1) The motive to pay stock dividend to retain cash to satisfy past-due bills, may result in
a decline in market value.
2) The effective rate of interest is the contractual rate of interest charged by a lender or
promised by a borrower.
3) Flotation costs reduce the net proceeds from the sale of a bond whether sold at a
premium, at a discount, or at its par value.
4) Collection float results from the lapse between the time that a firm deducts a
payment from its checking account ledger and the time that funds are actually
withdrawn from its accounts.
5) A call feature is a feature included in all corporate bonds and allows the issuer to
repurchase bonds at the market price prior to maturity.
6) An increase in fixed operating and financial cost results in an increase in risk, since
the firm will have to achieve a higher level of sales just to break even.
7) If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of
interest is 7.2 percent.
8) Interest paid to bondholders is tax deductible.
9) A computerized inventory system that simulates needed materials requirements for
the finished product, and then compares production needs to available inventory
balances to determine when orders should be placed is the ________.
A) basic economic order quantity system
B) materials requirement planning system
C) just-in-time system
D) red-line method
10) Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment
proposals for the year beginning in 2014. For each investment proposal, the relevant
cash flows and other relevant financial data are summarized in the table below. In the
case of a replacement decision, the total installed cost of the equipment will be partially
offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on
ordinary income and on long-term capital gains. The firm’s cost of capital is 15 percent.
________________________________________________________
*Not applicable
For Proposal 2, the cash flow pattern for the replacement project is ________. (See
Table 11.2)
A) a mixed stream and conventional
B) a mixed stream and nonconventional
C) a perpetuity and conventional
D) an annuity and nonconventional
11) Jia’s Oven Manufacturing is evaluating the acquisition of Cuisinaire Kitchen
Appliance Co. Cuisinaire has a loss carryforward of $1.5 million which resulted from
earlier operations. Jia’s Oven can purchase Cuisinaire for $1.8 million and liquidate the
assets for $1.3 million. Jia’s Oven expects earnings before taxes in the five years
following the acquisition to be as follows:
(These earnings are assumed to fall within the annual limit legally allowed for
application of the tax loss carryforward resulting from the proposed acquisition.) Jia’s
Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent.
(a)What is the tax advantage of the acquisition each year for Jia’s Oven?
(b)What is the maximum cash price Jia’s Oven would be willing to pay for Cuisinaire?
(c)Do you recommend the acquisition? Why or why not?
12) Short-term, self-liquidating loans are intended to ________.
A) provide one-time loan to the borrower who needs funds for a specific purpose
B) cover seasonal peaks in financing caused by inventory and receivable buildups
C) provide maximum amount to the firm that it can owe to the bank
D) recapitalize the firm
13) A(n) ________ is secured by real estate.
A) income bond
B) debenture
C) mortgage bond
D) subordinated debenture
14) Economic theories that a financial manager must ensure for efficient business
operations, include ________.
A) supply-and-demand analysis
B) asset pricing theory
C) Porter’s theory of five forces
D) Monte Carlo simulation
15) Mia’s Pet Store has warrants that allow the purchase of two shares of its outstanding
common stock at $30 per share. The common stock price per share is $33 and the
market value of the warrant is $8.
(a)Calculate the theoretical value of the warrant.
(b)Calculate the market premium for the warrant.
16) A form of debt or equity that possesses characteristics of both debt and equity
financing is called ________.
A) hybrid security
B) convertible security
C) derivative security
D) cumulative security
17) The wealth of the owners of a corporation is represented by ________.
A) profits
B) earnings per share
C) share value
D) cash flow
18) Improvements to cash management include ________.
A) a reduction in the cash turnover
B) a reduction in the cash conversion cycle
C) an increase in the average age of inventory
D) an increase in the credit period allowed to customers
19) Jia’s Jewelers has seasonal financing needs that vary from $250,000 to $2,725,000.
The permanent financing requirement is $4,100,000. Check the appropriate box
indicating the better strategy for each of the following events.
20) Nico Corporation has annual purchases of $300,000 and accounts payable of
$30,000, then average purchases per day are ________ and the average payment period
is ________.
A) 36.5; 821.9
B) 36.0; 833.3
C) 821.9; 36.5
D) 833.3; 36.0
21) Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with
an 8 percent interest rate. The original principal amount was ________.
A) $31,000
B) $30,000
C) $25,000
D) $20,000
22) Which of the following is an advantage for a firm to issue common stock over
long-term debt?
A) the cost of equity financing being less than the cost of debt financing
B) the primary claim of equity holders on income and assets in the event of liquidation
C) no maturity date on which the par value of the issue must be repaid
D) the tax deductibility of dividends which lowers the cost of equity financing
23) The ________ is created by a financial relationship between suppliers and
demanders of short-term funds.
A) stock market
B) capital market
C) forex market
D) money market
24) Benefits expected from proposed capital expenditures ________.
A) must be on a pre-tax basis because it provides the true position of profits by the firm
B) must be on an after-tax basis because no benefits may be used until tax claims are
satisfied
C) may be valued either on pre-tax or after-tax basis based on the size of the firm
D) are independent of interest and taxes
25) An efficient portfolio is defined as ________.
A) grouping of assets with same level of risk
B) collection of assets with the aim of maximizing the return
C) an investment in a single asset
D) grouping of assets with the highest possible correlation
26) A firm has actual sales in November of $1,000 and projected sales in December and
January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for
cash, collects 40 percent of its sales one month following the sale, and collects the
balance two months following the sale. The firm’s total expected cash receipts in
January is ________.
A) $700
B) $2,100
C) $1,900
D) $300
27) In their simplest form, bonds are pure ________.
A) debt
B) equity
C) hybrid security
D) current assets
28) Danny Joe borrows $10,500 from the bank at 11 percent annually compounded
interest to be repaid in six equal annual installments. The interest paid in the first year is
________.
A) $1,155
B) $2,481
C) $ 144
D) $1,327