1) “Business risk” relates to the inability of the firm to meet its debt obligations as they
come due.
2) The costs of bond refunding are the call premium and the underwriting costs on the
old and new bond issue.
3) Cash management becomes more important as the level of short-term interest rates
rises.
4) The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
5) The further the yield to maturity of a bond moves away from the bond’s coupon rate,
the greater the price-change effect will be.
6) It is not unusual for a corporate president, who deals with security analysts, to be as
sensitive to after-tax income as to cash flow.
7) When a firm raises its dividend, the information content is usually positive for
investors.
8) The efficient frontier is always along the left-most portion of the risk-return trade-off
diagram in which risk is measured on the X-axis and return is measured on the Y-axis.
9) As a financing device for creating common stock, warrants are usually more
desirable than convertible bonds.
10) Participating preferred stock is advantageous to common stockholders.
11) According to the interest rate parity theory, interest rates along with exchange rates
adjust until the foreign exchange market and the money market are in equilibrium.
12) Assume that Widget Repair Corporation provides services to 100 customers whose
decision to change suppliers is uncorrelated. The portfolio effect suggests that the
entrepreneur/owner of Widget, who is compensated on the basis of the firm’s profits,
may have lower cash-flow risk than a clerk who works full-time for Widget on a fixed
salary.
13) The conversion premium of a convertible is generally greater when the market price
of the stock is below the conversion price.
14) A reverse stock split is normally used by those firms whose stock price has been
stable for several years.
15) For a small business, it is possible for the purchase price of an asset to be expensed
rather than depreciated.
16) Insurance companies take advantage of the portfolio effect by insuring many
different homeowners against loss. However, the risks of loss for individual homes in
hurricane-prone or earthquake-prone areas such as Florida and California are highly
correlated. This suggests that insurance companies should avoid writing (or consider
canceling) some customers’ policies in Florida and California, even when the policies
are both needed by homeowners and expected to be highly profitable to the insurer.
17) If EBIT equals $200,000 and interest equals $40,000, what is the degree of financial
leverage?
A.5.33x
B.1.25x
C..8125x
D.4.33x
18) Which of the following is NOT a characteristic of commercial paper?
A.It is issued by large firms
B.It has a one- to two-year maturity
C.Its rates are usually below prime rates on business loans
D.All of these options are commercial paper characteristics
19) Selling stockholders who are offered cash or another company’s stock in a merger
may be willing to part with the shares they hold because
A.the offered shares may be more marketable
B.the price they are offered for their shares may be above market value
C.they can attain a greater degree of diversification as a result
D.All of these options
20) If the business cycle is just beginning its upswing, which firm would you anticipate
would be likely to show the best growth in EPS over the next year? Firm A has high
combined leverage and Firm B has low combined leverage.
A.Firm A
B.Firm B
C.Indifferent between the two
D.It depends on how much financial leverage each firm has
21) Candy Company had sales of $320,000 and cost of goods sold of $112,000. What is
the gross profit margin (ratio of gross profit to sales)?
A.55%
B.65%
C.73.3%
D.None of the options
22) An individual investing in preferred stock receiving a before-tax preferred yield of
6.75% and having a tax rate of 25% would receive an after-tax preferred yield of _____.
Assume the tax rate on dividends is 15%.
A.6.75%
B.5.1%
C.5.7%
D.6.1%
23) Variables important to credit scoring models include
A.age of company in years
B.negative public records
C.facility ownership
D.All of the options
24) The payback method has several disadvantages, among them:
A.Payback fails to choose the optimum or most economic solution to a capital
budgeting problem
B.Payback ignores cash inflows after the payback period
C.Payback fails to choose the optimum or most economic solution to a capital
budgeting problem, and it ignores cash inflows after the payback period
D.None of these options
25) When a corporation uses the financial markets to raise new funds, the sale of
securities is made in the
A.primary market
B.secondary market
C.online market
D.third market
26) Capital rationing
A.is a way of preserving the assets of the firm over the long term
B.is a less than optimal way to arrive at capital budgeting decisions
C.assures stockholder wealth maximization
D.assures maximum potential profitability
27) An item which may be converted to cash within one year or one operating cycle of
the firm is classified as a
A.current liability
B.long-term asset
C.current asset
D.long-term liability
28) Increasing the number of periods will increase all of the following except
A.the present value of an annuity
B.the present value of $1
C.the future value of $1
D.the future value of an annuity
29) The key initial element in developing all pro forma statements is
A.a cash budget
B.an income statement
C.a sales forecast
D.a collections schedule
30) A business combination of two or more companies in which the resulting firm
maintains the identity of the acquiring company is defined as a
A.consolidation
B.holding company
C.conglomerate
D.merger
31) Backdating of options is
A.A fair method to award top-performing employees
B.Illegal
C.Not to be reported unless a gain is provided to an employee
D.Considered a gift by tax law
32)
Refer to the figure above. Using the DuPont method, return on assets (investment) for
Tew is approximately ____.
