1) The cost of equity increases with increasing financial leverage in order to
compensate the stockholders for the higher degree of financial risk.
2) A controller administers a firm’s credit policy by analyzing or managing the
evaluation of credit applications, extending credit, and monitoring and collecting
accounts receivable.
3) The capital asset pricing model (CAPM) links together unsystematic risk and return
for all assets.
4) When computing an interest or growth rate, the rate will increase with a decrease in
future value, holding present value and the number of periods constant.
5) The risk-adjusted discount rate can be computed as the risk free rate plus the product
of a project’s beta and the credit risk premium.
6) The average tax rate paid on the firm’s ordinary income can be calculated by dividing
its taxes by its taxable income.
7) Since the payback period can be viewed as a measure of risk exposure, many firms
use it as a supplement to other decision techniques.
8) The closer the base sales level used is to the operating breakeven point, the smaller
the operating leverage.
9) Larger the difference between an asset’s worst outcome from its best outcome, the
higher the risk of an asset.
10) Ignoring general market fluctuations, the stock’s price would be expected to drop by
the amount of the declared dividend on the ex dividend date.
11) Target weights are either book value or market value weights based on a firm’s
desired capital structure proportions.
12) A relaxation of credit standards is expected to affect profits positively due to lower
carrying costs, whereas tightening credit standards would affect profits negatively as a
result of higher carrying costs.
13) The all-current-rate method is the method by which the functional
currency-denominated financial statements of an MNC’s subsidiary are translated into
the parent company’s currency.
14) The future value of an ordinary annuity of $1,000 each year for 10 years, deposited
at 3 percent, is ________.
A) $11,808.
B) $11,464.
C) $ 8,530.
D) $10,000.
15) The optimal capital structure is the one that balances ________.
A) return and risk factors in order to maximize profits
B) return and risk factors in order to maximize earnings per share
C) return and risk factors in order to maximize market value
D) return and risk factors in order to maximize dividends
16) At year end, Tangshan China Company balance sheet showed total assets of $60
million, total liabilities (including preferred stock) of $45 million, and 1,000,000 shares
of common stock outstanding. Based on this information, Tangshan’s book value per
share of common stock is ________.
A) $105
B) $10.50
C) $15
D) $150
17) In working capital management, risk is measured by the probability that a firm will
be ________.
A) unable to pay annual dividends to stockholders
B) unable to pay its bills as they come due
C) unable to repay its long-term obligations
D) unable to earn profits from day-to-day operations
18) A decrease in the current asset to total asset ratio will result in ________.
A) an increase in risk
B) a decrease in risk
C) an increase in profit
D) a decrease in profit
19) ________ is one of the primary responsibilities of a financial manager.
A) Monitoring quarterly tax payments
B) Analyzing budget and performance reports
C) Determining the audit policy
D) Preparing income statements
20) In theory, the conservative financing strategy ignores ________.
A) all current liabilities
B) the spontaneous forms of short-term financing
C) all current assets
D) the high risk associated with external financing
21) The portion of an asset’s sale price that is above its book value and below its initial
purchase price is called ________.
A) a capital gain
B) recaptured depreciation
C) a capital loss
D) book value
22) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro
forma financial statements will tend to ________.
A) understate profits when sales are decreasing
B) understate profits when sales are increasing
C) overstate profits when sales are increasing
D) neither understate nor overstate profits
23) The minimum return that must be earned on a project in order to leave the firm’s
value unchanged is ________.
A) the internal rate of return
B) the interest rate
C) the cost of capital
D) the compound rate
24) The cost of giving up a cash discount on a credit purchase is ________.
A) added on to the price of the goods in order to make payment quickly
B) deducted from the price of the goods in order to make payment quickly
C) the implied interest rate paid in order to delay payment for an additional number of
days
D) the true purchase price of the goods
25) Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares
of Stock Y which has a price of $3 per share. What is the proportion of Nico’s portfolio
invested in stock X?
A) 77%
B) 67%
C) 50%
D) 33%
26) Table 6.2
(a)Calculate the current value of Bond L. (See Table 6.2)
(b)What will happen to the value/price as the bond approaches maturity?