1) The number of authorized shares of common stock is always greater than or equal to
the number of outstanding shares of common stock.
2) The reorder point is the point at which a firm receives orders.
3) As financial leverage increases, the cost of debt initially remains constant and then
rises, while the cost of equity always rises.
4) Stock rights allow stockholders to purchase additional shares of stock in direct
proportion to the number of shares they own.
5) The cost of capital is used to decide whether a proposed corporate investment will
increase or decrease a firm’s stock price.
6) For any interest rate and for any period of time, the more frequently interest is
compounded, the greater the amount of money that has to be invested today in order to
accumulate a given future amount.
7) Table 10.1
Given the information in Table 10.1 and 15 percent cost of capital,
(a)compute the net present value.
(b)should the project be accepted?
8) The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) to reduce risk
D) for profit planning
9) The purpose of a reverse stock split is to ________.
A) issue additional shares
B) increase the dividend
C) increase the price of a stock
D) decrease trading activity
10) Stock rights provide the stockholder with ________.
A) the right to purchase additional shares in direct proportion to their number of owned
shares
B) the right to elect the board of directors
C) cumulative voting privileges over the preference stockholders
D) the opportunity to receive extraordinary earnings
11) Which of the following must be considered when making a lease-versus-purchase
decision?
A) the before-tax cash outflows for each year under the lease alternative
B) the before-tax cash outflows for each year under the purchase alternative
C) the after-tax cash outflows for each year under the lease alternative
D) the depreciation expense under the lease
12) Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
13) The potential risk of a host government’s implementation of specific rules and
regulations that can result in the discontinuity or seizure of the operations of a foreign
company is called ________.
A) exchange rate risk
B) financial risk
C) political risk
D) business risk
14) A firm has fixed operating costs of $525,000. The sales price per unit is $35 and its
variable costs per unit is $22.50. The firm’s operating breakeven point in units is
________.
A) $23,330
B) $32,000
C) $42,000
D) $52,000
15) Gordon’s “bird-in-the-hand” argument suggests that ________.
A) dividends are irrelevant
B) firms should have a 100 percent payout policy
C) shareholders are risk averse and attach less risk to current dividends
D) the market value of a firm is unaffected by dividend policy
16) The ________ is the compound annual rate of return that a firm will earn if it
invests in the project and receives the given cash inflows.
A) risk-free rate
B) internal rate of return
C) opportunity cost
D) cost of capital
17) Use of the capital asset pricing model (CAPM) in measuring the cost of common
stock equity differs from the constant-growth valuation model in that it directly
considers the firm’s risk as reflected by beta.
18) Which of the following groups of ratios primarily measure risk?
A) liquidity, activity, and profitability
B) liquidity, profitability, and market
C) liquidity, activity, and debt
D) activity, debt, and profitability
19) Options are the most popular type of ________.
A) derivative security
B) hybrid security
C) convertible security
D) fixed interest bearing security
20) Float is important in the cash conversion cycle of a firm because ________.
A) its presence reduces a firm’s average collection period
B) its presence reduces a firm’s average payment period
C) its presence lengthens both a firm’s average collection period and its average
payment period
D) its presence reduces the investment that a firm must make in its cash conversion
cycle
21) Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a)The firm earns 10 percent annually on its current assets.
(b)The firm earns 20 percent annually on its fixed assets.
(c)The firm pays 13 percent annually on current liabilities.
(d)The firm pays 17 percent annually on long-term funds.
(e)The firm’s monthly current, fixed, and total asset requirements for the previous year
are summarized in the table below:
The firm’s annual financing costs of the aggressive financing strategy are ________.
(See Table 15.1)
A) $21,175
B) $26,075
C) $24,475
D) $22,775
22) ________ measures the percentage of each sales dollar remaining after all costs and
expenses, including interest, taxes, and preferred stock dividends, have been deducted.
A) Net profit margin
B) Operating profit margin
C) Gross profit margin
D) Earnings available to common shareholders