1) Since the sales price per unit generally decreases with volume and the cost per unit
generally increases with volume, the true breakeven point may be different from those
obtained using linear revenue and cost functions as assumed in the breakeven analysis.
2) The inclusion of assets from countries that are less sensitive to the U.S. business
cycle reduces the portfolio’s responsiveness to market movement and to foreign
currency fluctuation.
3) Breakeven analysis is used by a firm to determine the level of operations necessary
to cover all fixed operating costs and to evaluate the profitability associated with
various levels of production.
4) Playing the float involves the strategic use of mailing points and bank accounts to
lengthen mail float and clearing float, respectively.
5) The DuPont system allows a firm to break its return on equity into a profit-on-sales
component, an efficiency-of-asset-use component, and a use-of-operating leverage
component.
6) In the grossing up procedure, MNCs add the before-tax subsidiary income to their
total taxable income, calculate the U.S. tax liability on the grossed -up income, and the
related taxes are paid in the foreign country are applied as a credit against the additional
U.S. tax liability.
7) The EBIT-EPS approach to capital structure involves selecting the capital structure
that maximizes earnings before interest and taxes (EBIT) over the expected range of
earnings per share (EPS).
8) Development of pro forma financial statements helps a financial manager to project
the amount of external financing required to support a given level of sales as well as
overall financial performance of the firm in the coming year.
9) As a result of the Maastricht Treaty of 1991, 12 EU nations adopted a single
currency, the euro, as a continent-wide medium of exchange.
10) Table 12.2
A firm is considering investment in a capital project which is described below. The
firm’s cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a
risk index of 1.5. The firm uses the following equation to determine the risk adjusted
discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital – Rf)
The discount rate that should be used in the net present value calculation to compensate
for risk is ________. (See Table 12.2)
A) 6 percent
B) 15 percent
C) 18 percent
D) 24 percent
11) When a firm pays a stated dollar dividend and adjusts the payment as earnings
increase, its dividend policy can be called ________.
A) a low-regular-and-extra dividend policy
B) a regular dividend policy
C) a target dividend-payout ratio policy
D) a constant-payout-ratio dividend policy
12) Which of the following is true of accrual basis accounting?
A) Expenses are recognized either when they are incurred or cash is paid
B) Revenue is recognized when a customer pays cash
C) Expenses are recognized when they are incurred
D) Revenue is recognized when a customer pays cash or shows interest to purchase the
product or service
13) The first step in the collection of overdue accounts is ________.
A) a letter
B) contacting a collection agency
C) legal actions
D) a personal visit
14) Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive
projects M and N which are described below. Tangshan Mining’s overall cost of capital
is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent.
Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
Using the risk-adjusted discount rate method of project evaluation, the better
investment for Tangshan Mining is ________. (See Table 12.3)
A) Project M because it has a higher NPV
B) Project N because it has a higher NPV
C) Project N because it has a higher IRR
D) Project M because it has a higher IRR
15) Which of the following is true of mortgage-backed securities?
A) Mortgage-backed securities assure a flat 15% return
B) Mortgage-backed securities are guaranteed by the U.S. government
C) Mortgage-backed securities can only be purchased by investment banks
D) Mortgage-backed securities represent claims on the cash flows generated by a pool
of homeloans
16) What is the highest effective rate attainable with a 12 percent nominal rate?
A) 12.00%
B) 12.55%
C) 12.75%
D) 12.95%
17) A firm issued $2 million worth of commercial paper that has a 90-day maturity and
sells for $1,900,000. The annual interest rate on the issue of commercial paper is
________ (assume 360 days in a year).
A) 5.26 percent
B) 10 percent
C) 17.77 percent
D) 21.05 percent
18) When a portion of a firm’s fixed assets are financed with current liabilities,
________.
A) the firm will have positive net working capital
B) the net working capital will decrease
C) the current ratio will increase
D) the firm will have negative net working capital
19) The difference between the number of days resources are tied up in the operating
cycle and the number of days a firm can use spontaneous financing before payment is
made is the ________.
A) cash conversion cycle
B) average payment period
C) operating cycle
D) average age of inventory