1) The cost of debt, preferred stock, and common equity must all be adjusted for tax
implications.
2) Operating leverage works best when volume is increasing.
3) It is more likely for financial managers to focus on cash flow and corporate
executives to focus on earnings of the company.
4) The interest factor for the present value of a single amount is the reciprocal of the
future value interest factor.
5) Sales commissions and raw materials are variable costs.
6) The Sarbanes-Oxley Act reduced agency conflicts by giving corporate managers
greater flexibility to select their preferred candidates to the board of directors.
7) U.S. government agency securities are directly guaranteed by the full faith and credit
of the U.S. Treasury.
8) A “put option” is the right to purchase securities at a predetermined price.
9) As noted in Finance in Action, initial public offerings have now increased because
long-term results are favored by shareholders and institutional investors.
10) The lending rate for borrowers in the Eurodollar market is based on the prime
lending rate.
11) General Motors Acceptance Corporation (GMAC) is one of the biggest issuers of
asset-backed securities.
12) A floating rate bond’s price is inversely related to the changes in interest rates.
13) Financial management requires both short-term activities as well as long-term
planning such as raising funds.
14) Expected value analysis requires taking the difference between the actual projected
outcome and the historic outcome times its probability and then summing these totals.
15) Preferred stock is compensated for not having the same ownership privileges as
common stock by offering a fixed dividend stream supported by a binding contractual
obligation.
16) The internal rate of return is the interest rate that equates the cash outflows of an
investment with the subsequent inflows.
17) Under normal conditions (70% probability), Plan A will produce a $20,000 higher
return than Plan B. Under tight money conditions (30% probability), Plan A will
produce $100,000 less than Plan B. What is the expected value of return?
A.$28,000
B.($16,000)
C.$58,000
D.($2,000)
18) Which investment has the least amount of risk?
A.Coefficient of variation = 8%, expected return = $800
B.Coefficient of variation = 8%, standard deviation = $200
C.Standard deviation = $300, expected return = $5,000
D.Standard deviation = $100, expected return = $80
19) The primary disadvantage of accrual accounting is that
A.it does not match revenues and expenses in the period in which they are incurred
B.it does not appropriately measure accounting profit
C.it does not recognize accounts receivable
D.it does not adequately show the actual cash flows of the firm
20) A correlation coefficient of _____ provides the greatest risk reduction.
A.0
B.-1
C.+1
D.+.5
21) Preferred stock may be good for a company because it
A.expands the capital base of the firm without diluting the common stock ownership
B.does not require interest payment in times of financial trouble, but are tax-deductible
when dividends are paid
C.is not as costly as common stock or bonds
D.has no future negative ramifications when dividend payments are missed
22) Financial instruments in the capital markets generally fall under which category in
the balance sheet?
A.Short-term liabilities and equity
B.Long-term liabilities and equity
C.Near cash assets
D.None of these options
23) Assume a $6,500 investment and the following cash flows for two alternatives.
Under the payback method, which of the following could be concluded?
A.Investment X should be selected
B.Investment Y should be selected
C.Investment X and Y provide the same payback period
D.Neither investment is acceptable under the payback method
24) Match the following with the questions below:
1>corporation
2>subchapter S corporation
3>partnership
4>articles of partnership
5>sole proprietorship
6>agency theory
7>capital structure theory
8>insider trading
A. The ability to make profits on financial securities because of having knowledge not
available to the public.
B. An agreement of partners specifying the ownership interest of a company.
C. A form of organization that represents single-person ownership and offers the
advantages of simplicity of decision making and low organizational and operating costs.
D. Separate legal entity owned by shareholders who only have limited liability.
E.The study of the relative importance of debt and equity.
F.Examines the relationship between the owners of the firm and the managers of the
firm.
G. A form of ownership in which profit is taxed as direct income to the stockholders
and thus is only taxed once.
H. A form of ownership that carries unlimited liability to the owners and where the
profits are taxed at the individual tax rates of the owners.
25) LIBOR is
A.a resource used in production
B.an interest rate paid on Eurodollar loans in the London market
C.an interest rate paid by European firms when they borrow Eurodollar deposits from
U.S. banks
D.the interest rate paid by the British government on its long-term bonds
26) All of the following is information required to create a net present value profile
except for which one?
A.NPV at a 0 discount rate
B.NPV at the risk-free rate
C.NPV at the cost of capital
D.IRR of investment
27) As the interest rate increases, the present value of an amount to be received at the
end of a fixed period
A.increases
B.decreases
C.remains the same
D.Not enough information is given to tell
28) The elimination of overlapping functions and the meshing of two firms’ strong areas
or products creates the managerial incentive for mergers known as
A.horizontal integration
B.vertical integration
C.synergy
D.theportfolio effect
29) Permanent current assets are not a factor in a manager’s decision-making process
when all current assets will be
A.financed by short-term debt
B.long-term in nature
C.self-liquidating
D.internally financed
30) Many bonds have some orderly, preplanned, alternative system of repayment.
Which of the following apply?
A.Sinking funds
B.Serial bonds
C.Income bonds
D.Sinking funds and serial bonds
31) Buggy Whip Manufacturing Company is issuing preferred stock yielding 8%.
Selten Corporation is considering buying the stock. Assume that Buggy’s tax rate is 0%
due to continuing heavy tax losses, and Selten’s tax rate is 34%. What is the after-tax
preferred yield for Selten? Assume the tax rate on dividends is 15%.
