1) The real utility of the coefficient of variation is in comparing assets that have equal
expected returns.
2) Treasury notes generate lower returns than U.S. Treasury bills.
3) Preferred stockholders are often referred to as residual claimants.
4) By using convertible bonds, an issuing firm can temporarily raise debt, which is
typically less expensive than common stock, to finance projects.
5) Working capital refers to a firm’s long-term capital.
6) By combining two projects with negatively correlated cash inflows, a firm reduces
the combined cash inflow variability and its risk.
7) Creditors are primarily interested in short-term liquidity of the company and its
ability to make interest and principal payments.
8) New investments must be considered in light of their impact on the risk and return of
the portfolio of assets because the risk of any single proposed asset investment is not
independent of other assets.
9) The conversion value of a bond is the minimum price at which a convertible bond
would be traded.
10) A conglomerate merger is a merger combining firms in unrelated businesses.
11) Dividends in arrears that must be paid to the preferred stockholders before payment
of dividends to common stockholders are ________.
A) cumulative
B) nonparticipating
C) participating
D) convertible
12) Regarding the tax treatment of payments to securities holders, it is true that
________.
A) interest and preferred stock dividends are not tax-deductible ,while common stock
dividends are tax deductible
B) interest and preferred stock dividends are tax-deductible, while common stock
dividends are not tax-deductible
C) common stock dividends and preferred stock dividends are tax-deductible, while
interest is not tax-deductible
D) common stock dividends and preferred stock dividends are not tax-deductible, while
interest is tax-deductible
13) 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 book value of the existing asset is ________. (See Table 11.3)
A) $7,250
B) $15,000
C) $21,250
D) $25,000
14) Credit terms 2/10, net 30 means ________.
A) a discount of 10% is granted if payments are done within 30 days
B) a discount of 10% is granted if payments are done within 2 days, net 30 days
available
C) a discount of 2% is granted if payments are done within 10 days, net 30 days
available
D) a discount of 2% is granted if payments are done within 30 days, beyond which a
10% interest is charged
15) One of the circumstances in which the Gordon growth valuation model for
estimating the value of a share of stock should be used is ________.
A) declining dividends
B) an erratic dividend stream
C) the lack of data on dividend payments
D) a steady growth rate in dividends
16) A(n) ________ is an arrangement whereby an insolvent firm’s creditors receive full
payment, although not immediately.
A) composition
B) creditor control agreement
C) extension
D) liquidation
17) A ________ is an option included as part of a bond or preferred stock that permits
the holder to convert the security into a specified number of shares of common stock.
A) put option
B) call option
C) conversion feature
D) repurchase agreement
18) Once sales are forecasted, ________ must be generated to estimate required raw
materials.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement
19) If the P/E paid for a target company is equal to the P/E of the acquiring company,
the effect on the earnings per share of the acquired company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
20) Match each marketable security with its description.
(a)Eurodollar deposit
(b)Banker’s acceptance
(c)Federal agency issue
(d)Commercial paper
(e)Repurchase agreement
(f)Treasury bill
(g)Money market mutual fund
(h)Negotiable certificate of deposit
(i)Treasury note
1>________ A short term, unsecured promissory note issued by a corporation.
2>________ An obligation of the U.S. Treasury with common maturities of 91 to 182
days.
3>________ A portfolio of marketable securities.
4>________ An arrangement whereby a bank or securities dealer sells specific
marketable securities to a firm and agrees to purchase them in the future.
5>________ An obligation of the U.S. Treasury with mutual maturities of between one
and seven years.
6>________ Negotiable instrument evidencing the deposit of a certain number of
dollars in a commercial bank.
7>________ An instrument issued by the Federal National Mortgage Association.
8>________ Funds deposited in banks located outside the U.S. and denominated in
U.S. dollars.
9>________ Short term credit arrangement used by businesses to finance transactions
with foreign countries or firms with unknown credit capacities.
21) A decrease in collection efforts by a firm will result in ________ in sales volume,
________ in the investment in accounts receivable, ________ in bad debt expenses, and
________ in collection expenditures.
A) an increase; an increase; an increase; a decrease
B) an increase; a decrease; an increase; an increase
C) an increase; a decrease; an increase; a decrease
D) a decrease; a decrease; a decrease; an increase
22) What is the expected market return if the expected return on Asset X is 20 percent,
its beta is 1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
23) A ________ is a method of structuring a financial merger, whereas a ________
involves the sale of the firm’s assets.
A) leveraged buyout; bankruptcy
B) congeneric buyout; divestiture
C) horizontal merger; leveraged divestiture
D) leveraged buyout; divestiture