1) The interest rates offered in the Euromarket on the U.S. dollar are greatly affected by
the prime rate inside the United States.
2) A compensating balance is a balance in checking account that is equal to a certain
percentage of the borrower’s short-term unsecured loan.
3) Exchange rate risk is the risk that an unexpected change in exchange rates will
reduce the market value of a project’s cash flows.
4) A creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for
valuing a firm both in terms of its liquidation value and as a going concern.
5) Increasing the length of the credit period can increase sales, but both the investment
in accounts receivable and bad debt expenses are likely to increase as well.
6) The cash conversion cycle is the total number of days in the operating cycle less the
average payment period for inputs to production.
7) One motive for issuing convertibles is that convertible securities can be issued with
far fewer restrictive covenants than nonconvertibles.
8) Which of the following legal forms of organization has the ease of dissolution?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
9) A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent
preferred stock outstanding. The firm’s financial breakeven (assuming a 40 percent tax
rate) is ________.
A) $860,000
B) $716,000
C) $1,100,000
D) $1,400,000
10) Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The
gluing machine costs $50,000 and requires installation costs of $2,500. This outlay
would be partially offset by the sale of an existing gluer. The existing gluer originally
cost $10,000 and is four years old. It is being depreciated under MACRS using a
five-year recovery schedule and can currently be sold for $15,000. The existing gluer
has a remaining useful life of five years. If held until year 5, the existing machine’s
market value would be zero. Over its five-year life, the new machine should reduce
operating costs (excluding depreciation) by $17,000 per year. Training costs of
employees who will operate the new machine will be a one-time cost of $5,000 which
should be included in the initial outlay. The new machine will be depreciated under
MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and
a 40 percent tax on ordinary income and capital gains.
The present value of the project’s annual cash flows is ________. (See Table 11.5)
A) $ 47,820
B) $ 42,820
C) $ 51,635
D) $100,563
11) CAFTA is ________.
A) a treaty establishing free trade and open markets between Europe and five Central
American Countries
B) a major South American trading bloc that includes countries that account for more
than half of total Latin American GDP
C) a significant economic force currently made up of 28 nations with a population of
more than 500 million that permits free trade within the countries that make up this
group
D) a trade agreement signed in 20032004 by the United States, the Dominican
Republic, and five Central American countries
12) 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 average collection period for Dana Dairy Products in 2013 was ________. (See
Table 3.2)
A) 32.5 days
B) 11.8 days
C) 25.3 days
D) 35.9 days
13) Table 8.3
Consider the following two securities X and Y.
Which security (X or Y) in Table 8.3 has the least total risk? Which has the least
systematic risk?
A) X; X
B) X; Y
C) Y; X
D) Y; Y
14) Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return
on the market portfolio of assets is 14 percent. The asset’s required rate of return is
________.
A) 13.4 percent
B) 22.0 percent
C) 15.4 percent
D) 6.0 percent
15) If the P/E paid for a target company is less than the P/E of the acquiring company,
the effect on the earnings per share of the acquiring company will be ________.
A) positive
B) neutral
C) negative
D) uncorrelated
16) The expected value, standard deviation of returns, and coefficient of variation for
asset A are ________. (See below.)
Asset A
A) 10 percent, 8 percent, and 1.25, respectively
B) 9.33 percent, 8 percent, and 2.15, respectively
C) 9.35 percent, 4.68 percent, and 2.00, respectively
D) 9.35 percent, 2.76 percent, and 0.295, respectively
17) The advantage of using simulation in the capital budgeting process is the ________.
A) ease of calculation over scenario analysis
B) continuum of risk-return trade-offs for decision making
C) single point estimate that helps the decision maker to choose the most accurate
alternative
D) use of several possible outcomes to asses risk
18) A(n) ________ is a graphic depiction between the maturity and rate of return for
bonds with similar risks.
A) yield curve
B) supply function
C) risk-return profile
D) aggregate demand curve
19) Appropriate collateral for a loan secured under a floating inventory lien is
________.
A) cars
B) granite slabs
C) air conditioners
D) paper clips
20) A ________ allows a firm to force conversion.
A) warrant
B) option
C) call feature
D) striking price
21) An internal forecast is based on ________.
A) a buildup, or consensus, of sales forecasts through a firm’s own sales channels,
adjusted for additional factors such as production capabilities
B) the relationships between a firm’s sales and certain economic indicators
C) the prediction of a firm’s sales over a given period through surveys sent to financial
analysts
D) developing the pro forma income statement to forecast sales and then express the
various income statement items as percentage of projected sales
22) Fixed relationship among currencies refers to ________.
A) the relationship in which the value of any one currency with respect to all other
currencies is allowed to fluctuate on a yearly basis
B) the relationship in which the value of any two currencies with respect to each other
is allowed to fluctuate on a monthly basis
C) the constant relationship of a currency to one of the major currencies, a combination
of major currencies, or some type of international foreign exchange standard
D) the constant relationship of a currency to one of the major foreign exchange market
or a combination of markets
23) Gina has planned to start her college education four years from now. To pay for her
college education, she has decided to save $1,000 a quarter for the next four years in a
bank account paying 12 percent interest. How much will she have at the end of the
fourth year?
A) $ 1,574
B) $19,116
C) $20,157
D) $16,000
24) A ________ may result in the expansion of a firm’s operations in an existing
product line and elimination of a competitor.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
25) A firm is evaluating three capital projects. The net present values for the projects are
as follows:
The firm should ________.
A) accept Projects 1 and 2, and reject Project 3
B) accept Projects 1 and 3, and reject Project 2
C) accept Project 3, and reject Projects 1 and 2
D) accept all projects