1) There is an inverse relationship between the quality or rating of a bond and the rate
of return it must provide bondholders.
2) A firm can raise capital by issuing securities such as convertibles and warrants but a
firm has nothing to do with the creation of options to raise capital.
3) The term structure of interest rates is a graphical presentation of the relationship
between the maturity and rate of return.
4) No-par preferred stock has no stated face value, but its annual dividend is stated as a
percentage of the market value.
5) Disbursement float is experienced by a payee and is a delay in the actual withdrawal
of funds.
6) Assuming that the level of total assets remains unchanged, the effect of a decrease in
the ratio of current assets to total assets is an increase in a firm’s risk of insolvency.
7) The three major cash flow components include the initial investment, operating cash
flows, and terminal cash flow.
8) In theory, a firm’s optimal capital structure is that which minimized the firm’s overall
cost of capital resulting in a maximization of the market value of a firm.
9) IBM stock will experience greater trading activity (in terms of the number of shares
traded on a given day) compared to IBM bonds.
10) Since a putable bond gives its holder the right to “put the bond” at specified times
or because of specified actions by the issuing firm, the bond’s yield would be lower than
that of an otherwise equivalent non-putable bond.
11) The market value of common stock is completely unrelated to its par value.
12) Table 15.2
The company earns 5 percent on current assets and 15 percent on fixed assets. The
firm’s current liabilities cost 7 percent to maintain and the average annual cost of
long-term funds is 20 percent.
If the firm was to shift $3,000 of current assets to fixed assets, the firm’s net working
capital would ________, and the risk of insolvency would ________, respectively. (See
Table 15.2)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
13) A formal proposal to purchase a given number of shares of a firm’s stock at a
specified price is a ________.
A) golden parachute
B) call option
C) put option
D) tender offer
14) In a financial statement of the firm, put and call options ________.
A) determine cash management policy
B) influence the capital structure decision
C) affect bond financing
D) have no influence
15) A ________ has an effect on a firm’s share price similar to that of a ________.
A) stock repurchase; stock split
B) stock dividend; stock split
C) cash dividend; stock dividend
D) cash dividend; stock split
16) Table 15.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 3 percent cash discount for payment within 10 days. The
firm’s current average collection period is 90 days, sales are 400 films per year, selling
price is $25,000 per film, variable cost per film is $18,750, and the average cost per
film is $21,000. The firm expects that the change in credit terms will result in a minor
increase in sales of 10 films per year, that 75 percent of the sales will take the discount,
and the average collection period will drop to 30 days. The firm’s bad debt expense is
expected to become negligible under the proposed plan. The bad debt expense is
currently 0.5 percent of sales. The firm’s required return on equal-risk investments is 20
percent. (Assume a 360-day year.)
What is the cost of the marginal cash discount? (See Table 15.7)
A) $768,750
B) $300,000
C) $307,500
D) $230,625
17) Which of the following is true of changes in cash discount period?
A) If a firm increases its cash discount period, the sales are expected to decrease, the
bad debts are expected to decrease, and the profit per unit is expected to increase
B) If a firm decreases its cash discount period, the sales are expected to decrease, the
bad debts are expected to decrease, and the profit per unit is expected to increase
C) If a firm increases its cash discount period, the sales are expected to increase, the
bad debts are expected to decrease, and the profit per unit is expected to decrease
D) If a firm decreases its cash discount period, the sales are expected to decrease, the
bad debts are expected to increase, and the profit per unit is expected to decrease
18) Which of the following is an advantage of factoring?
A) accounts receivable immediately turned into cash
B) addition of credit and collection departments
C) less costly form of secured short-term loans
D) improves current ratio
19) Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive
projects M and N which are described below. Tangshan Mining’s overall cost of capital
is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent.
Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
The shares traded publicly in an efficient market are ________.
A) generally positively affected by diversification, because of the reduction in risk
B) generally negatively affected by diversification, because of the increase in risk
C) generally not affected by diversification, unless greater returns are expected
D) generally negatively affected by diversification, because of the increase in the
required rate of return
20) A(n) ________ gives purchasers inflation protection.
A) zero-coupon bond
B) junk bond
C) floating rate bond
D) income bond
21) Systematic risk is also referred to as ________.
A) business specific risk
B) internal risk
C) nondiversifiable risk
D) maturity risk