1) A stock split commonly increases the stock’s per share par value.
2) Business risk is the risk to a firm of being unable to cover operating costs.
3) The dominant organized options exchange in which options are traded is the Chicago
Board Options Exchange (CBOE).
4) The empirical measurement of beta can be approached by using least-squares
regression analysis to find the regression coefficient (bj) in the equation for the slope of
the “characteristic line.”
5) The dollar breakeven sales level can be solved for by dividing fixed costs by the
contribution margin ratio.
6) Preemptive rights allow common stockholders to maintain their proportionate
ownership in the corporation when new issues are made.
7) Using simulations, a firm can determine the amount of financing needed to protect it
adequately against a cash shortage.
8) A lessee is the receiver of the services of the assets under a lease whereas a lessor is
the owner of the assets that are being leased.
9) ________ is the price at which a bond would sell in the market without the
conversion feature.
A) Conversion value
B) Straight bond value
C) Strike price value
D) Market premium
10) A decrease in fixed operating costs will result in ________ in the degree of financial
leverage.
A) a decrease
B) an increase
C) no change
D) an undetermined change
11) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 2, the tax effect on the sale of the existing asset at the end of the fifth year
results in ________. (See Table 11.2)
A) $12,000 tax liability
B) $14,560 tax liability
C) $25,280 tax liability
D) $16,600 tax liability
12) Table 15.4
Bowring Ball Bearings has 10 different items in its inventory. The average number of
units held in inventory and the average unit cost are listed for each item. The firm uses
an ABC system of inventory control.
Inventory items that belong in the A category include ________. (See Table 15.4)
A) Items 4 and 6
B) Items 1 and 7
C) Items 3 and 9
D) Items 1 and 9
13) Harry Trading Company must choose its optimal capital structure. Currently, the
firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of
$5.44 per share. Dividends are expected to remain at this level indefinitely.
Stockholders currently require a 12.1 percent return on their investment. Harry is
considering changing its capital structure if it would benefit shareholders. The firm
estimates that if it increases the debt ratio to 30 percent, it will increase its expected
dividend to $5.82 per share. Again, dividends are expected to remain at this new level
indefinitely. However, because of the added risk, the required return demanded by
stockholders will increase to 12.6 percent. Based on this information, should Harry
make the change?
A) Yes, since the value of the firm will increase by $1.23 per share
B) No, since the value of the firm will decrease by $1.23 per share
C) Yes, since the value of the firm will increase by $0.25 per share
D) No, since the value of the firm will decrease by $0.25 per share
14) Which of the following serves as an intermediary channeling the savings of
individuals, businesses, and governments into loans and investments?
A) financial institutions
B) financial markets
C) Securities and Exchange Commission
D) OTC market
15) Which of the following is true of net working capital?
A) When current assets of a firm exceed its current liabilities,a firm is said to have
negative net working capital
B) When current assets of a firm are less than its total assets,a firm is said to have
positive net working capital
C) When current assets of a firm exceed its current liabilities,a firm is said to have
positive net working capital
D) When current assets of a firm exceed its total assets,the firm is said to have negative
net working capital
16) Which of the following is true of current assets?
A) The time of conversion of current assets to more liquid form is relatively
unpredictable
B) They are used to fund long-term operations and pay long-term expenses
C) They are more profitable because they add more value to the product than that
provided by fixed assets
D) They are sources of short-term financing for a firm
17) Which of the following activities of a finance manager determines how the firm
raises money to pay for the assets in which it invests?
A) financial analysis and planning
B) investment decisions
C) financing decisions
D) analyzing and planning cash flows
18) The philosophy of the ________ is that a firm would have only work-in-process
inventory.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) LIFO method
19) MACRS RATE
A corporation has decided to replace an existing asset with a newer model. Two years
ago, the existing asset originally cost $30,000 and was being depreciated under
MACRS using a five-year recovery period. The existing asset can be sold for $25,000.
The new asset will cost $75,000 and will also be depreciated under MACRS using a
five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and
capital gains, the initial investment is ________.
A) $42,000
B) $52,440
C) $54,240
D) $50,000