1) Converting a convertible security is beneficial when the market price of the common
stock into which it can be converted is greater than its conversion price.
2) An increase in a firm’s risk will always result in a higher share price since the
stockholder must be compensated for the greater risk.
3) The ranking approach involves the ranking of capital expenditure projects on the
basis of some predetermined measure such as the rate of return.
4) The degree of operating leverage will increase if a firm decides to compensate its
sales representatives with a fixed salary and bonus rather than with a pure
percent-of-sales commission.
5) In general, a firm’s theoretical optimal capital structure is that which balances the tax
benefits of equity financing against the increase probability of bankruptcy that results
from its use.
6) The yields on negotiable certificates of deposit are typically above those on U.S.
Treasury issues and comparable to the yields on commercial paper with similar
maturities.
7) The future value of an annuity due is always greater than the future value of an
otherwise identical ordinary annuity for interest rates greater than zero.
8) Securitization is the process of pooling mortgages or other types of loans and selling
the claims or securities against that pool in the secondary market.
9) Controlled disbursing involves the strategic use of mailing points and bank accounts
to lengthen mail float and clearing float, respectively.
10) In doing business in foreign countries, financing operations in the local market not
only improves the company’s business ties to the host community but also minimizes
exchange rate risk.
11) If an asset is sold for less than its book value, the loss on the sale may be used to
offset ordinary operating income provided the asset is used in the business.
12) In the most basic sense, risk is a measure of the uncertainty surrounding the return
that an investment will earn.
13) Assets leased under ________ leases generally have a usable life longer than the
term of the lease.
A) financial
B) operating
C) capital
D) direct
14) In a ________, the lessor acts as an equity participant supplying part of the
necessary capital while a lender supplies the remaining balance.
A) direct lease
B) leveraged lease
C) sale-leaseback
D) mortgage
15) 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 tax effect on the sale of the existing asset results in ________. (See Table 11.3)
A) $800 tax benefit
B) $1,000 tax liability
C) $1,100 tax liability
D) $6,000 tax liability
16) Deeply discounted bond that pays no coupon interest is a ________.
A) junk bond
B) floating rate bond
C) zero coupon bond
D) subordinated debenture
17) Cash outlays that had been previously made and have no effect on the cash flows
relevant to a current decision are called ________.
A) incremental historical costs
B) incremental past expenses
C) opportunity costs foregone
D) sunk costs
18) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40.
Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0.
If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset,
her new portfolio beta will be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25
19) Collateral is typically required for a ________.
A) secured short-term loan
B) line of credit
C) short-term, self-liquidating loan
D) single-payment note
20) A firm has an outstanding bond with a $1,000 par value that is convertible at $40
per share of common stock. The bond’s conversion ratio is ________.
A) 20
B) 25
C) 40
D) 50
21) Poor capital structure decisions can result in ________ the cost of capital, resulting
in ________ acceptable investments.
A) increasing; fewer
B) decreasing; more
C) increasing; more
D) decreasing; fewer
22) Hayley Medical, Inc. is evaluating the acquisition of Health-o-Matic, Inc., which
had a loss carryforward of $3.75 million, resulting from earlier operations. Hayley
Medical can purchase Health-o-Matic for $4.5 million and liquidate the assets for $3.25
million. Hayley Medical expects earnings before taxes in the three years following the
acquisition to be as follows:
(These earnings are assumed to fall within the annual limit legally allowed for
application of a tax loss carryforward resulting from the proposed acquisition.) Hayley
Medical has a 40 percent tax rate and a cost of capital of 15 percent. The approximate
maximum cash price Hayley Medical would be willing to pay for Health-o-Matic is
________.
A) $4,757,000
B) $4,253,000
C) $4,409,600
D) $3,750,000
23) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000,
then the inventory turnover is ________ and the average age of inventory is ________.
A) 36.5; 10
B) 10; 36.5
C) 36.0; 10
D) 30; 36.0
24) In general, firms that are subject to a high degree of ________, relatively short
production cycles, or both, tend to use shorter planning horizons.
A) profitability
B) financial certainty
C) operating uncertainty
D) financial planning