1) Leontief’s Wigs can borrow from its bank at 16% to take a cash discount. The terms
of the cash discount are 2/10, net 60 . Leontief’s should borrow from the bank to take
the discount.
2) The major suppliers of funds to the U.S. credit markets are foreign suppliers, mutual
funds, and federal, state, and local governments.
3) Debentures are commonly issued by small companies.
4) A compensating balance will be lower in periods of tight money than in periods of
credit easing.
5) Most corporations include call provisions in agreements relating to the issue of
warrants.
6) Common stockholders have a residual claim to income, in other words they are last
in line.
7) An increase in yield to maturity would be associated with an increase in the price of a
bond.
8) The “marginal principle of retained earnings” holds that corporate investment should
provide a return equal to or higher than what a stockholder could earn.
9) Preferred stock dividends are paid out before income taxes.
10) Ratios are not distorted by inflation.
11) The price-earnings ratio is another tool used to measure the value of common stock.
12) Firms in stable industries are advised to keep debt levels very low so that
shareholders, rather than creditors, receive the benefits of steady cash flows.
13) Following the payment of a stock dividend, the firm’s stock price tends to drop
slightly.
14) In the initial stage (Stage I), the corporation
A.has a product yet to be accepted in the marketplace
B.anticipates rapid growth in sales and earnings
C.needs all its earnings for reinvestment in new assets
D.All of these options
15) The required compensating balance is usually computed as a
A.percentage of the customer’s loans outstanding
B.factor of accounts receivable
C.percentage of the bank’s commitments toward future loans to the customer
D.percentage of the customer’s loans outstanding or percentage of the bank’s
commitments toward future loans to the customer
16) The future value of a $500 investment today at 10% annual interest compounded
semiannually for five years is ______.
A.$805
B.$814
C.$750
D.$923
17) Allais Company’s bond has an $85 annual interest payment that will mature in 10
years at a value of $1,000. The bond has a current market price of $1,140. What is the
nominal yield of the bond?
A.7.5%
B.12.4%
C.8.5%
D.10%
18) If a firm has invested in corporate bonds, it may engage in a financial futures
contract in order to protect itself from
A.declining interest rates
B.rising interest rates
C.inflation
D.changes in hedging activities
19) Gerry Co. has a gross profit of $1,200,000 and $400,000 in depreciation expense.
Selling and administrative expense is $250,000. Given that the tax rate is 40 percent,
compute the cash flow for Gerry Co.
A.$730,000
B.$550,000
C.$330,000
D.None of the options
20) Which of the following would indicate an accurate statement of cash flows?
A.Net cash flow is equal to marketable securities balance
B.Net cash flows from financing activities are equal to the change in stockholder’s
equity
C.Net cash flow is equal to the ending cash balance
D.Net cash flow is equal to the change in the cash balance
21) Floating rate bonds provide which one of the following advantages?
A.A lower risk for the issuing corporation
B.A higher initial rate received by the investor
C.Higher tax advantages for the investor than a conventional bond
D.A fixed market value for the investor
22) Market Enterprises would like to issue bonds and needs to determine the
approximate rate they would need to pay investors. A firm with similar risk recently
issued bonds with the following current features: a 5% coupon rate, 10 years until
maturity, and a current price of $1,150. At what rate would Market Enterprises expect to
issue their bonds, assuming annual interest payments? (Solve this problem using either
Excel’s “Goal Seek” function or a financial calculator.)
A.3.2%
B.5.9%
C.5%
D.4.8%
23) Of the following efficient market hypotheses, which one has research generally
indicated is not correct?
A.Weak
B.Semi-strong
C.Strong
D.Two of the options
24) A banker’s acceptance
A.is a draft drawn on a bank and paid by that bank when presented to it
B.may be accepted by the bank for future payment
C.can be traded in a relatively liquid market until maturity
D.All of the options
25) A company experiencing rapid price increases for its products would take the most
conservative approach by using
A.FIFO accounting
B.LIFO accounting
C.average cost accounting
D.either FIFO or average cost accounting
26) The Export-Import Bank (Eximbank)
A.lends money to foreign purchasers of U.S. goods
B.issues letters of credit
C.makes parallel loans
D.makes fronting loans
27) A firm’s debt-to-equity ratio varies at times because
A.a firm will want to sell common stock when prices are high and bonds when interest
rates are low
B.a firm will want to take advantage of timing its fund-raising in order to minimize
costs over the long run
C.the market allows some leeway in the debt-to-equity ratio before penalizing the firm
with a higher cost of capital
D.All of these are accurate statements
28) The best indication of the operational efficiency of management is
A.net income
B.earnings per share
C.earnings before interest and taxes (EBIT)
D.gross profit
29) Technology Corp. is considering a $200,000 investment in a new marketing
campaign that they anticipate will provide annual cash flows of $52,000 for the next
five years. The firm has a 10% cost of capital. What should the analysis indicate to the
firm’s managers?