A.7.22%
B.5.33%
C.7.64%
D.8.04%
32) Match the following with the items below:
1>commercial paper
2>asset-backed public offering
3>bank holding company
4>cash discount
5>spontaneous sources of funds
6>LIBOR
7>net trade credit
8>term loan
9>compensating balances
10>annual percentage rate (APR)
11>self-liquidating loan
12>prime rate
13>installment loan
14>Eurodollar loan
A. A measure of the relationship between accounts receivable and accounts payable for
the firm.
B. A measure of the effective rate of a loan.
C.The practice of using accounts receivable from sales of computers and automobiles,
for example, to collateralize an offering of securities in the secondary market.
D. A reduction in the amount payable by the customer if a payment is made within a
specified time.
E. An extension of credit generally for a time period of from one to seven years.
F. Arise through the normal course of business from various points within the firm.
G. Use a series of equal payments to retire a loan.
H. A loan from a foreign bank denominated in U.S. dollars.
I. A legal entity in which one key bank owns a number of affiliate banks as well as other
nonbank subsidiaries engaged in related activities.
J. An unsecured promissory note issued by a large corporation to investors.
K. A bank requirement that business customers maintain a minimum level of cash in
their account.
L. A benchmark interest rate set in Europe that is competitive with the U.S. prime rate.
M. Bank loans that are usually paid off as the inventory is sold and cash is collected.
N. The interest level charged to a U.S. bank’s most creditworthy customers.
33) A serial bond repayment plan involves a(n)
A.lump-sum payment at maturity
B.conversion of debt to common stock
C.early redemption of all debt
D.series of installments to retire the debt over the life of the issue
34) A loan arrangement in which a parent company reduces its political risk by using an
intermediary bank rather than a direct transfer of funds to a subsidiary is called a(n)
A.parallel loan
B.Eximbank direct loan
C.fronting loan
D.None of these
35) Companies that perform well
A.can sell their stock for a lower price
B.can minimize dilution when issuing new shares
C.can issue debt at a lower interest rate
D.can minimize dilution when issuing new shares and can issue debt at a lower interest
rate
36) The term structure of interest rates
A.changes daily to reflect current competitive conditions in the money and capital
markets
B.plots returns for securities of different risk
C.shows the relative interest rate spread between bonds with different risk ratings such
as AAA, AA, A, BBB, and so on
D.depicts interest rates for T-bills over the last year
37) The problem in stretching out the maturity of marketable securities is that
A.you are legally locked in until the maturity date
B.longer-term securities are often not available
C.there is a greater possibility of loss
D.interest rates are generally lower
38) The Wet Corp. has an investment project that will reduce expenses by $25,000 per
year for three years. The project’s cost is $55,000. If the asset is part of the three-year
MACRS category (33% first year depreciation) and the company’s tax rate is 34%, what
is the cash flow from the project in year 1?
A.$16,800
B.$15,100
C.$22,671
D.$16,667
39) Match the following to the items below:
1>fronting loan
2>repatriation of earnings
3>expropriation
4>translation exposure
5>foreign exchange risk
6>currency futures contract
7>purchasing power parity theory
8>parallel loan
9>interest rate parity theory
10>transaction exposure
11>letter of credit
12>multinational corporation
13>foreign exchange rate
14>balance of payments
A. The relationship between the values of two currencies.
B. The interplay between interest rate differentials and exchange rates.
C. An arrangement in which a U.S. firm lends dollars to a foreign affiliate in the U.S.,
while that affiliate’s parent company lends its own currency to the U.S. firm’s affiliate in
that country.
D. A firm that does business across its national border.
E. A written promise made by an IMPORTER’S bank to an EXPORTER to pay for
merchandise.
F.Net income forwarded from the foreign affiliate to the parent company.
G. A system of government accounts that catalogs the flow of economic transactions
between the residents of one country and those of other countries.
H. An instrument that may be used to protect against foreign exchange risk.
I. The possibility of experiencing a drop in revenue or an increase in cost in an
international transaction due to a change in foreign exchange rates.
J. Losses and gains on the balance sheet of an MNC as a result of changing exchange
rates.
K. Currency exchange rates tend to vary inversely with their respective purchasing
powers in order to provide the same or similar purchasing power in each country.
L. A parent company’s loan to its foreign subsidiary through a large international bank.
M. A government takeover of a foreign subsidiary’s assets.
N. Foreign exchange gains or losses resulting from international business transactions.
40) In regard to two-step buyouts,
A.the SEC highly approves of them
B.the FTC highly approves of them
C.the SEC is keeping a close eye on them
D.the FTC is keeping a close eye on them
41) The value of a common stock is based on its
A.past performance
B.historic dividends
C.current earnings
D.value of future benefits to the holder
42) The term structure of interest rates
A.is often referred to as the yield curve
B.depicts the relative level of short- and long-term interest rates
C.is usually constructed with U.S. government securities of varying maturities
D.All of the options
43) Underpricing occurs
A.when additional shares are to be issued for companies with securities already publicly
traded
B.to aid in the market’s reception of the securities
C.in large secondary offerings
D.All of these options
44) The longer the life of an investment
A.the more significant the discount rate
B.the less significant the discount rate
C.make no difference to the discount rate
D.None of these options