1) Weights that use accounting values to measure the proportion of each type of capital
in a firm’s financial structure are called market value weights.
2) Capital budgeting is the process of evaluating and selecting short-term investments
that are consistent with the firm’s goal of maximizing owners’ wealth.
3) Bondholders will convert their convertible bonds into shares of stock only when the
conversion price is greater than the market price of the stock.
4) In case of an existing asset which is depreciable and is used in business and is sold
for a price equal to its initial purchase price, the difference between the sales price and
its book value is considered as recaptured depreciation and will be taxed as ordinary
income.
5) For firms that are in a financial position to take a cash discount, it is advisable to take
the discount if the terms offered are 2/10 net 30.
6) As a foreign exchange hedging tool, currency swaps ________.
A) provide the right to buy or sell an amount of foreign currency
B) allow each party to pay the other’s interest payments
C) represent an obligation to buy or sell
D) are a variety of combinations of the other hedging tools
7) The future value of $100 received today and deposited in an account for four years
paying semiannual interest of 6 percent is ________.
A) $450
B) $127
C) $889
D) $134
8) Which of the following is a disadvantage of payback period approach?
A) It does not examine the size of the initial outlay
B) It does not use net profits as a measure of return
C) It does not explicitly consider the time value of money
D) It does not take into account an unconventional cash flow pattern
9) Which of the following affects business risk?
A) revenue stability
B) financial leases
C) operating leverage
D) preferred stock
10) A firm is evaluating a proposal which has an initial investment of $35,000 and has
cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback
period of the project is ________.
A) 1 year
B) 2 years
C) between 1 and 2 years
D) between 2 and 3 years
11) Convertible preferred stock and convertible bonds are normally convertible over
________, respectively.
A) a limited time period and an unlimited time period
B) an unlimited time period and a limited time period
C) a limited time period and a limited time period
D) an unlimited time period and an unlimited time period
12) Under the judgmental approach for developing a pro forma balance sheet, the
“plug” figure required to bring the statement into balance may be called the ________.
A) cash balance
B) retained earnings
C) external financing required
D) accounts receivable
13) Smith, Inc. stock currently sells for $75 per share. The firm has total assets of
$1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has
10,000 shares of common stock outstanding,
(a)what is the book value of each share of common stock?
(b)is the stock overvalued or undervalued in the marketplace?
(c)what is the reason(s) for your answer in (b)?
14) Two frequently cited ratios of profitability that can be read directly from the
common-size income statement are ________.
A) the earnings per share and the return on total assets
B) the gross profit margin and the earnings per share
C) the gross profit margin and the return on total assets
D) the gross profit margin and the net profit margin
15) Other things being equal, a decrease in total asset turnover will result in ________
in the return on total assets.
A) an increase
B) a decrease
C) no change
D) an undetermined change
16) 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 initial outlay equals ________. (See Table 11.2)
A) $170,400
B) $211,000
C) $196,000
D) $300,000
17) Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as
follows:
The beta of the portfolio in Table 8.2, containing assets X, Y, and Z is ________.
A) 1.5
B) 2.4
C) 1.6
D) 2.0
18) Congress allows corporations to exclude from taxes 70 to 100 percent of dividends
received from other corporations. Congress did this to ________.
A) encourage corporations to invest in each other
B) avoid double taxation on dividends
C) eliminate most of the potential tax liability from the dividends received by the
second and any subsequent corporations
D) lower the cost of equity financing for corporations
19) Cash flows directly related to production and sale of a firm’s products and services
are called ________.
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities
20) Table 3.2
Dana Dairy Products Key Ratios
Income Statement
Dana Dairy Products
For the Year Ended December 31, 2013
Balance Sheet
Dana Dairy Products
December 31, 2013
The inventory management at Dana Dairy Products ________ since 2012. (See Table
3.2)
A) has deteriorated
B) has remained the same
C) has improved slightly
D) cannot be determined
21) ________ leverage is concerned with the relationship between earnings before
interest and taxes and earnings per share.
A) Financial
B) Operating
C) Variable
D) Total
22) The three categories of a firm’s statement of cash flows are ________.
A) cash flow from operating activities, cash flow from investment activities, and cash
flow from
noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow
from
financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow
from
financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash
flow from
financing activities
23) Which of the following is an important type of risk in an international capital
budgeting context?
A) business cycle risk
B) political risk
C) appropriation risk
D) default risk
24) The Sarbanes-Oxley Act of 2002 was passed in response to ________.
A) insider trading activities
B) false disclosures in financial reporting
C) the decline in technology stocks
D) the agency issue