A.IRR is between 9% and 10%. Accept the project
B.IRR is between 9% and 10%. Reject the project
C.IRR is between 10% and 11%. Accept the project
D.Not enough information is given to determine an answer
30) The residual theory of dividend policy asserts that
A.sufficient dividends are paid to maintain a stable total dividend paymentany residual
is invested internally by the firm
B.sufficient dividends are paid to maintain a stable dividend payout ratioany residual is
invested internally by the firm
C.dividends are paid out of the residual remaining after internal investments by the firm
D.dividend payments are adjusted to maintain dividends at a constant percentage of
total cash flows
31) The following are primary purchasers of preferred stock except
A.corporate investors
B.insurance companies
C.pension funds
D.individual investors
32) An asset fitting into the 7-year MACRS category was purchased two years ago for
$72,000. The book value of this asset is now ________.
A.$44,064
B.$31,200
C.$48,317
D.$60,052
33) Normally, permanent current assets should be financed by
A.long-term funds
B.short-term funds
C.borrowed funds
D.internally generated funds
34) Which of the following is an advantage to private bond placement over public
offerings?
A.Higher interest costs
B.Greater flexibility in negotiating terms
C.Higher SEC registration fees
D.Lower interest costs
35) Assuming that we can earn a 10% return on accounts receivable, which of the
following strategies to finance an increase in our accounts receivable balance would be
optimal?
A.An increase in bank loans that would cost us 8%
B.A decrease in inventories that are earning a 16% return
C.A reduction in marketable securities that are earning a return of 14%
D.An increase in accounts payable that would cost our firm 15%
36) The first administrative consideration in any capital budgeting process is collection
of data.
37) Preferred stock has all but which of the following characteristics?
A.No stated maturity
B.A fixed dividend payment that carries a higher precedence than common stock
dividends
C.The same binding contractual obligation as debt
D.Preferred lacks the full ownership privilege of common stock
38) Which two ratios are used in the Du Pont system to create return on assets?
A.Return on assets and asset turnover
B.Profit margin and asset turnover
C.Return on total capital and profit margin
D.Inventory turnover and return on fixed assets
39) If a corporate charter includes a provision for preemptive rights, the stockholders
A.must sell their stock to the company
B.get first option to buy additional issues of common stock
C.may purchase existing treasury stock
D.cannot utilize cumulative voting procedures
40) The cost of not taking the discount on trade credit of 2/10, net 30 is approximately
______.
A.44.54%
B.43.20%
C.36.73%
D.None of these options
41) If Allison has saved $1,000,000 upon retirement, how much can she live on each
year if she can earn 6% per year and will end with $0 when she expects to die 25 years
after retirement?
A.$295,334
B.$20,953
C.$70,952
D.$78,229
42) Private placement of corporate bonds
A.has increased in use as new bond issues increased
B.exceed 30% of all long-term corporate debt outstanding
C.are more expensive to issue than publicly placed bonds
D.have lower interest rates than mortgage-backed securities
43) For a U.S. company, foreign business operations are more complex because the
A.host country’s economy may be different from the domestic economy
B.rules of taxation are different
C.structure and operations of financial markets vary
D.All of these options are true
44) An investment banker most commonly makes money from
A.commissions from buyers
B.fees from other investment bankers in the syndicate
C.the spread between the issue price and proceeds to the issuer
D.artificially supporting the stock price during and after the offering
45) PharmaDuece Corporation, which manufactures biotech drugs, has been
experiencing a tremendous growth in the price of its common stock. The stock price
increased from $3.25 on January 1, 2010, to $18.00 per share on December 31, 2010 .
Its current net worth statement includes the following:
a) What is the effect on the company’s captions on the Net Worth Statement if they
declare a “2-for-1” stock split?
b) If the Company’s Net Income Available to Common Shareholders is $1,875,000 for
the year ended Dec. 31, 2010, what is their “Earnings per Share” both BEFORE and
AFTER the split occurs?
46) The Nickelodeon Manufacturing Co. has a series of $1,000 par value bonds
outstanding. Each bond pays interest semi-annually and carries an annual coupon rate
of 6%. Some bonds are due in 4 years, while others are due in 10 years. If the required
rate of return on bonds is 10%, what is the current price of:
a) the bonds with four years to maturity?
b) the bonds with 10 years to maturity?
c) Explain the relationship between the number of years until a bond matures and its
price.
47) As the discount rate becomes higher and higher, the present value of inflows
approaches
A.0
B.minus infinity
C.plus infinity
D.More information is needed
48) Which of the following is NOT an accusation made against MNCs by foreign
countries?
A.MNCs cause instability in their currencies in international money and foreign
exchange markets
B.MNCs contribute to unemployment and avoid taxes
C.MNCs exploit local labor with low wages
D.All of these options are accusations made by critics of MNCs
49) Generally, the safest and most marketable instrument for short-term investment is
A.commercial paper
B.a large denomination certificate
C.Treasury notes
D.Treasury bills
50) The interest rate on convertibles is generally ____________ the interest rate on
similar nonconvertible instruments.
A.greater than
B.less than
C.the same as
D.at least twice
51) Agency theory deals with the issue of
A.when to hire an agent to represent the firm in negotiations
B.the legal liabilities of a firm if an employee, acting as the firm’s agent, injures
someone
C.the limitations placed on an employee acting as the firm’s agent to obligate or bind
the firm
D.the conflicts that can arise between the viewpoints and motivations of a firm’s owners
and managers
52) The measure of risk is best described as
A.potential loss
B.the variability of outcomes around some expected value
C.the probability of expected values
D.the potential expected loss