1) In general, with an amortized loan, the payment amount remains constant over the
life of the loan, the principal portion of each payment declines over the life of the loan,
and the interest portion of each payment grows over the life of the loan.
2) The term “risk” is used interchangeably with “uncertainty” to refer to the variability
of returns associated with a given asset.
3) On a purely theoretical basis, NPV is preferred over IRR because NPV assumes a
more conservative reinvestment rate and does not exhibit the mathematical problem of
multiple IRRs that often occurs when IRRs are calculated for nonconventional cash
flows.
4) A congeneric merger is a merger in which a firm acquires a supplier or a customer.
5) On a purely theoretical basis, NPV is the better approach to capital budgeting than
IRR because NPV implicitly assumes that any intermediate cash inflows generated by
an investment are reinvested at the firm’s cost of capital.
6) A firm’s free cash flow (FCF) represents the amount of cash flow available to
investors (stockholders and bondholders) after the firm has met all operating needs and
after having paid for net fixed asset investments and net current asset investments.
7) Certain mathematical properties may cause a project with a nonconventional cash
flow pattern to have multiple IRRs; this problem does not occur with the NPV
approach.
8) Restrictive covenants, coupled with standard debt provisions, help the lender to
monitor the borrower’s activities to ensure efficient use of funds.
9) If the level of bad debt attributable to credit policy is relatively constant, increasing
collection expenditures can be expected to reduce bad debts.
10) A white knight is a takeover defense in which a firm issues securities that give their
holders certain rights that become effective when a takeover is attempted and that make
the target firm less desirable to a hostile acquirer.
11) A conversion feature is an option that is included as part of a common stock issue
that allows its holder to change the stock into a stated number of shares of preferred
stock.
12) A warrant premium depends largely on investor expectations and on the ability of
investors to get more leverage from the warrants than from the underlying stock.
13) The pledging cost of accounts receivable is normally 2 to 5 percent above the prime
rate.
14) The cost of giving up a cash discount under the terms of sale 5/20 net 120 (assume a
360-day year) is ________.
A) 15 percent
B) 18.9 percent
C) 15.8 percent
D) 20 percent
15) A ________ guarantees the borrower that a specified amount of funds will be
available regardless of the scarcity of money.
A) revolving credit agreement
B) mortgage loan
C) short-term, self-liquidating loan
D) single payment note
16) A firm expects to have funds of $150,000 idle for 60 days. If the firm could
purchase marketable securities yielding 10 percent and pay brokerage fees of $1,500,
the firm ________.
A) should make the investment since interest earned exceeds brokerage fees
B) should not make the investment since the required rate of return is less than the cost
of investment
C) should leave the $150,000 in cash
D) should invest the funds for more than 60 days due to the favorable rate
17) In the EOQ model, ________ costs are the fixed clerical cost of writing a purchase
order, processing the paper work, and verifying the invoice.
A) basic
B) order
C) carrying
D) insurance
18) Other factors remaining constant, an increase in the average payment period will
result in ________.
A) a decrease in the average collection period
B) a decrease in the cash conversion cycle
C) an increase in the cash conversion cycle
D) an increase in the average collection period
19) You are planning to purchase the stock of Ted’s Sheds Inc. and you expect it to pay
a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to sell the
stock for $100 in 3 years. If your required return for purchasing the stock is 12 percent,
how much would you pay for the stock today?
A) $75.45
B) $77.24
C) $81.52
D) $85.66
20) 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 3, the book value of the existing asset is ________. (See Table 11.2)
A) $21,000
B) $43,000
C) $52,000
D) $80,000
21) Comprehensive rules, regulations, and incentives aimed at regulating the inflow of
direct foreign investments involving MNCs and at extracting more benefits from their
presence are termed as ________.
A) unitary tax laws
B) foreign direct investments
C) Eurocurrency markets
D) national entry control systems
22) By definition, the money market involves the buying and selling of ________.
A) stocks and bonds
B) short-term securities
C) all financial instruments except derivatives
D) secured premium notes
23) One way to improve the cash conversion cycle is to ________.
A) speed up collections
B) slow down credit approvals
C) slow down inventory turnover
D) speed up payments