1) Profitability ratios allow one to measure the ability of the firm to earn an adequate
return on sales, total assets, and invested capital.
2) The use of “float” has dramatically increased since the Check Clearing for the 21st
Century Act was passed.
3) A higher growth rate in sales will often require more external funds.
4) Zero-coupon bonds are sold at face value.
5) In determining the cost of preferred stock, the earnings on outstanding preferred
stock may be used as a proxy.
6) The percent-of-sales method would be more accurate under a steady sales
assumption than with cyclical sales.
7) The ratio of long-term financing to short-term financing at any given time will be
greatly influenced by the term structure of interest rates.
8) Investment bankers can help a firm undertake a secondary offering when the
company is too small for a primary offering IPO.
9) Bonds may be recalled only if there is a specific call provision in the bond.
10) A stock dividend is often used when the company has high cash levels, but feels that
a stock dividend would be more beneficial to the investors.
11) Regardless of risk, no projects should be accepted unless they earn more than the
firm’s weighted average cost of capital.
12) Preferred stock would generally provide a lower before-tax yield to investors than
secured debt due to its lower risk.
13) Float is the difference between the cash balance on the corporate books and the
amount currently credited to the corporation by the bank.
14) There is unlimited liability in a general partnership.
15) Investment A may have a higher standard deviation than investment B and still have
less risk.
16) The cost of capital for each source of funds is dependent on current market
conditions and expected rates of return.
17) The future value is the same concept as the way money grows in a bank account.
18) In the last decade, free cash flow has been associated with special financial
activities such as
A.leveraged buyouts
B.ESOPs
C.stock options
D.golden parachutes
19) Which of the following properly represents the hierarchy of creditor and
stockholder claims?
A.Common stock, senior secured debt, subordinated debentures
B.Preferred stock, common stock, subordinated debentures
C.Debentures, preferred stock, common stock
D.None of these options is a valid hierarchy
20) The term structure of interest rates
A.is an indication of investors’ expectations about inflation and future interest rates
B.will be downward sloping if short-term interest rates are higher than long-term rates
C.will be upward sloping under normal conditions
D.All of the options
21) The Securities Act of 1933 did not
A.require that all securities sold in more than one state be registered with the SEC
B.hold corporate officers liable for losses for those who were misled by false
information in the prospectus
C.set guidelines for insiders who trade in the securities of their own firm
D.require a prospectus for all new issues of securities, which contains all information
appearing in the registration statement
22) A firm purchases an asset falling into the 3-year MACRS category for $48,000. The
second year’s depreciation expense for this asset would be ________.
A.$34,710
B.$21,360
C.$16,000
D.The answer cannot be determined without knowing second-year earnings before
depreciation and taxes
23) Shelf registration has been most frequently used with
A.common stock
B.preferred stock
C.debt
D.commercial paper
24) The return measure that an investor demands for giving up current use of funds,
without adjusting for purchasing power changes or the real rate of return, is the
A.risk premium
B.inflation premium
C.dividend yield
D.discount rate
25) A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm
changes its credit terms to 2/20, net 90 . What change might be expected on the balance
sheets of its customers?
A.Decreased receivables and increased bank loans
B.Increased receivables and increased bank loans
C.Increased payables and decreased bank loans
D.Increased payables and increased bank loans
26) The difference between total receipts and total payments is referred to as
A.cumulative cash flow
B.beginning cash flow
C.net cash flow
D.cash balance
27) American Depository Receipts (ADRs) are
A.receipts sent to foreign stockholders who own American companies
B.proof of ownership for Eurodollar deposits held by Americans
C.certificates that have a legal claim on an ownership interest in a foreign company’s
common stock
D.certificatesin U.S. companies that allow foreign investors to buy shares of American
companies
28) All of the following are methods of evaluating the risk of a project except which
one?
A.The net present value profile
B.A Monte Carlo simulation
C.Decision trees
D.The coefficient of variation
29) The theoretical floor value for a convertible bond is its
A.conversion price
B.conversion value
C.par value
D.pure bond value
30) Cash flow does not rely on which of the following?
