1) The greater the leverage, the smaller the risk involved.
2) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a
stated price prior to maturity, and this option has a greater chance of being exercised (to
the benefit of the bondholder) if market interest rates have fallen since the bond was
issued.
3) In general, the greater a firm’s current assets relative to its short-term obligations, the
better able it will be to pay its bills as they come due.
4) The market premium may be defined as the amount by which the conversion value
exceeds its straight value.
5) The tax deductibility of interest lowers the cost of debt financing, thereby causing the
cost of debt financing to be lower than the cost of equity financing.
6) Prior to the 2008 financial crisis, most investors viewed mortgage-backed securities
as relatively safe investments.
7) Given the following expected returns and standard deviations of assets B, M, Q, and
D, which asset should the prudent financial manager select?
A) Asset B
B) Asset M
C) Asset Q
D) Asset D
8) In comparing the constant-growth model and the capital asset pricing model (CAPM)
to calculate the cost of common stock equity, ________.
A) the CAPM ignores risk, while the constant-growth model directly considers risk as
reflected in the beta
B) the CAPM directly considers risk as reflected in the beta, while the constant-growth
model uses the market price as a reflection of the expected risk-return preference of
investors
C) the CAPM directly considers risk as reflected in the beta, while the constant growth
model uses dividend expectations as a reflection of risk
D) the CAPM indirectly considers risk as reflected in the market return, while the
constant growth model uses dividend expectations as a reflection of risk
9) Tony’s Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his
T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this
information, the breakeven sales level in dollars is ________.
A) $125,495
B) $112,425
C) $108,995
D) $110,495
10) In the international context, the ________ interest rate involves only the MNC
parent’s currency, while the ________ interest rate includes any forecast appreciation or
depreciation of a foreign currency relative to that of the MNC parent.
A) effective; nominal
B) macro; nominal
C) nominal; effective
D) nominal; micro
11) Table 10.4
A firm must choose from six capital budgeting proposals outlined below. The firm is
subject to capital rationing and has a capital budget of $1,000,000; the firm’s cost of
capital is 15 percent.
Using the net present value approach to ranking projects, which projects should the firm
accept? (See Table 10.4)
A) 1, 2, 3, 4, and 5
B) 1, 2, 3, 5, and 6
C) 2, 3, 4, and 5
D) 1, 3, 4, 5, and 6
12) The purchaser of a convertible issue sacrifices a portion of his or her interest return
________.
A) to raise temporarily cheap funds
B) due to the reduced risk of default in the future
C) when the call feature is exercised
D) to become a common shareholder in the future
13) Combining negatively correlated assets having the same expected return results in a
portfolio with ________ level of expected return and ________ level of risk.
A) a higher; a lower
B) the same; a higher
C) the same; a lower
D) a lower; a higher
14) The purpose of a stock split is to ________.
A) change a firm’s capital structure
B) decrease the dividend
C) enhance the trading activity of the stock by lowering the market price
D) increase the market price of a stock
15) Short-term financial plans and long-term financial plans generally cover periods
ranging from ________ years and ________ years, respectively.
A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen
16) One way a firm can reduce the amount of cash it needs in any month is to
________.
A) slow down the payment of receivables
B) delay the payment of wages
C) accrue taxes
D) speed up payment of accounts payable
17) The shareholder receiving a stock dividend receives ________.
A) a share of common stock of equal value to their existing shares of common stock
B) cash
C) additional shares of common stock and cash
D) nothing of value
18) Dividend payment policy is a form of ________.
A) capital budgeting policy
B) financing policy
C) working capital policy
D) dividend reinvestment policy
19) A(n) ________ in the beta coefficient normally causes ________ in the required
return and therefore ________ in the price of the stock, everything else remaining the
same.
A) increase; an increase; an increase
B) increase; a decrease; an increase
C) increase; an increase; a decrease
D) decrease; a decrease; a decrease
20) Bill plans to fund his individual retirement account (IRA) with the maximum
contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12
percent on his contributions, how much will he have at the end of the twentieth year?
A) $19,292
B) $14,938
C) $40,000
D) $144,104
21) A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of
$6,000 and a tax rate of 40 percent. The firm’s degree of financial leverage at a base
EBIT level of $375,000 is ________.
A) 0.97
B) 1.29
C) 1.27
D) 1.09
22) In a corporation, the board of directors are elected by the ________.
A) chief executive officer
B) creditors
C) stockholders
D) employees
23) A firm with a cost of capital of 13 percent is evaluating three capital projects. The
internal rates of return are as follows:
The firm should ________.
A) accept Project 1 and 2, and reject Project 3
B) accept Project 2, and reject Projects 1 and 3
C) accept Project 1, and reject Projects 2 and 3
D) accept Project 3, and reject Projects 1 and 2
24) Which of the following is a cash inflow?
A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities
25) ________ are not obligations of the U.S. government, but most purchasers feel that
they are implicitly guaranteed by the federal government.
A) Treasury notes
B) Treasury bills
C) Federal agency issues
D) Banker’s acceptances