1) Call options are purchased with the expectation that the market price of the
underlying security will rise while put options are purchased with the expectation that
the market price of the underlying security will fall.
2) The total leverage measures the combined effect of operating and financial leverage
on a firm’s risk.
3) Interest rate risk is the risk that results from the changes in interest rates and thereby
impact the bond value.
4) The degree of operating leverage depends on the base level of sales used as a point of
reference. The closer the base sales level used is to the operating breakeven point, the
greater the operating leverage.
5) A method of acquisition in which the acquiring firm exchanges its debt for shares of
the target company according to a predetermined ratio is called a leveraged buyout.
6) Due to inflationary effects, inventory costs and depreciation write-offs can differ
from their true values, thereby distorting profits.
7) Scenario analysis is a statistics-based behavioral approach that applies predetermined
probability distributions and random numbers to estimate risky outcomes.
8) Gross profit margin measures the percentage of each sales dollar left after a firm has
paid for its goods and operating expenses.
9) Cumulative preferred stocks are preferred stocks for which all passed (unpaid)
dividends in arrears must be paid along with the current dividend prior to the payment
of dividends to common stockholders.
10) The dollar breakeven sales level can be solved for by dividing fixed costs by the
dollar contribution margin.
11) An efficient market is a market that establishes correct prices for the securities that
firms sell and allocates funds to their most productive use as a result of the intense
competition among investors.
12) Which of the following is a difference between debt and equity capital?
A) Debt capital does not require periodic payments, whereas equity capital requires
period payments
B) Debt capital requires returns in proportion to profits, whereas equity capital requires
a fixed rate of return
C) Debt capital provides a tax shield, whereas equity capital does not provide a tax
shield
D) Debt capital affects operating leverage, whereas equity capital affects financial
leverage
13) A firm has an operating cycle of 170 days, an average payment period of 50 days,
and an average age of inventory of 145 days. The firm’s average collection period is
________ days.
A) 25
B) 75
C) 95
D) 120
14) A(n) ________ is a noncancellable arrangement that requires the lessee to make
payments for the use of an asset over a relatively long period of time.
A) operating lease
B) financial lease
C) sale-leaseback arrangement
D) direct lease
15) Corporate bonds have a ________.
A) face value of $5,000
B) market price of $1,000
C) specified coupon rate paid annually
D) par value of $1,000
16) A(n) ________ is undertaken with the goal of restructuring the acquired company in
order to improve its cash flow and unlock its hidden value.
A) operating merger
B) strategic merger
C) financial merger
D) hostile takeover
17) Projects that compete with one another, so that the acceptance of one eliminates the
others from further consideration are called ________.
A) independent projects
B) mutually exclusive projects
C) replacement projects
D) capital projects
18) Convertible securities can usually be sold with interest rates ________.
A) lower than those of other nonconvertible securities
B) equal to those of other nonconvertible securities
C) higher than those of other nonconvertible securities
D) that has no relation to those of other nonconvertible securities
19) The ________ has/have the ultimate responsibility in guiding corporate affairs and
carrying out policies.
A) board of directors
B) chief financial officer
C) stockholders
D) creditors
20) The ________ is an inventory management technique that compares production
needs to available inventory balances and determines when orders should be placed for
various material inputs.
A) ABC system
B) EOQ model
C) MRP system
D) JIT system
21) MACRS RATE
A corporation is selling an existing asset for $21,000. The asset, when purchased, cost
$10,000, was being depreciated under MACRS using a five-year recovery period, and
has been depreciated for four full years. If the assumed tax rate is 40 percent on
ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $7,560 tax liability
C) $4,400 tax liability
D) $7,720 tax liability
22) A corporation has concluded that its financial risk premium is too high. In order to
decrease this, the firm can ________.
A) increase the proportion of long-term debt to decrease the cost of capital
B) increase the proportion of short-term debt to decrease the cost of capital
C) decrease the proportion of common stock equity to decrease financial risk
D) increase the proportion of common stock equity to decrease financial risk