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1) Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently
dividends are subject to a maximum tax rate of 8 percent.
2) The operating cycle is the length of time a firm's cash is tied up between payment for
production inputs and receipt of payment from the sale of the resulting finished product.
3) The Eurocurrency market is a market for short-term bank deposits denominated in
U.S. dollars or other easily convertible currencies.
4) A derivative security is neither debt nor equity but instead derives its value from an
underlying asset.
5) The security market line is not stable over time and shifts over time in response to
changing inflationary expectations.
6) Which of the following is an advantage of leasing from a lessee's perspective?
A) The return to the lessor is quite high
B) prohibition on leasehold improvements
C) Maximum claim of the lessor in the event of bankruptcy is ten years of lease
payments.
D) Maximum claim of the lessor in the event of bankruptcy is three years of lease
payments.
7) What is the NPV for a project whose cost of capital is 15 percent and initial after-tax
cost is $5,000,000 and is expected to provide after-tax operating cash inflows of
$1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in
year 4?
A) $1,700,000
B) $371,764
C) -$137,053
D) -$4,862,947
8) When evaluating a capital budgeting project, installation costs of a new machine
must be considered as part of ________.
A) the operating cash inflows
B) the initial investment
C) the incremental operating cash inflows
D) the operating cash outflows
9) Tender offer repurchase is a repurchase program in which a firm ________.
A) offers to repurchase a fixed number of shares, usually at a discount relative to the
market value
B) offers to repurchase a fixed number of shares, usually at a premium relative to the
market value
C) offers to repurchase a fixed number of shares, usually at par relative to the market
value
D) has a right to repurchase a fixed number of shares at a premium relative to the
market value
10) The tax liability of a corporation with ordinary income of $1,100,000 is ________.
Range of taxable incomeMarginal rate
$ 0to$ 50,00015%
50,000 to75,00025
75,000 to100,00034
100,000 to 335,00039
335,000to10,000,00034
10,000,000 to15,000,00035
A) $362,250
B) $340,000
C) $374,000
D) $390,000
11) Find the present value of the following stream of a firm's cash flows, assuming that
the firm's opportunity cost is 9 percent.
A) $ 13,252
B) $141,588
C) $ 10,972
D) $ 79,345
12) A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a
variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of
operating leverage is ________.
A) 1.07
B) 1.11
C) 1.18
D) 1.23
13) A ________ is a short-term, unsecured promissory note issued by a corporation
with a very high credit standing.
A) negotiable certificate of deposit
B) repurchase agreement
C) money market mutual fund
D) commercial paper
14) When issuing a(n) ________ the issuer can annually deduct the current year's
interest accrual without having to actually pay the interest until the bond matures.
A) junk bond
B) zero coupon bond
C) floating rate bond
D) extendible note
15) Promo Pak has compiled the following financial data:
(a)Calculate the weighted average cost of capital using book value weights.
(b)Calculate the weighted average cost of capital using market value weights.
16) Which of the following is considered as a violation of business ethics?
A) earnings management
B) repurchase of shares
C) using the call option on a callable bond when the interest rate is low
D) paying a high amount of dividends every year
17) Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to
prepare a pro forma balance sheet for cash and profit planning purposes for the coming
year ended December 31, 2015. Using the percent-of-sales method and the following
financial data, prepare the pro forma balance sheet in order to answer the following
multiple choice questions.
(a)The firm estimates sales of $1,000,000.
(b)The firm maintains a cash balance of $25,000.
(c)Accounts receivable represents 15 percent of sales.
(d)Inventory represents 35 percent of sales.
(e)A new piece of mining equipment costing $150,000 will be purchased in 2010.
Total depreciation for 2010 will be $75,000.
(f)Accounts payable represents 10 percent of sales.
(g)There will be no change in notes payable, accruals, and common stock.
(h)The firm plans to retire a long term note of $100,000.
(i)Dividends of $45,000 will be paid in 2015.
(j)The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2014
The pro forma accumulated retained earnings amount is ________. (See Table 4.5)
A) $90,000
B) $175,000
C) $140,000
D) $130,000
18) As sales increase, a company needs more inventory and more employees resulting
in ________.
A) more accounts payable and accruals, and therefore increasing its spontaneous
liabilities
B) less accounts payable and accruals, and therefore decreasing its spontaneous
liabilities
C) more accounts payable and accruals, and therefore decreasing its spontaneous
liabilities
D) less accounts payable and accruals, and therefore increasing its spontaneous
liabilities
19) The constant-growth valuation model is based on the premise that the value of a
share of common stock is ________.
A) the sum of the dividends and expected capital appreciation
B) determined based on an industry standard P/E multiple
C) determined by using a measure of relative risk called correlation coefficient
D) equal to the present value of all expected future dividends
20) What is the approximate yield to maturity for a $1,000 par value bond selling for
$1,120 that matures in 6 years and pays 12 percent interest annually?
A) 8.5 percent
B) 9.3 percent
C) 12.0 percent
D) 13.2 percent
21) Which of the following methods can be utilized by a firm when it wants to purchase
outstanding shares of common stock?
A) a purchase of stock through private placement
B) a tender offer at varying prices
C) a tender offer at a specified price
D) an European auction plan
22) Which of the following is a marketable security?
A) mutual funds
B) Treasury bill
C) provident fund
D) forward contracts
23) Table 4.7
The income statement and balance sheet for the ZZZ Mattress Co. for the year ended
December 31, 2015 follow.
Balance Sheet
ZZZ Mattress Company
December 31, 2015
The ZZZ Mattress Co. has been requested by the 1st National Bank, a major creditor, to
prepare a pro forma balance sheet for the year ending, December 31, 2016. Using the
percent-of-sales method and the following financial data, prepare the pro forma income
statement and balance sheet and discuss the resulting external financing required. (See
Table 4.7)
2016 sales are estimated at $330,000.
Accounts receivable represent 20 percent of sales.
A minimum cash balance of $1,650 is maintained.
Inventory represents 32 percent of sales.
Fixed-asset outlays in 2006 are $20,000. Total depreciation expense for 2016 will be
$15,000.
Accounts payable represents 15 percent of sales.
Notes payable and accruals will remain the same.
No long-term debt will be retired in 2016.
No common stock will be repurchased in 2016.
The firm will pay dividends equal to 50 percent of its earnings after taxes.
24) Which of the following statements about put and call options is true?
A) They are traded only over-the-counter
B) They are a form of deferred equity financing by a firm
C) They can be used to lock in a gain or prevent a loss on a stock holding
D) They provide the seller with an opportunity to earn larger returns than simply buying
or selling common stock