A.125%
B.34.1%
C.293.0%
D.None of the options
33) A tool that helps to organize the decision process by presenting a graphical
comparison of investment choices is called a
A.module hierarchy diagram
B.”what if” simulation
C.decision tree
D.None of these options
34) Firms with a high degree of operating leverage are
A.easily capable of surviving large changes in sales volume
B.usually trading off lower levels of risk for higher profits
C.significantly affected by changes in interest rates
D.trading off higher fixed costs for lower per-unit variable costs
35) Under a two-step buyout procedure
A.shareholders receive a higher total price than if a single offer is made
B.the second offer is at a higher price per share
C.shareholders are encouraged to react quickly to the offer
D.Two of the options are correct
36)
Refer to the figure above. The firm’s return on equity is ____.
A.136.5%
B.135.29%
C.80.29%
D.57.5%
37) The purpose of secondary trading is to
A.provide liquidity and competition between investments
B.provide a market to issue securities not handled in primary trading
C.provide jobs for brokers and dealers
D.provide lower commissions than on the organized exchanges
38) The most subjective and also significant segment of the 5 Cs of credit for giving
final approval is
A.capacity
B.collateral
C.character
D.conditions
39) Under SEC Rule 415, shelf registration
A.requires that companies registering securities, file a detailed statement for ongoing
SEC review and approval
B.has been used more frequently for equity than debt issues
C.has allowed smaller investment bankers to compete for more business
D.allows a corporation to issue securities when market conditions are more
advantageous than current conditions
40) The interplay between interest rate differentials and exchange rates such that each
adjusts until the foreign exchange market and the money market reach equilibrium is
called the
A.purchasing power parity theory
B.balance of payments
C.interest rate parity theory
D.None of these options
41) In order to estimate production requirements, we
A.add beginning inventory to projected sales in units and subtract desired ending
inventory
B.add projected sales in units to desired ending inventory and subtract beginning
inventory
C.add beginning inventory to desired ending inventory and divide by two
D.add beginning inventory to desired ending inventory and subtract projected sales in
units
42) If the flotation cost goes up, the cost of retained earnings will
A.go up
B.go down
C.stay the same
D.slowly increase
43) A corporation is
A.owned by stockholders who enjoy the privilege of limited liability
B.easily divisible between owners
C.a separate legal entity with perpetual life
D.All of the options
44) What discount rate is used in the net present value of the refunding decision?
A.The before-tax cost of the new debt
B.The after-tax cost of new debt
C.The weighted average cost of capital
D.The after-tax cost of total firm capital
45) If the inflation premium for a bond goes up, the price of the bond
A.is unaffected
B.goes down
C.goesup
D.More information is needed for an answer
46) If accounts receivable stays the same, and credit sales go up
A.the average collection period will go up
B.the average collection period will go down
C.accounts receivable turnover will decrease
D.the average collection period will go down and accounts receivable turnover will
decrease
47) If one project has a higher standard deviation than another,
A.it always has a greater risk
B.it always has a higher expected value
C.it has fewer possible outcomes
D.it may be riskier, but this can only be determined by the coefficient of variation
48) The following are the expected one-year T-bill rates for the next four years: 3%,
4%, 5%, and 6%. According to the basic model of the expectations hypothesis, what
would you expect the rate for three-year securities to be?
A.4%
B.4.5%
C.6%
D.3.75%