1) In case of international capital budgeting, a U.S. company can minimize its political
risk by creating a joint venture with a competent and well-connected local partner.
2) A call feature in a bond allows bondholders to change each bond into a stated number
of shares of common stock.
3) One measure of the cost of common stock equity is the rate at which investors
discount the expected common stock dividends of the firm to determine its share value.
4) Assuming that a firm has done all it can to stimulate customers to pay promptly and
to select vendors offering the most attractive and flexible credit terms, it can further
speed collections and slow disbursements by taking advantage of the “float” existing in
the collection and payment systems.
5) In case of international capital budgeting, long-term exchange rate risk can be
minimized by financing the project, in whole or in part, in local currency.
6) Unlike equityholders, creditors are owners of the firm.
7) The risk-adjusted discount rate (RADR) is the rate of return that must be earned on a
given project to compensate a firm’s owners adequately, that is, to maintain or improve
the firm’s share price.
8) A hybrid security is neither debt nor equity but instead derives its value from an
underlying asset.
9) A higher earnings per share (EPS) does not necessarily translate into a higher stock
price.
10) For tax purposes, using MACRS recovery periods, assets in the first four property
classes are depreciated by the double-declining balance method using the half-year
convention and switching to straight line when advantageous.
11) Increases in the basic cost of long-term funds or in risk will raise the required return
on a bond.
12) Accounts payable are spontaneous secured sources of short-term financing that arise
from the normal operations of a firm.
13) 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 pro forma total current assets amount is ________. (See Table 4.5)
A) $470,900
B) $500,000
C) $525,000
D) $575,000
14) A firm may have a negative cash conversion cycle if it carries ________.
A) very little inventory and sells its products on credit
B) high inventory and sells its products on credit
C) very little inventory and sells its products for cash
D) high inventory and sells its products for cash
15) The higher, the value of ________ ratio, the better able a firm is to fulfill its interest
obligations.
A) dividend payout
B) average collection period
C) times interest earned
D) average payment period
16) Ex dividend is ________.
A) a period beginning 2 business days prior to the date of record, during which a stock
is sold without the right to receive the current dividend
B) the date on which all investors whose names are recorded as stockholders receive a
declared dividend at a specified future time
C) a period beginning 7 business days prior to the date of record, during which a stock
is sold without the right to receive the current dividend
D) the actual date on which a firm mails the dividend payment to the holders of record
17) Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The depreciation expense for 2015 is ________. (See Table 4.1)
A) $0
B) $200
C) $50
D) $1,000
18) A corporation has $10,000,000 of 10 percent preferred stock outstanding and a 40
percent tax rate. The amount of earnings before interest and taxes (EBIT) required to
pay the preferred dividends is ________.
A) $1,000,000
B) $400,000
C) $600,000
D) $1,666,667
19) ________ are funds denominated in U.S. dollars and deposited in banks located
outside the United States.
A) Negotiable certificates of deposit
B) Eurodollar deposits
C) Banker’s acceptances
D) Money market mutual funds
20) Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is
currently 10 percent, and the required return on the market portfolio is 16 percent. The
firm estimates that its future dividends will continue to increase at an annual compound
rate consistent with that experienced over the 2010-2013 period.
(a)Estimate the value of Tangshan Antiques stock.
(b)A lawsuit has been filed against the company by a competitor in 2013, and the
potential loss has increased risk, which is reflected in the company’s beta, increasing it
to 1.6. What is the estimated price of the stock following the filing of the lawsuit in
2013?
21) If the expected return is above the required return on an asset, rational investors will
________.
A) buy the asset, which will drive the price up and cause expected return to reach the
level of the required return
B) buy the asset, which will drive the price down and cause the expected return to reach
the level of the required return
C) sell the asset, which will drive the price up and cause the expected return to reach
the level of the required return
D) sell the asset, since price is expected to decrease
22) Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive
projects, A and B. The relevant cash flows for each project are given in the table below.
The cost of capital for use in evaluating each of these equally risky projects is 10
percent.
The NPVs of Projects A and B are ________. (See Table 12.6)
A) $95,066 and $56,386, respectively
B) $56,386 and $95,066, respectively
C) -$56,386 and -$95,066, respectively
D) $45,000 and $650,000, respectively
23) A firm plans to depreciate a five year asset in the next planning period. The
statements that will be directly affected are the ________.
A) pro forma income statement, pro forma balance sheet, and cash budget
B) pro forma balance sheet, cash budget, and statement of retained earnings
C) cash budget and pro forma balance sheet
D) pro forma income statement and pro forma balance sheet
24) The conversion of current assets ________.
A) from cash to receivables to inventory provides the cash used to pay non-current
liabilities
B) from inventory to receivables to marketable securities provides the cash used to buy
plant and equipment
C) from inventory to receivables to cash provides the cash used to pay current liabilities
D) from cash to receivables to inventory provides the cash used to repurchase stock
25) A firm has prepared the coming year’s pro forma balance sheet resulting in a plug
figure in a preliminary statementcalled the external financing requiredof negative
$250,000. The firm may prepare to ________.
A) sell common stock totaling $250,000
B) arrange for a loan of $250,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $250,000
26) A straight bond value is the ________.
A) minimum price at which a convertible bond would be traded
B) optimum price at which a callable bond would be traded
C) maximum price at which a callable bond would be traded
D) average price at which a convertible bond would be traded