1) A shareholder receiving a stock dividend typically receives nothing of value.
2) Pledges of accounts receivable are never made on a notification basis because the
lender does not trust the borrower to collect the pledged account receivable and remit
these payments as they are received.
3) The cost of retained earnings is generally higher than both the cost of debt and cost
of preferred stock.
4) The purchase of additional physical facilities, such as additional property or a new
factory, is an example of a capital expenditure.
5) The common stock entry in balance sheet is the par value of common stock.
6) The level of dividends a firm expects to pay is often directly related to how rapidly it
expects to grow and expand its operations.
7) Primary and secondary markets are markets for short-term and long-term securities,
respectively.
8) Time value of money is based on the belief that a dollar that will be received at some
future date is worth more than a dollar today.
9) The liquidity of a business firm is measured by its ability to satisfy its long-term
obligations as they come due.
10) An approach to capital rationing that involves graphing project returns in
descending order against the total dollar investment to determine the group of
acceptable projects is called the ________.
A) net present value approach
B) internal rate of return approach
C) payback approach
D) profitability index approach
11) A ________ occurs when the operations of the acquiring and target firms are
combined in order to achieve economies and thereby cause the performance of the
merged firm to exceed that of the pre-merged firm.
A) financial merger
B) hostile takeover
C) operating merger
D) strategic merger
12) The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a
360-day year) is ________.
A) 7.3 percent
B) 6.1 percent
C) 14.7 percent
D) 12.2 percent
13) The ________ measures the amount of time it takes a firm to recover its initial
investment.
A) profitability index
B) internal rate of return
C) net present value
D) payback period
14) If the P/E paid is greater than 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) unrelated
15) ________ is a procedure resulting in a number reflecting an applicant’s credit
strength, derived as a weighted average of the scores obtained on a variety of key
financial and credit characteristics.
A) Credit scoring
B) Aging of receivables
C) CAPM
D) The economic order quantity model
16) A firm can reduce its cash conversion cycle by ________.
A) increasing the average age of inventory
B) increasing the average collection period
C) increasing the operating cycle
D) increasing the average payment period
17) A major weakness of a partnership is ________.
A) the difficulty in maintaining owners’ control
B) the difficulty in liquidating or transferring ownership
C) the double taxation of income
D) its high organizational costs
18) Which the following is true of stock purchase warrants?
A) When a firm makes a large issue of debt, the attachment of stock purchase warrants
may deteriorate the marketability of the issue
B) Warrants are similar to conversion features on debt
C) Suppliers of debt are more likely to require warrants on an issue of debt from an
existing corporation than from a new firm
D) The attachment of warrants increases the required interest rate
19) A controller is commonly responsible for ________.
A) managing cash
B) financial accounting
C) managing credit activities
D) financial planning
20) Table 4.3
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for
the coming months of January through May. Historically, 75 percent of sales are for
cash with the remaining 25 percent collected in the following month. The ending cash
balance in January is $3,000.
The total cash receipts for April are ________. (See Table 4.3)
A) $5,000
B) $7,500
C) $9,250
D) $10,000
21) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its
efforts to price the issue, Zheng Corporation has identified a company of similar risk
with an outstanding bond issue that has an 8 percent coupon rate having a maturity of
ten years. This firm’s bonds are currently selling for $1,091.96. If interest is paid
annually for both bonds, what must the coupon rate of the new bonds be in order for the
issue to sell at par?
A) 5.78%
B) 6.88%
C) 6.50%
D) 6.71%
22) Leveraged buyouts require a target firm ________.
A) to have low level of investments in fixed assets
B) to possess high leverage in its capital structure
C) to maintain relatively high provision for doubtful accounts
D) to have a high level of bankable assets
23) Which of the following is true of a tender offer?
A) It is another form of put option
B) The management of the target company has the exclusive right to accept the offer
C) The target firm may take defensive tactics to ward off the offer
D) It facilitates negotiations for an acquisition
24) At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and
a degree of financial leverage of 1.5. The firm’s degree of total leverage is ________.
A) 3.5
B) 3.0
C) 0.5
D) 1.3
25) The cost of common stock equity is ________.
A) the cost of the guaranteed stated dividend expected by the stockholders
B) the rate at which investors discount the expected dividends of the firm to determine
its share value
C) the after-tax cost of the interest obligations
D) the historical cost of floating the stock issue