1) Cross-sectional analysis involves the comparison of different firms’ financial ratios at
the same point in time.
2) A cash budget gives the financial manager a clear view of the timing of a firm’s
expected profitability over a given period.
3) In general, floatation costs include two components, underwriting costs and
administrative costs.
4) Clientele effect is the argument that a firm attracts shareholders whose preferences
with respect to the payment and stability of dividends corresponds to the payment
pattern and stability of the firm itself.
5) The NPV of a project with an initial investment of $1,000 that provides after-tax
operating cash flows of $300 per year for four years where the firm’s cost of capital is
15 percent is $856.49.
6) The financial manager must look beyond financial statements to obtain insight into
developing or existing problems since the accrual accounting data do not fully describe
the circumstances of a firm.
7) A project’s net present value profile is a graph that plots a project’s IRR for various
discount rates.
8) In computing the weighted average cost of capital, the target weights are either book
value or historical value weights based on actual capital structure proportions.
9) The amount of the claim of preferred stockholders in liquidation is normally equal to
the market value of the preferred stock.
10) According to the bird-in-the-hand argument, current dividend payments reduce
investor uncertainty and result in a higher value for a firm’s stock.
11) Most investments decline in value when the interest rates rise and increase in value
when interest rates fall.
12) As credit standards are relaxed, sales are expected to increase and the investment in
accounts receivable is expected to decrease.
13) The reorder point is an inventory management system that compares production
needs to available inventory balances and determines when orders should be placed for
various items on a firm’s bill of materials.
14) Ratios merely direct an analyst to potential areas of concern and it does not provide
conclusive evidence as to the existence of a problem.
15) Recent divestitures seem to suggest that many operating units are worth much more
to others than to the firm itself.
16) As part of a union negotiation agreement, the United Clerical Workers Union
conceded to be paid every two weeks instead of every week. A major firm employing
hundreds of clerical workers had a weekly payroll of $1,000,000 and the cost of
short-term funds was 12 percent. The effect of this concession was to delay clearing
time by one week. Due to the concession, the firm ________.
A) realized an annual loss of $120,000
B) realized an annual savings of $120,000
C) increased its cash cycle
D) decreased its cash turnover
17) Adong’s Fishing Products is analyzing the performance of its cash management. On
average, the firm holds inventory for 65 days, pays its suppliers in 35 days, and collects
its receivables in 15 days. The firm has a current annual outlay of $1,960,000 on
operating cycle investments. Adong currently pays 10 percent for its financing.
(Assume a 360-day year.)
(a)Calculate the firm’s cash conversion cycle.
(b)Calculate the firm’s operating cycle.
(c)Calculate the daily expenditure and the firm’s annual savings if the operating cycle is
reduced by 15 days.
18) A form of divestiture in which an operating unit becomes an independent company
by issuing shares in it on a pro rata basis to the parent company’s shareholders is called
________.
A) leveraged buyout
B) employee stock option
C) spin-off
D) strategic takeover
19) In defending against a hostile takeover, the strategy that involves the firm
repurchasing through negotiation a large block of stock at a premium from one or more
shareholders in order to end those shareholders’ hostile takeover attempt is known as the
________ strategy.
A) poison pill
B) greenmail
C) golden parachute
D) shark repellent
20) An investor is considering buying 500 shares of ABC Company at $32 per share.
Analysts agree that the firm’s stock price may increase to $45 per share in the next four
months. As an alternative, the investor could purchase a 120-day call option at a
striking price of $30 for $5,000. What profit would the investor realize if the stock price
increased to $42 per share?
A) $0
B) $1,000
C) $4,000
D) $6,000
21) ________ refers to funds that have been dispatched by a payer but are not in a form
that can be spent by the payee.
A) Banker’s acceptance
B) Float
C) A direct send
D) Lockbox
22) The dominant organized options exchange is the ________.
A) over-the-counter exchange
B) CBOE
C) NASDAQ
D) NYSE
23) Nongovernmental issues typically have slightly higher yields than government
issues with similar maturities because ________.
A) they experience little or no loss in value over time
B) of the slightly higher risk associated with them
C) the yields are guaranteed by the federal government
D) of having stronger secondary market
24) Nico Nelson, a management trainee at a large New York-based bank, is trying to
estimate the real rate of return expected by investors. He notes that the 3-month T-bill
currently yields 3 percent and has decided to use the consumer price index as a proxy
for expected inflation. What is the estimated real rate of interest if the CPI is currently 2
percent?
A) 5%
B) 1%
C) 3%
D) 2%
25) A hostile merger is accomplished through ________.
A) a cash purchase of stock
B) leveraged buyouts
C) a tender offer
D) divestitures
26) A firm has issued preferred stock at its $125 per share par value. The stock will pay
a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The
cost of the preferred stock is ________.
A) 7.2 percent
B) 12 percent
C) 12.4 percent
D) 15 percent
27) Holders of equity capital ________.
A) own the firm
B) receive interest payments
C) receive guaranteed income
D) have loaned money to the firm
28) Financial leverage measures the effect of fixed financing costs on the relationship
between ________.
A) sales and EBIT
B) sales and EPS
C) EBIT and EPS
D) net income and sales
29) A firm’s total asset turnover increased from 0.75 to 0.90. Which of the following is
true about the given data?
A) Its assets have been efficiently used to derive the optimum level of sales
B) Its assets have been efficiently used to derive the optimum level of net income
C) Its assets have been efficiently used to derive the minimum level of net income
D) Its assets have been efficiently used to derive the minimum level of gross profit