104) A firm will usually increase the ratio of long-term debt to short-term debt when
A) short-term debt has a lower cost than long-term equity.
B) future interest rates are expected to increase.
C) long-term debt has a lower cost than long-term equity.
D) future interest rates are expected to decrease.
105) Which of the following yield curves would be present during a period of high economic
growth?
A) Upward sloping
B) Downward sloping
C) Horizontal
D) Humped
106) An inverted yield curve would suggest that
A) interest rates are expected to rise.
B) interest rates are expected to fall.
C) inflation is expected to rise in the future.
D) long-term rates are being pushed up by Federal Reserve policy.
107) When the term structure of interest rates is downward sloping and interest rates are
expected to decline, the
A) financial manager generally borrows short-term.
B) financial manager borrows at the lower long-term rates.
C) corporation’s ratio of short-term to long-term debt is low.
D) None of the options are true.
108) During tight money periods, generally
A) long-term rates are higher than short-term rates.
B) short-term rates are higher than long-term rates.
C) short-term rates are equal to long-term rates.
D) the relationship between short- and long-term rates remains unchanged.
109) Which of the following techniques allows explicit consideration of more than one possible
outcome?
A) Operating leverage
B) Present value
C) Least-squares regression
D) Expected value
110) Under normal conditions (60% probability), Financing Plan A will produce a $30,000
higher return than Plan B. Under tight money conditions (40% probability), Plan A will produce
$40,000 less than Plan B. What is the expected value of return?
A) $34,000
B) $4,000
C) $4,800
D) $2,000
111) Under normal conditions (70% probability), Plan A will produce a $20,000 higher return
than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less
than Plan B. What is the expected value of return?
A) $28,000
B) ($16,000)
C) $44,000
D) ($2,000)
112) Which of the following is a reason for diminishing liquidity in modern corporations?
A) Just-in-time inventory programs.
B) Better utilization of cash via computers.
C) Increased use of point-of-sale terminals.
D) All of the options are reasons for diminishing liquidity.
113) Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can
borrow long-term debt at 8 percent interest per year for two years. Alternatively, Kuznets can
borrow short-term debt at 6 percent interest in the first year and 9 percent interest in the second
year. Assuming Kuznets pays off the interest at the end of each year, which of the following
statements is true?
A) Kuznets will end up paying more in total interest under the long-term financing plan.
B) Kuznets will end up paying less in total interest under the long-term financing plan.
C) Kuznets will pay less in the first year under the long-term financing plan.
D) Kuznets will pay less in the second year under the short-term financing plan.
114) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to
obtain financing for $1,200,000 of assets. The company’s tax bracket is 40%. If the firm uses
short-term debt, its rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how
much will earnings after taxes change if the company chooses the more conservative financing
plan instead of the more aggressive plan?
A) $10,000
B) ($10,800)
C) ($18,000)
D) $6,000
115) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to
obtain financing for $1,200,000 of assets. The company’s tax bracket is 40%. If the firm uses
short-term debt, its rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how
much will earnings after taxes change if the company chooses to use short-term debt financing
for the first year?
A) $10,000
B) $10,800
C) $18,000
D) $6,000
116) Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to
obtain financing for $1,200,000 of assets. Its tax bracket is 40%. If the firm uses short-term debt,
its rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how much will their
earnings after taxes change if they choose the more aggressive financing plan instead of the more
conservative plan?
A) $10,800
B) ($10,000)
C) ($6,000)
D) $6,000
117) An aggressive, risk-oriented firm will likely
A) borrow long-term and carry low levels of liquidity.
B) borrow short-term and carry low levels of liquidity.
C) borrow long-term and carry high levels of liquidity.
D) borrow short-term and carry high levels of liquidity.
118) A manager can be aggressive if the firm has all of the following EXCEPT
A) predictable cash-flow patterns.
B) high amounts of permanent current assets.
C) a stable inventory price.
D) basic access to capital markets.
119) 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.
120) Which of the following combinations of asset structures and financing patterns is likely to
create the least volatile earnings?
A) Illiquid assets and heavy short-term borrowing
B) Illiquid assets and heavy long-term borrowing
C) Liquid assets and heavy long-term borrowing
D) Liquid assets and heavy short-term borrowing
121) Which of the following combinations of asset structures and financing patterns is likely to
create the most volatile earnings?
A) Illiquid assets and heavy short-term borrowing
B) Illiquid assets and heavy long-term borrowing
C) Liquid assets and heavy long-term borrowing
D) Liquid assets and heavy short-term borrowing
122) An aggressive working capital policy would have which of the following characteristics?
A) A high ratio of long-term debt to fixed assets
B) A low ratio of short-term debt to fixed assets
C) A high ratio of short-term debt to long-term sources of funds
D) A short average collection period
123) The following are the expected one-year T-bill rates for the next four years: 3%, 4%, 5%,
and 6%. According to the basic model of the expectations hypothesis, what would you expect the
rate for three-year securities to be?
A) 4%
B) 4.5%
C) 6%
D) 3.75%
124) The following are the expected one-year T-bill rates for the next four years: 2%, 3%, 4%,
and 5%. According to the basic model of the expectations hypothesis, what would you expect the
rate for four-year securities to be?
A) 4.5%
B) 4.25%
C) 3%
D) 3.5%
125) Riley Co. is considering a short-term or long-term financing plan of $4,000,000 assets. It
expects the following one-year interest rates over the next three years: 6.5%, 7.75%, and 9%.
The long-term interest rate will be 7.5% during those three years. What will be the difference in
interest costs over the three years?
A) Long-term interest will be $630,000 more than short-term interest.
B) Long-term interest will be $30,000 less than short-term interest.
C) Long-term interest will be $140,000 less than short-term interest.
D) None of the options are true.
126) Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing
(9% rate) and 70% with short-term financing (7%) rate. What will be its annual interest costs?
A) $78,000
B) $126,000
C) $440,000
D) $304,000
127) Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing
(9% rate) and 70% with short-term financing (7%) rate. Assuming a 21% tax rate, what will its
annual after-tax interest costs be?
A) $81,000
B) $147,000
C) $182,400
D) $240,160
128) When the yield curve is upward sloping, generally a financial manager should
A) utilize long-term financing.
B) utilize short-term financing.
C) wait to see what will happen with future financing.
D) utilize long-term equity.
129) When the yield curve is downward sloping, generally a financial manager should
A) expect an economic boom.
B) utilize long-term financing.
C) increase investment and the level of financing overall.
D) utilize short-term financing.