1) A poison pill will raise the potential for maximizing shareholder value because it
deters takeover bids.
2) The Sarbanes-Oxley Act of 2002 holds a firm’s internal auditors legally accountable
for the accuracy of their firm’s financial statements.
3) The majority of total dollar trading volume in 2008 took place in U.S. financial
markets.
4) Many companies such as McDonald’s have embraced supply chain management
using Web-based procedures.
5) As time to maturity increases, bond price sensitivity decreases.
6) Securities issued by states and municipalities are referred to as statutory bonds and
municipal bonds, respectively.
7) When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to
receive a right.
8) Just-in-time inventory systems can leave manufacturers empty-handed if suppliers
can’t keep up with product growth rates.
9) Under MACRS depreciation, there are no tax credits for the purpose of calculating
the base for depreciation expenses.
10) Pro forma statements are generally prepared six months to a year into the future.
11) Operating profit is essentially a measure of how efficient management is in
generating revenues and controlling expenses.
12) The “term structure of interest rates” is a schedule that tells when a company’s
bonds mature and shows how many dollars a firm must pay in interest payments.
13) A market-maker transacts in stocks as a broker.
14) Operating leverage influences the bottom half of the income statement while
financial leverage deals with the top half.
15) The difference between the initial bond price and the maturity value is amortized
for tax purposes over the life of a zero-coupon bond.
16) Because the capital gains tax is so high, there are no real tax advantages to a stock
repurchase option.
17) Par value and face value on a bond generally are the same.
18) Risk exposure due to heavy short-term borrowing can be compensated for by
A.carrying highly liquid assets
B.carrying many illiquid assets
C.carrying longer term, more profitable current assets
D.carrying more receivables to increase cash flow
19) Assuming proper accounting disclosure is used, a large extraordinary loss has what
effect on the cost of goods sold?
A.It raises it
B.It lowers it
C.It has no effect
D.More information is needed to determine the effect
20) A firm’s stock is selling for $65. The dividend yield is 6%. A 7% growth rate is
expected for the common stock. The firm’s tax rate is 40%. What is the firm’s cost of
retained earnings?
A.8.16%
B.13.00%
C.12.35%
D.The retained earnings cannot be determined from this information
21) Which of the following is not a valid reason for holding cash?
A.To meet transaction requirements
B.To earn the highest return possible
C.To satisfy emergency needs for funds
D.To provide a compensating balance for a bank
22) Commercial bank term loans
A.usually carry fixed interest rates
B.are very short-term in nature
C.are offered to superior credit applicants
D.are very short-term in nature and are offered to superior credit applicants
23) Dixon Corporation is considering a public offering of common stock. The firm will
offer one million shares of common stock for sale. The estimated selling price is $45
per share, with Dixon Corp. receiving $40.50 per share after the offering. Additional
registration fees are estimated at $275,000.
a) What is the spread in dollars? In percent?
b) What are the total expenses of the issue?
c) If Dixon Corp. needs to generate $28 million, how many shares will have to be sold?
24) Ratio analysis can be useful for
A.historical trend analysis within a firm
B.comparison of ratios within a single industry
C.measuring the effects of financing
D.All of the options
25) The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The
Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a
non-discounted basis) the sum of ______________ for the carryforward alone.
A.$108,000
B.$52,000
C.$63,000
D.$1,200,000
26) Heavy use of long-term debt may be beneficial in an inflationary economy because
A.the debt may be repaid in more “expensive” dollars
B.nominal interest rates exceed real interest rates
C.inflation is associated with the peak of a business cycle
D.the debt may be repaid in “cheaper” dollars
27) Financial intermediaries serve which of the following purposes?
A.They allow for indirect investment in the capital markets by households
B.They aid in the flow of funds through the economy
C.They help provide allocation of funds to the best investments
D.All of these options
28) The belief that shifts in exchange rates result from increasing or decreasing demand
for a country’s exports (or the corresponding opposite movements in supply of a
country’s imports) forms the basis for the
A.purchasing power theory of exchange rates
B.interest rate parity theory of exchange rates
C.balance of payments theory of exchange rates
D.government intervention theory of exchange rates
29) Which of the following is not true about leverage?
A.Operating leverage influences the top half of the income statement, determining
EBIT
B.Financial leverage deals with the bottom half of the income statement, determining
EPS
C.Combined leverage utilizes the entire income statement, showing the impact of
change in volume on EBIT
D.None of the options
30) A good capital budgeting program requires that a number of steps be taken in the
decision-making process. The first step is the explanation of data.
31) To the corporate investor, preferred stock offers which of the following advantages?
A.A higher yield than debt, everything else being equal before taxes
B.30% of preferred dividends are tax-exempt
C.70% of preferred dividends are tax-exempt
D.70% of preferred dividends are tax-exempt and have a higher yield than debt, all else
equal before taxes
32) The Prada Corporation is considering a merger with the Stone Company, which has
500,000 outstanding shares selling for $30. An investment banker has advised that to
succeed in its merger, Prada Corp. would have to offer $45 per share for Stone’s stock.
Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have
to be exchanged to acquire all of Stone’s stock?
