1) The foreign direct investment (FDI) is a multi-national corporation’s transfer of
capital, managerial, and technical assets from a foreign country to its home country.
2) A lease arrangement has many more restrictive covenants than those that are
normally included as part of a long-term loan.
3) Exchange rate risk is easier to protect as compared to political risk.
4) The liquidation value per share of common stock is the amount per share of common
stock that would be received if all of a firm’s assets were sold for their accounting value
and the proceeds remaining were divided among common stockholders.
5) The aggressive funding strategy is a strategy by which a firm finances its current
assets with short-term funds and its fixed assets with long-term funds.
6) Investors purchase a stock when they believe that it is undervalued and sell when
they feel that it is overvalued.
7) Nonrecourse basis is the basis on which accounts receivable once sold to a factor, the
factor accepts all the credit risks on the purchased accounts.
8) In the OTC market, the ask price is the highest price offered by a dealer to purchase a
given security.
9) The market rewards firms that adopt a constant dividend payout policy rather than a
fixed or increasing level of dividends through higher share prices.
10) Methods of divestiture include the sale of a product line to another firm, the sale of
a unit to existing management, spin-offs, and the liquidation of assets.
11) The liquidity preference theory suggests that the shape of the yield curve is
determined by the supply and demand for funds within each maturity segment.
12) Spontaneous liabilities such as accounts payable and accruals represent a source of
financing that arise from the normal course of business.
13) The primary concern of creditors when assessing the strength of a firm is its
________.
A) profitability
B) leverage
C) short-term liquidity
D) share price
14) In defending against a hostile takeover, the strategy that involves the target firm
creating securities that give their holders certain rights that become effective when a
takeover is attempted is called the ________ strategy.
A) shark repellent
B) greenmail
C) poison pill
D) golden parachute
15) Taizhou Products uses 800 units of a product per year on a continuous basis. The
product has carrying costs of $50 per unit per year and order costs of $300 per order. It
takes 30 days to receive a shipment after an order is placed and the firm requires a
safety stock of 5 days usage in inventory.
(a)Calculate the economic order quantity (EOQ).
(b)Determine the reorder point. (Assume a 360-day year.)
16) The agency problem may result from a manager’s concerns about ________.
A) job security
B) maximizing shareholder value
C) corporate goals
D) increasing credit worthiness
17) Table 9.2
A firm has determined its optimal structure which is composed of the following sources
and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A
flotation cost of 2 percent of the face value would be required in addition to the
premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The
dividend expected to be paid at the end of the coming year is $5. Its dividend payments
have been growing at a constant rate for the last five years. Five years ago, the dividend
was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2
per share and the firm must pay $1 per share in flotation costs. Additionally, the firm
has a marginal tax rate of 40 percent.
The firm’s cost of retained earnings is ________. (See Table 9.2)
A) 10.2 percent
B) 14.3 percent
C) 18.9 percent
D) 17.0 percent
18) ________ analysis is a technique used to assess the returns associated with various
cost structures and levels of sales.
A) Time-series
B) Marginal
C) Breakeven
D) Ratio
19) A firm is selling an existing asset for $5,000. The asset, when purchased, cost
$10,000, was being depreciated under MACRS using a five-year recovery period and
has been depreciated for four full years. If the assumed tax rate is 40 percent on
ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $1,320 tax liability
C) $1,160 tax liability
D) $2,000 tax benefit
20) One major expense associated with issuing new shares of common stock is
________.
A) coupon payment
B) sunk cost
C) overvaluation
D) underpricing
21) The current price of DEF Corporation stock is $26.50 per share. Earnings next year
should be $2 per share and it should pay a $1 dividend. The P/E multiple is 15 times on
average. What price would you expect for DEF’s stock in the future?
A) $13.50
B) $15.00
C) $26.50
D) $30.00
22) Given the returns of two stocks J and K in the table below over the next 4 years.
