1) The ratio of exchange in market price indicates the market price per share of an
acquiring firm paid for each dollar of market price per share of the target firm.
2) Maintenance clauses are provisions normally included in an operating lease that
require the lessor to maintain the assets and to make insurance and tax payments.
3) Commercial paper is a short-term loan issued by commercial banks that have
variable yields based on size, maturity, and prevailing money market conditions.
4) The inclusion of assets from countries with business cycles that are not highly
correlated with the U.S. business cycle reduces the portfolio’s responsiveness to market
movements.
5) A firm’s net cash flow is the mathematical difference between the firm’s beginning
cash and its cash disbursements in each period.
6) If a firm has overdue liabilities or is legally insolvent or bankrupt, most states
prohibit its payment of cash dividends.
7) The payment of cash dividends to corporate stockholders is decided based on the
recommendation of the auditors.
8) The beta of a portfolio is a function of the standard deviations of the individual
securities in the portfolio, the proportion of the portfolio invested in those securities,
and the correlation between the returns of those securities.
9) An operating lease need not be capitalized, but its basic features must be disclosed in
a footnote to the financial statements.
10) Both current and prospective shareholders are interested in the firm’s current and
future level of risk and return, which directly affect share price.
11) The more fixed cost financing a firm has in its capital structure, the greater is its
financial leverage and risk.
12) Debentures such as convertible bonds are unsecured bonds that only the most
creditworthy firms can issue.
13) Two assets whose returns move in the same direction and have a correlation
coefficient of +1 are very risky assets.
14) The president or chief executive officer is elected by a firm’s stockholders and has
ultimate authority to guide corporate affairs and make general policy.
15) A sunk cost is a cash flow that could be realized from the best alternative use of an
owned asset.
16) 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.
The firm’s initial ratio of current assets to total assets is ________. (See Table 15.2)
A) 3:1
B) 1:3
C) 2:1
D) 2:3
17) Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive
projects, A and B. The relevant cash flows for each project are given in the table below.
The cost of capital for use in evaluating each of these equally risky projects is 10
percent.
The annualized NPV of Project A is ________. (See Table 12.6)
A) $22,674
B) $12,947
C) $38,227
D) $21,828
18) A firm has the balance sheet accounts, Common Stock and Paid-in Capital in
Excess of Par, with values of $40,000 and $500,000, respectively. The firm has 40,000
common shares outstanding. If the firm had a par value of $1, the stock originally sold
for ________.
A) $11.50/share
B) $12.50/share
C) $13.50/share
D) $15.50/share
19) The total payments of ________ lease over the lease period are greater than the
initial cost of the leased asset to the lessor.
A) a financial
B) an operating
C) a leveraged
D) a direct
20) Nico Trading Corporation is considering issuing long-term debt. The debt would
have a 30-year maturity and a 10 percent coupon rate. In order to sell the issue, the
bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm
would have to pay flotation costs of 5 percent of face value. The firm’s tax rate is 35
percent. Given this information, the after-tax cost of debt for Nico Trading would be
________.
A) 7.26%
B) 11.17%
C) 10.00%
D) 9.00%
21) Table 12.1
A corporation is assessing the risk of two capital budgeting proposals. The financial
analysts have developed pessimistic, most likely, and optimistic estimates of the annual
cash inflows which are given in the following table. The firm’s cost of capital is 10
percent.
The expected net present value of Project A if the outcomes are equally probable and
the project has five-year life is ________. (See Table 12.1)
A) -$1,045
B) $17,910
C) $36,865
D) $93,730
22) The amount earned during the accounting period on each outstanding share of
common stock is called ________.
A) dividend per share
B) earnings per share
C) net profits after taxes
D) book value per share
23) The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12
percent compounded quarterly is ________.
A) $17,549
B) $75,401
C) $93,049
D) $11,200
24) Because equityholders are the last to receive any distribution of assets as a result of
bankruptcy proceedings, they expect ________.
A) fixed dividend payments
B) greater returns from their investment in the firm’s stock
C) all profits to be paid out in dividends
D) warrants to be attached to the stock issue
25) Which of the following is a fixed asset?
A) land
B) accounts payable
C) accruals
D) notes payable
26) Mr. & Mrs. Pribel wish to purchase a boat in 8 years when they retire. They are
planning to purchase the boat using proceeds from the sale of their property which is
currently worth $90,000 and its value is growing at 7 percent a year. The boat is
currently worth $200,000 increasing at 5 percent per year. In addition to the value of
their property, how much additional money should they deposit at the end of each year
in an account paying 9 percent annual interest in order to be able to buy the boat upon
retirement?
27) Calculate the future value of $4,600 received today if it is deposited at 9 percent for
three years.
28) Ms. Day needs $20,000 to buy her dream car. In her search for the best (low cost)
loan, she has gathered the following information from three local banks. Which bank
would you recommend Ms. Day borrow from?
29) Tim purchased a bounce house one year ago for $6,500. During the year it
generated $4,000 in cash flow. If Time sells the bounce house today, he could receive
$6,100 for it. What would be his rate of return under these conditions?
30) Edward Accounting Services has an outstanding issue of 1,000 shares preferred
stock with a $100 par value, an 9 percent annual dividend, and 5,000 shares of common
stock outstanding. If the stock is cumulative and the board of directors has passed the
preferred dividend for the last two years, how much must preferred stockholders be
paid prior to paying dividends to common stockholders?
31) Identify whether the key characteristic describes common stock (CS) or preferred
stock (PS).
1>Source of financing which places minimum constraints on the firm
2>Used by young firms receiving investment funds from venture capital firms
3>Potential dilution of earnings and voting power
4>Fixed financial obligation
5>Increases the firm’s borrowing power
6>May have cumulative and participating features
7>May be convertible into another type of security
8>Last to receive earnings or distribution of assets in the event of bankruptcy
9>Frequently includes a call feature
32) Calculate the change in the key balance sheet accounts between 2014 and 2015 and
classify each as a source (S), a use (U), or neither (N), and indicate which type of cash
flow it is: an operating cash flow (O), and investment cash flow (I) or a financing cash
flow (F).
ABC Corp.
Balance Sheet Changes and Classification
of Key Accounts between 2014 and 2015
33) Congratulations! You have just won the lottery! However, the lottery bureau has
just informed you that you can take your winnings in one of two ways. Choice X pays
$1,000,000. Choice Y pays $1,750,000 at the end of five years from now. Using a
discount rate of 5 percent, based on present values, which would you choose? Using the
same discount rate of 5 percent, based on future values, which would you choose? What
do your results suggest as a general rule for approaching such problems? (Make your
choices based purely on the time value of money.)
34) Assuming the following returns and corresponding probabilities for asset A,
compute its standard deviation and coefficient of variation.