1) Under recapitalization, debts are generally exchanged for equity or the maturities of
existing debts are extended.
2) Strategic mergers seek to achieve various economies of scale by eliminating
redundant functions, increasing market share, and improving raw material sourcing and
finished product distribution.
3) In partnerships, owners have unlimited liability and may have to cover debts of other
less financially sound partners.
4) Controlled disbursing is a method of consciously anticipating the mail, processing,
and clearing time involved with the payment process.
5) Supervoting shares of common stock provide shareholders with ten times the voting
power of ordinary shares of common stock.
6) Cash planning involves the preparation of a firm’s cash budget. Without adequate
cashregardless of the level of profitsany firm could fail.
7) In general, the lower the correlation between asset returns, the greater the potential
diversification of risk.
8) A call feature is a feature that allows preferred stockholders to change each share into
a stated number of shares of common stock.
9) A horizontal merger is a merger in which one firm acquires another firm in the same
general industry but neither in the same line of business nor a supplier or customer.
10) For firms that are in a financial position to take a cash discount, it is advisable not
to take the discount if the terms offered are 2/10 net 30.
11) A firm should take the cash discount if the firm’s cost of borrowing from the bank is
greater than the cost of giving up a cash discount.
12) Pledges of accounts receivable are normally made on a nonnotification basis,
meaning that a customer whose account has been pledged as collateral is not notified.
13) A normal yield curve is upward-sloping and indicates generally cheaper short-term
borrowing costs than long-term borrowing costs.
14) Holders of equity have claims on both income and assets that are secondary to the
claims of creditors.
15) Convertibles can normally be sold with lower interest rates than nonconvertibles.
16) The theoretical basis from which the concept of risk-adjusted discount rates is
derived is ________.
A) the Gordon model
B) the capital asset pricing model
C) simulation theory
D) the basic cost of money
17) A(n) ________ provides a financial summary of a firm’s operating results during a
specified period.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings
18) The major type of loan made by banks to businesses is the ________.
A) fixed-asset-based loan
B) short-term secured loan
C) short-term, self-liquidating loan
D) capital improvement loan
19) Which of the following is true of a securities exchange?
A) It serves as an intermediary by channeling the savings of individuals, businesses,
and governments into loans or investments
B) It borrows funds directly from the financial institutions
C) It is an association of banks who meet to buy and sell stocks and bonds
D) It provides a marketplace in which firms can raise funds through the sale of new
securities and purchasers can resell securities
20) The ________ uses no, or very little, safety stock.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) FIFO method
21) When managing accounts payable, a good strategy would be to ________.
A) pay as early as possible creating better credit rating for a firm
B) pay as slowly as possible without damaging a firm’s credit rating
C) pay big customers early to maintain good relations and small customers on a later
date
D) pay only when a firm has adequate funds to meet its liabilities
22) The prime rate of interest fluctuates with ________.
A) the changing supply-and-demand relationship for long-term funds
B) the changing supply-and-demand relationship for short-term funds
C) the liquidity requirement in a money market
D) the demand in a bond market
23) A corporation that has voting control of one or more other corporations is called a
________.
A) holding company
B) congeneric formation
C) subsidiary
D) target firm
24) How long would it take for Nico to save an adequate amount for retirement if he
deposits $40,000 per year into an account beginning one year from today that pays 12
percent per year if he wishes to have a total of $1,000,000 at retirement?
A) 12.2 years
B) 15.7 years
C) 14.5 years
D) 16.5 years
25) Which of the following is excluded when calculating quick ratio?
A) accounts receivable
B) accounts payable
C) cash
D) inventory
26) 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:
If the firm’s current liabilities in December were $40,000, the net working capital was
________. (See Table 15.1)
A) $140,000
B) $60,000
C) $10,000
D) -$10,000