A.The payment patterns of customers
B.The monetary policy of the Federal Reserve
C.The speed at which suppliers and creditors process checks
D.The efficiency of the banking system
31) The future value of an annuity table provides a ‘shortcut” for calculating the future
value of a steady stream of payments, denoted as A. The same value can be calculated
directly from the following equation:
32) Dun &Bradstreet is known for providing
A.interest rate information to cash managers
B.credit scoring reports that rank a company’s payment habits relative to its peer group
C.cash management systems to corporate treasurers
D.consumer credit reports to credit card companies
33) An aggressive working capital policy would have which of the following
characteristics?
A.A high ratio of long-term debt to fixed assets
B.A low ratio of short-term debt to fixed assets
C.A high ratio of short-term debt to long-term sources of funds
D.A short average collection period
34) A conversion feature allows
A.the bondholder to redeem the bond before the maturity date
B.the corporation to redeem the bond before the maturity date
C.the bondholder to convert the bond to common stock
D.the bondholder to demand increased collateral
35) Expectations of a significant increase in the price of a firm’s common stock will
result in
A.large conversion premiums for the firm’s convertible bonds
B.small conversion premiums for the firm’s convertible bonds
C.negative conversion premiums for the firm’s convertible bonds
D.no effect at all on conversion premiums
36) The most important feature of the preemptive right is that the rights
A.may be sold for profit
B.afford stockholders possible protection against dilution
C.may be cumulatively voted
D.are nontransferable
37) A retirement plan guarantees to pay to you or your estate a fixed amount for 20
years. At the time of retirement, you will have $73,425 to your credit in the plan. The
plan anticipates earning 9% interest. Given the following information, how much will
your annual benefits be?
Present value of $1 PVIF = .178
Future value of $1 FVIF = 5.604
Present value of annuity PVIFA = 9.129
Future value of annuity FVIFA = 51.16
A.$1,435
B.$13,070
C.$8,043
D.$13,102
38) Shelf registration
A.allows firms to file with the SEC 20 days before the issue date
B.is advantageous primarily to smaller investment banking firms
C.allows firms to issue securities when market conditions are more favorable than
current conditions
D.More than one of the options
39) The Taylor Corporation is using a machine that originally cost $88,000. The
machine is being depreciated by the straight-line method over eight years ($11,000 per
year) and has four years of depreciation remaining. The machine has a book value of
$44,000 and a current market value of $40,000. Jacqueline Elliott, the Chief Financial
Officer of Taylor, is considering replacing this machine with a newer model costing
$75,000. The new machine will save $5,000 in after-tax earnings each year for the next
six years. The new machine is in the 5-year MACRS category. Taylor Corporation is in
the 34% tax bracket and has a 10% cost of capital.
a) Calculate the cash inflows from the sale of the old machine.
b) Calculate the net cost of the new machine.
c) Calculate the incremental depreciation on the new versus the old machine.
d) Determine the net present value of the new machine. Should they purchase the new
machine?
40) Green Co. has total assets $400,000, a cost of borrowed funds of 6%, and an EBIT
of $42,500. From a financial break-even perspective, Green Co. is
A.breaking even
B.lower than the breakeven point
C.higher than the break-even point
D.in need of new financing
41) The lower borrowing costs in the Eurodollar market as compared to the U.S. are
often attributed to
A.lower inflation abroad
B.higher inflation in the United States
C.slower money growth in the United States
D.smaller overhead costs and the absence of a compensating balance requirement
abroad
42)
Refer to the figure above. The degree of financial leverage (DFL) is _____.
A.3.50x
B.1.40x
C.1.95x
D.1.25x
43) The London Interbank Offered Rate (LIBOR)
A.competes with the U.S. Prime Rate for those companies with an international
presence
B.has been lower than the U.S. Prime Rate for at least the last decade
C.is an estimate of the interbank lending rate for London banks
D.All of these options are correct
44) The higher the bond rating,
A.the higher the interest rate on a bond
B.the lower the interest rate on a bond
C.the higher the call premium
D.the lower the call premium
45) Which of the following generally does NOT influence the dividend policy of the
firm?
A.The cash position of the firm
B.The desire for control
C.Seasonal changes in the level of income
D.Investors’ expectations of the future based on dividend policy