1) A primary market is a financial market in which pre-owned securities are traded.
2) GAAP is the accounting profession’s rule-setting body.
3) Consolidation involves the combination of two or more firms, and the resulting firm
maintains the identity of one of the firms.
4) Strategic financial plans are planned long-term financial actions and the anticipated
financial impact of those actions.
5) Coupon interest rate on a bond represents the percentage of the bond’s par value that
will be paid annually, typically in two equal semiannual payments, as interest.
6) A change in inflationary expectations resulting from events such as international
trade embargoes or major changes in Federal Reserve policy will result in a shift in the
SML.
7) A financial manager’s goal for the firm is to create a portfolio that maximizes return
for a given level of risk.
8) The IRR is the discount rate that equates the NPV of an investment opportunity with
$0.
9) Table 15.5
Caren’s Canoes is considering relaxing its credit standards to encourage more sales. As
a result, sales are expected to increase 15 percent from 300 canoes per year to 345
canoes per year. The average collection period is expected to increase to 40 days from
30 days and bad debts are expected to double the current 1 percent level. The price per
canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the
300 unit level is $700. The firm’s required return on investment is 20 percent. (Assume
a 360-day year)
What is the cost of marginal investments in accounts receivable under the proposed
plan? (See Table 15.5)
A) $1,817
B) $1,867
C) $1,733
D) $1,617
10) A local brokerage firm is offering a zero-coupon certificate of deposit for $10,000.
At maturity, three years from now, the investor will receive $14,000. What is the rate of
return on this investment?
A) 14 percent
B) 13 percent
C) 12 percent
D) 11 percent
11) In a period of rising sales utilizing past cost and expense ratios (percent-of-sales
method), when preparing pro forma financial statements and planning financing, will
tend to ________.
A) understate retained earnings and understate the additional financing needed
B) overstate retained earnings and overstate the additional financing needed
C) understate retained earnings and overstate the financing needed
D) overstate retained earnings and understate the financing needed
12) A ________ is responsible for a firm’s financial activities such as financial planning
and fund raising, making capital expenditure decisions, and managing cash, credit, the
pension fund, and foreign exchange.
A) treasurer
B) controller
C) foreign exchange manager
D) pension fund manager
13) Which of the following statements is true of payback period?
A) If the payback period is less than the maximum acceptable payback period,
management should be indifferent
B) If the payback period is greater than the maximum acceptable payback period,
accept the project
C) If the payback period is less than the maximum acceptable payback period, accept
the project
D) If the payback period is greater than the maximum acceptable payback period,
management should be indifferent
14) A firm has arranged for a lockbox system to reduce collection time of accounts
receivable. Currently the firm has an average collection period of 43 days, an average
age of inventory of 50 days, and an average payment period of 10 days. The lockbox
system will reduce the average collection period by 3 days by reducing processing,
mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently
pays 9 percent for its financing. (Assume a 360-day year.)
(a)Calculate the cash conversion cycle before and after the lockbox system.
(b)Calculate the savings in financing costs from the lockbox system.
15) A credit applicant’s ________ reflects its ability to repay the requested credit.
A) character
B) capacity
C) capital
D) collateral
16) A $1,000, 8% bond sells for 980. $1,000 is called the ________.
A) current value
B) market value
C) par value
D) auction value
17) The cost of common stock equity may be estimated by using the ________.
A) yield curve
B) break-even analysis
C) Gordon model
D) DuPont analysis
18) A credit applicant’s ________ is his or her financial strength as reflected by his or
her ownership position.
A) character
B) capacity
C) capital
D) collateral
19) A firm has an outstanding 15-year convertible bond issue with a $1,000 par value
and a stated annual interest rate of 7 percent. The bond is convertible into 50 shares of
common stock which has a current market price of $25. A straight bond could have
been sold with a 10 percent stated interest rate. The straight value of the bond is
________.
A) $1,328
B) $1,217
C) $972
D) $772
20) Only a firm’s permanent financing requirement (and not the seasonal requirement)
is financed with ________ in the aggressive funding strategy.
A) long-term debt
B) T-bills
C) retained earnings
D) accounts payable
21) In the statement of cash flows, retained earnings are handled through the adjustment
of ________.
A) “Revenue” and “Cost” accounts
B) “Current Assets” and “Current Liabilities” accounts
C) “Depreciation” and “Purchases” accounts
D) “Net Profits After Taxes” and “Dividends Paid” accounts
22) In the capital asset pricing model, an increase in inflationary expectations will be
reflected by ________.
A) no effect on security market line
B) a decrease in the slope of the security market line
C) a parallel shift downward in the security market line
D) a parallel shift upward in the security market line
23) The residual theory of dividends suggests that ________.
A) different payout policies attract different types of investors but still do not change
the value of a firm
B) dividends are irrelevant in determining the value of a firm
C) as long as a firm’s equity need exceeds the amount of retained earnings, no cash
dividend is paid
D) the payout policies of different firms have no impact on the taxes that investors have
to pay
24) What is the NPV for a project if its cost of capital is 12 percent and its initial
after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows
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) -$1,494,336
B) $158,011
C) -$158,011
D) $3,505,664
25) A ________ agreement normally states the exact conditions and procedures for the
purchase of an account.
A) factoring
B) pledging accounts receivable
C) revolving credit
D) line of credit
26) The primary source of secured short-term loans to businesses are ________.
A) commercial banks and commercial finance companies
B) lines of credit and revolving lines of credit
C) commercial paper dealers and investment bankers
D) life insurance companies and government securities brokers
27) When warrants are used as ‘sweeteners” by a new firm, the firm is essentially
allowing creditors to ________.
A) vote along with common stockholders
B) share the possible future success of the firm
C) protect their interest
D) receive extra income
28) Angel recently purchased a block of 100 shares of Hayley’s Optical common stock
for $6,000. The stock is expected to provide an annual cash flow of dividends of $400
indefinitely. Assuming a discount rate of 8 percent, how does the price Angel paid
compare to the value of the stock?
29) Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent
annually. She plans to leave the funds in this account for seven years earning interest. If
the goal of this deposit is to cover a future obligation of $65,000, what recommendation
would you make to Aunt Tillie?
30) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a
wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent
given the facts above?
31) Jia has just won a $20 million lottery, which will pay her $1 million at the end of
each year for 20 years. An investor has offered her $10 million for this annuity. She
estimates that she can earn 10 percent interest, compounded annually, on any amounts
she invests. She asks your advice on whether to accept or reject the offer. What will you
tell her? (Ignore Taxes)
32) Calculate the combined future value at the end of year 3 of $1,000 received at the
end of year 1, $3,000 received at the end of year 2, and $5,000 received at the end of
year 3, all sums deposited at 5 percent.