1) Research and development is considered to be a motive for making capital
expenditures.
2) Disbursement float results from the delay between the time that a payer or customer
deducts a payment from its checking account ledger (disburses it) and the time that a
payee or vendor actually receives these funds in a spendable form.
3) Firms are able to reduce financing costs or increase the funds available for expansion
by maximizing the amount of funds tied up in working capital.
4) In an LBO, 90 percent or more of the purchase price is financed with debt.
5) Operating cash flow (OCF) is calculated by deducting depreciation from net
operating profit after taxes.
6) Firms’ motives to merge include growth or diversification, synergy, fund raising, tax
considerations, and defense against takeover.
7) In the valuation process, the higher the risk, the greater is the required return.
8) Financial leverage results from the presence of variable financial costs in a firm’s
income stream.
9) Duration measures the sensitivity of a bond’s prices to changing interest rates.
10) Tangshan China’s stock is currently selling for $160.00 per share and the firm’s
dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s
most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the
expected market return is 8 percent, and Tangshan has a beta of 1.2, Tangshan’s stock
would be ________.
A) overvalued because the market price is higher than the resulting share value
B) undervalued because the market price is less than the resulting share value
C) overvalued because the resulting share value is higher than the market value
D) undervalued because the resulting share value is less than the market value
11) The conflict between the goals of a firm’s owners and the goals of its non-owner
managers is ________.
A) the agency problem
B) incompatibility
C) serious only when profits decline
D) the window-dressing
12) A firm is analyzing two possible capital structures30 and 50 percent debt ratios. The
firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm
has a marginal tax rate of 40 percent on ordinary income. If the interest rate on debt is 7
percent and 9 percent for the 30 percent and the 50 percent debt ratios, respectively, the
amount of interest on the debt under each of the capital structures being considered
would be ________.
A) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000
B) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000
C) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000
D) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000
13) The theory suggesting that for any given issuer, long-term interest rates tends to be
higher than short-term rates is called ________.
A) expectation hypothesis
B) liquidity preference theory
C) market segmentation theory
D) interest parity theory
14) On the balance sheet, net fixed assets represent ________.
A) gross fixed assets at cost minus depreciation expense
B) gross fixed assets at market value minus depreciation expense
C) gross fixed assets at cost minus accumulated depreciation
D) gross fixed assets at market value minus accumulated deprecation
15) A firm’s year-end retained earnings balances are $320,000 and $400,000, for 2014
and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015.
The firm’s dividend payment for 2015 is ________.
A) $0
B) $20,000
C) $80,000
D) $100,000
16) Which of the following is true of a partnership and a corporation?
A) In a corporation, income is taxed at the corporate level; whereas, in a partnership,
income is taxed twice
B) In a partnership, income is taxed at the corporate level; whereas, in a corporation,
income is taxed twice
C) Income from both forms of organizations are double-taxed
D) In a partnership, income is exempted from tax up to $10 million; whereas, in a
corporation, income is taxed twice
17) FASB No. 52 is a statement issued by the Financial Accounting Standards Board
requiring American MNCs to first convert the financial statement accounts of foreign
subsidiaries into the country’s functional currency and then translate the accounts into
the parent firm’s currency using the ________ method.
A) historical rate
B) all-current-rate
C) average rate
D) weighted average
18) A firm’s ________ is the mix of long-term debt and equity utilized by the firm,
which may significantly affect its value by affecting return and risk.
A) dividend policy
B) capital budget
C) capital structure
D) working capital
19) A firm has common stock with a market price of $55 per share and an expected
dividend of $2.81 per share at the end of the coming year. The dividends paid on the
outstanding stock over the past five years are as follows:
The cost of the firm’s common stock equity is ________.
A) 4.1 percent
B) 5.1 percent
C) 12.1 percent
D) 15.4 percent
20) The inexpensive nature of long-term debt in a firm’s capital structure is due to the
fact that ________.
A) the equity holders are the true owners of the firm
B) equity capital has a fixed return
C) interest payments are tax-deductible
D) equity holders have a higher position in the priority of claims
21) A ________ is a restrictive provision in a bond indenture, providing for the
systematic retirement of the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause
22) Which of the following affects the slope of yield curve?
A) tax rates
B) dividend policy
C) selection of accounting standards
D) liquidity preferences
23) In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed
________.
A) to ease the calculations of owners’ equity
B) to isolate the impact on returns of the financing costs associated with alternative
capital structures
C) to emphasize the relationship between interest expenses and taxes
D) to concentrate on the effect of revenue and expense on capital structure decisions
24) Dan and Jia are newlyweds and have just purchased a condominium for $70,000.
Since the condo is very small, they hope to move into a single-family house in 5 years.
How much will their condo worth in 5 years if inflation is expected to be 8 percent?
25) Agatha Concrete Company has been offered by its bank to manage its cash at a cost
of $35,000 per year. Under the proposed cash management, the firm can reduce the cash
required on hand by $180,000. Since the bank is also doing a lot of record keeping, the
firm’s administrative cost would decrease by $2,000 per month. What recommendation
would you give the firm with respect to the proposed cash management assuming the
firm’s opportunity cost is 12 percent?
26) Key Financial Data
Income Statement, Dreamscape, Inc.
For the Year Ended December 31, 2013
Prepare a common-size income statement for Dreamscape, Inc. for the year ended
December 31, 2013. Evaluate the company’s performance against industry average
ratios and against last year’s results.
27) A firm is evaluating two mutually exclusive projects that have unequal lives. The
firm must evaluate the projects using the annualized net present value approach and
recommend which project they should select. The firm’s cost of capital has been
determined to be 18 percent, and the projects have the following initial investments and
cash flows:
28) Timothy borrows $6,930 from the bank. For a four-year loan, the bank requires
annual end-of-year payments of $2,281.86. Calculate the interest rate on the loan.