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1) The base level of sales must be held constant to compare the total leverage associated
with different levels of fixed costs.
2) Foreign bond is an international bond that is sold primarily in countries other than
the country of the currency in which the issue is denominated.
3) In finding the operating breakeven point, it is important to divide the cost of goods
sold and operating expenses into fixed and variable operating costs.
4) Because of the basic mathematics of compounding and discounting, the risk-adjusted
discount rate (RADR) approach implicitly assumes that risk is an increasing function of
time.
5) The market price of a callable bond will not generally exceed its call price, except in
the case of a convertible bond.
6) The exercise price or option price of a warrant is normally set below the market price
of the firm's stock at the time of issuance.
7) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
The debt ratio for Dana Dairy Products in 2013 was ________. (See Table 3.2)
A) 50 percent
B) 11 percent
C) 55 percent
D) 44 percent
8) The depreciable value of an asset, under MACRS, is ________.
A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value
9) As credit standards are relaxed, sales are expected to ________ and the investment in
accounts receivable is expected to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
10) What is the current price of a $1,000 par value bond maturing in 12 years with a
coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?
A) $604
B) $1,090
C) $1,060
D) $1,073
11) A group formed by an investment banker to share the financial risk associated with
underwriting new securities is called a(n) ________.
A) underwriting syndicate
B) selling group
C) investment banking consortium
D) broker pool
12) A ________ permits the firm to raise additional funds at some point in the future by
selling common stock and thereby shifting the firm's capital structure to a less highly
levered position.
A) put option
B) stock purchase warrant
C) conversion feature
D) repurchase agreement
13) A proxy statement gives shareholders the right ________.
A) of one vote for each share owned
B) to give up their vote to another party
C) to maintain their proportionate ownership in the corporation when new common
stock is issued
D) to sell their share of stock at a premium
14) Tangshan Mining Company has an outstanding issue of convertible bonds with a
$1,000 par value. The bonds have a 10 percent coupon rate, have a 10-year maturity,
and are convertible into 100 shares of common stock. The yield to maturity on bonds of
similar risk is 10 percent and the market price of the firm's common stock is currently
$15.00. Based on this information, the conversion value of the bond is ________.
A) $1,000.00
B) $1,500.00
C) $750.00
D) $1250.00
15) Tangshan Mining has extended credit terms of 3/15 net 30 EOM. The cost of giving
up the cash discount, assuming payment would be made on the last day of the credit
period, would be ________.
A) 75.26%
B) 3.1%
C) 72.99%
D) 37.12%
16) The specific cost of each source of long-term financing is based on ________ and
________ costs.
A) before-tax; historical
B) after-tax; historical
C) before-tax; book value
D) after-tax; current
17) Which of the following is true of call and put options?
A) Options are issued by private firms
B) The presence of options trading in a firm's stock could increases the firm's share
price
C) Options are a source of funding to a corporation
D) Call options help to manage downside risk and put options help to manage upside
risk
18) Lenders of secured short-term funds prefer collateral ________.
A) as it reduces the risk of default
B) that are illiquid assets
C) to reduce the losses if the borrower defaults
D) so that they can charge a higher interest rate
19) The ________ is utilized to value preferred stock.
A) capital asset pricing model
B) arbitrage pricing model
C) zero-growth model
D) Black-Scholes model
20) 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 NPV for Project
M is ________. (See Table 12.3)
A) $156,494
B) $122,970
C) $85,732
D) $500,000
21) The ________ rate is typically the nominal rate of interest on a three-month U.S.
Treasury bill.
A) expected
B) real
C) risk-free
D) premium
22) 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 incremental depreciation expense for year 5 is ________. (See Table 11.3)
A) $2,250
B) $5,110
C) $7,950
D) $6,360
23) Calculate the NPV of projects X and Y assuming that the firm did not employ the
RADR method and instead used the firm's overall cost of capital to evaluate projects X
and Y. (See Table 12.5)
24) Karina's Caribbean Foods had total assets as recorded on its balance sheet are
$1,500,000. What is the value of the Karina's common stock if it has $950,000 in
liabilities, and 7,500 shares of common stock outstanding?
25) Table 11.1
Fine Press is considering replacing the existing press with a more efficient press. The
new press costs $55,000 and requires $5,000 in installation costs. The old press was
purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net
of any removal costs today. Both presses are depreciated under the MACRS 5-year
recovery schedule. The firm is in 40 percent marginal tax rate.
Calculate the book value of the existing press being replaced. (See Table 11.1)
26) Sunshine Corporation had a retained earnings balance of $850,000 at the beginning
of 2015. By the end of 2015, the company's retained earnings balance stood at
$950,000. During 2015, the company earned $245,000 as net profits after paying its
taxes. The company was then able to pay its preferred stockholders a sum of $45,000.
Compute the common stock dividend per share in 2015 assuming 10,000 shares of
common stock outstanding.
27) Meese Paper Distributors, Inc. has before-tax earnings of $1,900,000. Calculate the
amount of the total tax liability.
Range of taxable incomeMarginal rate
$ 0to$50,00015%
50,000to75,00025
75,000 to100,00034
100,000to335,00039
335,000 to10,000,00034
10,000,000to15,000,00035
15,000,000to18,333,33338
28) Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year
ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is
currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today,
what rate of return would he realize?
29) What is the value of an asset which pays $200 a year for the next 5 years and can be
sold for $1,500 at the end of five years from now? Assume that the opportunity cost is
10 percent.
30) John borrowed $12,000 to buy a new car and expects to pay $564.87 per month for
the next 2 years to pay off the loan. What is the loan's rate of interest?
