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Fundamentals of FM
1. __________ is concerned with the acquisition, financing, and management of assets with some overall goal in mind.
a. Financial management b. Profit maximization c. Agency theory d. Social responsibility
2. Jensen and Meckling showed that __________ can assure themselves that the __________ will make optimal decisions only if appropriate incentives are given and only if the __________ are monitored. a. principals; agents; agents b. agents; principals; principals c. principals; agents; principals d. agents; principals; agents
3. __________ is concerned with the maximization of a firm's earnings after taxes. a. Shareholder wealth maximization b. Profit maximization c. Stakeholder maximization d. EPS maximization
4. What is the most appropriate goal of the firm? a. Shareholder wealth maximization. b. Profit maximization. c. Stakeholder maximization. d. EPS maximization.
5. Which of the following statements is correct regarding profit maximization as the primary goal of the firm?
a. Profit maximization considers the firm's risk level.b. Profit maximization will not lead to increasing short-term profits at the expense of lowering expected future profits.c. Profit maximization does consider the impact on individual shareholder's EPS.d. Profit maximization is concerned more with maximizing net income than the stock price.
6. __________ is concerned with the branch of economics relating the behavior of principals and their agents. a. Financial management b. Profit maximization c. Agency theory d. Social responsibility
7. A concept that implies that the firm should consider issues such as protecting the consumer, paying fair wages, maintaining fair hiring practices, supporting education, and considering environmental issues. a. Financial management b. Profit maximization c. Agency theory d. Social responsibility
8. Which of the following is not normally a responsibility of the treasurer of the modern corporation but rather the controller? a. Budgets and forecasts b. Asset management c. Investment management d. financing management
9. The __________ decision involves determining the appropriate make-up of the right-hand side of the balance sheet. a. asset management b. financing c. investment d. capital budgeting
10. To whom does the Treasurer most likely report? a. Chief Financial Officer. b. Vice President of Operations. c. Chief Executive Officer. d. Board of Directors.
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11. The authors of your textbook suggest that you need to understand financial management even if you have no intention of becoming a financial manager. One reason is that the successful manager of the not-too-distant future will need to be much more of a __________ who has the knowledge and ability to move not just vertically within an organization but horizontally as well. Developing __________ will be the rule, not the exception. a. specialist; specialties b. generalist; general business skills c. technician; quantitative skills d. team player; cross-functional capabilities
12. The __________ decision involves a determination of the total amount of assets needed, the composition of the assets, and whether any assets need to be reduced, eliminated, or replaced.
a. asset management b. financing c. investment d. accounting13. How are earnings per share calculated? a. Use the income statement to determine earnings after taxes (net income) and divide by the previous period's earnings after taxes. Then subtract 1 from the previously calculated value. b. Use the income statement to determine earnings after taxes (net income) and divide by the number of common shares outstanding. c. Use the income statement to determine earnings after taxes (net income) and divide by the number of common and preferred shares outstanding. d. Use the income statement to determine earnings after taxes (net income) and divide by the forecasted period's earnings after taxes. Then subtract 1 from the previously calculated value.
14. According to the text's authors, what is the most important of the three financial management decisions? A. Asset management decision. B. Financing decision. C. Investment decision. D. Accounting decision.
15. The __________ decision involves efficiently managing the assets on the balance sheet on a day-to-day basis, especially current assets. A. asset management B. financing C. investment D. accounting
16. Which of the following is not a perquisite (perk)? A. Company-provided automobile. B. Expensive office. C. Salary. D. Country club membership.
17. Which of the following is not normally a responsibility of the controller of the modern corporation? A. Budgets and forecasts. B. Asset management. C. Financial reporting to the IRS. D. Cost accounting.
18. All constituencies with a stake in the fortunes of the company are known as __________. A. shareholders B. stakeholders C. creditors D. customers
19. Which of the following statements is not correct regarding earnings per share (EPS) maximization as the primary goal of the firm? A. EPS maximization ignores the firm's risk level. B. EPS maximization does not specify the timing or duration of expected EPS. C. EPS maximization naturally requires all earnings to be retained. D. EPS maximization is concerned with maximizing net income.
20. __________ is concerned with the maximization of a firm's stock price. A. Shareholder wealth maximization B. Profit maximization C. Stakeholder welfare maximization D. EPS maximization
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21. Corporate governance success includes three key groups. Which of the following represents these three groups? A. Suppliers, managers, and customers. B. Board of Directors, executive officers, and common shareholders. C. Suppliers, employees, and customers. D. Common shareholders, managers, and employees.
