects have negative NPV
D) neither, since both the projects have positive NPV
22) 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 average seasonal funds requirement is ________. (See Table 15.1)
A) $17,500
B) $57,500
C) $40,000
D) $157,500
23) Cash flows associated with the purchase and sale of fixed assets and business
interests are called cash flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) equity activities