A.266,667
B.600,000
C.900,000
D.None of these options
33)
Refer to the figure above. What is Tew’s total asset turnover?
A.2.9x
B.1.3x
C.1.0x
D.1.25x
34) If TechCor has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit
of $7, and depreciation expense of $25,000, what is their cash breakeven in units?
A.6,034 units
B.11,458 units
C.12,375 units
D.45,833 units
35) A firm has a debt-to-equity ratio of 40%, a debt of $250,000, and a net income of
$100,000. The return on equity is
A.60%
B.16%
C.30%
D.There’s not enough information to determine the return on equity
36) Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his
approximate effective rate of interest?
A.9.3%
B.6.7%
C.11.7%
D.None of these options
37) Koopman’s Chickens, Inc. plans to borrow $275,000 from its bank for one year. The
rate of interest is 9%, but a compensating balance of 20% is required. What is the
effective rate of interest?
A.Less than 11.4%
B.More than 11.4% but less than 11.6%
C.More than 11.6% but less than 11.8%
D.More than 11.8%
38) Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts
receivable (combined) will increase $8,000,000 to accommodate this sales level. The
company has a profit margin of 6 percent and a 30 percent dividend payout. How much
external financing will the firm have to seek? Assume there is no increase in liabilities
other than that which will occur with the external financing.
A.No external financing will be needed
B.Less than $1,000,000 of external financing is needed
C.Between $1,000,000 and $5,000,000 of external financing is needed
D.More than $5,000,000 of external financing is needed
39) Which one of the following is NOT an advantage that American Depository
Receipts (ADRs) have over investing in actual shares of a foreign stock?
A.ADRs are an effective barrier to foreign currency risk
B.Unlike direct foreign stock, ADRs have financial statements presented in a GAAP
format
C.Dividends are paid in dollars and are easier to collect than actual shares of foreign
stock
D.ADRs are more liquid and less expensive than buying foreign stock directly
40) Density Farms Inc. had sales of $750,000, cost of goods sold of $200,000, selling
and administrative expense of $70,000, and operating profit of $150,000. What was the
value of depreciation expense?
A.$150,000
B.$230,000
C.$330,000
D.None of the options
41) Lucky Dog Pet Food has a $1,000 convertible bond outstanding with a conversion
price of $12.00 per share. The bond pays an interest payment of $40 semiannually and
matures in 20 years unless converted into common stock earlier or called by the
company. The common stock currently sells for $11.25 per share. If the bond sold at its
theoretical bond value, it would be priced competitively to yield 10% with bonds of the
same risk class.
a) How many shares of stock are received on conversion?
b) What is the conversion value?
c) What is the pure bond value?
d) How much downside protection has the pure bond value provided to investors?
(Provide the answer in dollars.)
42) Cash break-even analysis
A.is helpful in analyzing the short-term outlook of the firm, particularly when it is in
trouble financially
B.is important when analyzing long-term profitability
C.includes depreciation expense as a fixed cost when calculating the degree of financial
leverage
D.None of the options
43) In managing cash and marketable securities, what should be the manager’s primary
concern?
A.Maximization of profit
B.Maximization of liquid assets
C.Acceptable return on investment
D.Liquidity and safety
44) Which of the following is NOT a method of avoiding a takeover?
A.Increasing the firm’s cash level
B.Moving corporate offices to advantageous states
C.Staggering the election of boards of directors
D.Buying back shares
45) Cost savings from JIT inventory management include(s)
A.reduced overhead expenses
B.lower inventory financing costs
C.greater productivity
D.All of the options
46) Business Book Publishing needs to borrow $800,000 in order to finance its new
inventory. Two banks they were considering offered different annual loan terms: Marine
Bank offered a 7% loan with a 15% compensating balance to be paid back in quarterly
payments. McLean National Bank offered Business Book Publishing an 8.25% loan to
be paid back semi-annually. Which loan terms should Business Book Publishing take?
47) Dairy Corp. has a $20 million bond obligation outstanding, which it is considering
refunding. The bonds were issued at 8% and the interest rates on similar bonds have
declined to 6%. The bonds have five years of their 20-year maturity remaining. The
new bond will have a five-year maturity. Dairy will pay a call premium of 5% and will
incur new underwriting costs of $400,000 immediately. There is no underwriting cost
consideration on the old bond. The company is in a 40% tax bracket. To analyze the
refunding decision, use a 5% discount rate. Should the old issue be refunded?
48) The stockholders’ equity portion of Brimstone Tire Company follows:
The current market value of Brimstone’s stock is $25. Show what the balance sheet will
look like if Brimstone declares a 5% stock dividend.
49) Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank
gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the bank uses a discounted loan?
50) The Magic Pumpkin Limousine Company wants to purchase a car entertainment
system for one of its automobiles. The entertainment system vendor has offered to
finance the $2,000 purchase over one year in 12 installments, with a total of $200 in
interest to be paid on the loan. Magic Pumpkin’s bank has offered to finance the
purchase with an installment loan, where $155 in interest will be repaid and payments
on the loan must be made quarterly. What are the effective interest rates on these loans?
Which loan should they select?