Find the expected return and standard deviation of holding a portfolio of 40% of stock J
and 60% in stock K over the next 4 years:
A) 10.7% and 1.34%
B) 10.6% and 1.79%
C) 10.6% and 1.16%
D) 14.3% and 2.02%
23) The dividend policy must be formulated considering two basic objectives, namely
________.
A) delaying the tax liability of the stockholder and information content
B) maximizing shareholder wealth and maintaining liquidity
C) maximizing shareholder wealth and providing for sufficient financing
D) maintaining liquidity and minimizing the weighted average cost of capital
24) A firm’s dividend payout ratio is calculated by ________.
A) dividing cash dividend per share by its earnings per share
B) dividing earnings per share by its cash dividend per share
C) dividing cash dividend per share by its net income
D) dividing net income by its cash dividend per share
25) In calculating the cost of common stock equity, ________.
A) the use of the capital asset pricing model (CAPM) is often preferred, because the
data required are more readily available
B) the use of the CAPM is preferred, because it directly considers risk and the effect of
inflation on the stock prices
C) the use of the constant-growth valuation model is often preferred, because the data
required are more readily available
D) the use of the constant-growth valuation model is often preferred, because it has a
stronger theoretical foundation
26) Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price
of $6,000,000. The primary motivation for Tangshan’s purchase of Zhengsen is for a
special piece of drilling equipment that it believes will generate after-tax cash flows if
$2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of
$9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000.
Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on
this information, what is the net value of the special drilling equipment?
A) $1,795,690
B) $1,500,000
C) ($1,795,690)
D) ($1,500,789)
27) Which of the following legal forms of organizations is characterized by unlimited
liability?
A) sole proprietorship
B) limited partnership
C) corporation
D) C-corporation
28) When assessing the fixed-payment coverage ratio, ________.
A) the lower its value the more risky is the firm
B) the lower its value, the higher is the firm’s financial leverage
C) preferred stock dividend payments can be disregarded
D) the higher its value, lesser is its reliability to pay up the debts
29) Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The
gluing machine costs $50,000 and requires installation costs of $2,500. This outlay
would be partially offset by the sale of an existing gluer. The existing gluer originally
cost $10,000 and is four years old. It is being depreciated under MACRS using a
five-year recovery schedule and can currently be sold for $15,000. The existing gluer
has a remaining useful life of five years. If held until year 5, the existing machine’s
market value would be zero. Over its five-year life, the new machine should reduce
operating costs (excluding depreciation) by $17,000 per year. Training costs of
employees who will operate the new machine will be a one-time cost of $5,000 which
should be included in the initial outlay. The new machine will be depreciated under
MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and
a 40 percent tax on ordinary income and capital gains.
The internal rate of return for the project is ________. (See Table 11.5)
A) between 7 and 8 percent
B) between 9 and 10 percent
C) greater than 12 percent
D) between 10 and 11 percent
30) A warrant is attached to a $1,000 par, 10 percent, 15-year bond, paying annual
interest and having 10 warrants attached for the purchase of the firm’s stock. The bonds
were initially sold for $1,020. When issued similar risk straight bonds were selling to
yield a 12 percent rate of return. Calculate the implied price of the warrant.
31) What potential biases exist in project selection if Nico Manufacturing did not adjust
for the difference in risk between Projects X and Y (See Table 12.5).
32) Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000,
paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and
has 5 years to maturity. What is the value of the bond assuming 14 percent rate of
interest?
33) Calculate the present value of an annuity of $3,900 each year for four years,
assuming an opportunity cost of 10 percent.
34) Calculate the present value of $89,000 to be received in 15 years, assuming an
opportunity cost of 14 percent.
35) China America Manufacturing has a beta of 1.50, the risk-free rate of interest is
currently 12 percent, and the required return on the market portfolio is 18 percent. The
company plans to pay a dividend of $2.45 per share in the coming year and anticipates
that its future dividends will increase at an annual rate consistent with that experienced
over the 2001-2003 period.
Estimate the value of China America Manufacturing’s stock.