TRUE / FALSE Questions 22. Capital budgeting is a responsibility of the Treasurer. A. True B. False 23. Cash management is a responsibility of the Controller. A. True B. False24. The asset management decision involves determining the optimal firm size and the assets that should be acquired or eliminated. A. True B. False 25. The financing decision involves determining how the assets will be financed with regards to the type and mix as well as the best dividend policy. A. True B. False 26. The greater the ownership percentage of managers, then the more likely the managers will behave in a shareholder wealth maximizing behavior. A. True B. False 27. Corporate governance refers to the system by which the firm hires and manages employees. A. True B. False1. "Shareholder wealth" in a firm is represented by:
the number of people employed in the firm.
the book value of the firm's assets less the book value of its liabilities.
the amount of salary paid to its employees.
the market price per share of the firm's common stock.
2. The long-run objective of financial management is to:maximize earnings per share.
maximize the value of the firm's common stock.
maximize return on investment.
maximize market share.
3. What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax profits, has 200,000 common shares outstanding and $1.2 million in retained earning at the year end?
$100,000
$6.00
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$0.50 = (100,000/200,000=0.50)
$6.50
4. A(n) would be an example of a principal, while a(n) would be an example of an agent.
shareholder; manager
manager; owner
accountant; bondholder
shareholder; bondholder
5. The market price of a share of common stock is determined by:the board of directors of the firm.
the stock exchange on which the stock is listed.
the president of the company.
individuals buying and selling the stock.
6. The focal (main) point of financial management in a firm is:the number and types of products or services provided by the firm.
the minimization of the amount of taxes paid by the firm.
the creation of value for shareholders.
the dollars profits earned by the firm.
7. The decision function of financial management can be broken down into the decisions.financing and investment
investment, financing, and asset management
financing and dividend
capital budgeting, cash management, and credit management
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8.The controller's responsibilities are primarily in nature, while the treasurer's responsibilities are primarily related to .
operational; financial management
financial management; accounting
accounting; financial management
financial management; operations
9. In the US, the has been given the power to adopt auditing, quality control, ethics, and disclosure standards for public companies and their auditors as well as investigate and discipline those involved.
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Public Company Accounting Oversight Board (PCAOB)
Securities and Exchange Commission (SEC)
10. A company's is (are) potentially the most effective instrument of good corporate governance.
common stock shareholders
board of directors
top executive officers
11. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:a series of corporate scandals involving Enron, WorldCom, Global Crossing, Tyco and numerous
others.
a dramatic rise in the US trade deficit.
charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial accounting for stock options.
The following item is NEW to the 13th edition.
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12. ___________ refers to meeting the needs of the present without compromising the ability of future generations to meet their own needs.
Corporate Social Responsibility (CSR)
Sustainability
Convergence
Green EconomicsChapter 2: The Business, Tax, and Financial EnvironmentsJust click on the button next to each answer and you'll get immediate feedback.
1. Which of the following enjoys limited liability?A general partnership.
A corporation.
A sole proprietorship.
None of the above.
2. Michael Cohn is a "member" (a type of owner) of a marine supply business. Michael's business is
a sole proprietorship.
a corporation.
a limited liability company.
a general partnership.
3. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the MACRS method of depreciation. What is tax depreciation for the second year of the asset's life?
$12,000
$19,200 =(60,000*0.32)=19,200
$20,000
$24,000
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4. A corporation in which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. You will be called on to pay:
a proportionate share of bondholder claims based on the number of common shares that you own.
a proportional share of all creditor claims based on the number of common shares that you own.
an amount that could, at most, equal what you originally paid for the shares of common stock in the corporation.
nothing.
5. A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in the
primary money market.
secondary money market.
primary capital market.
secondary capital market.
6. A major advantage of the corporate form of organization is:reduction of double taxation.
limited owner liability.
legal restrictions.
ease of organization.
7. Money market mutual fundsenable individuals and small businesses to invest indirectly in money-market instruments.
are available only to high net-worth individuals.
are involved in acquiring and placing mortgages.
are also known as finance companies.
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8. The purpose of financial markets is to:increase the price of common stocks.
lower the yield on bonds.
allocate savings efficiently.
control inflation.
9. Which of the following is NOT an example of a financial intermediary?International Business Machines, Inc. (IBM).
Vanguard Mutual Fund.
El Dorado Savings and Loan Association.
Bank of America.
10. How are funds allocated efficiently in a market economy?The most powerful economic unit receives the funds.
The economic unit that is willing to pay the highest expected return receives the funds.
the economic unit that considers itself most in need of funds receives them.
Receipt of the funds is rotated so that each economic unit can receive them in turn.
11. Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50 percent applies to a new, $100,000 piece of equipment purchased by Bellemans Chocolatier, Inc. The asset has a $10,000 estimated final salvage value. If this asset is fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will have depreciated for tax purposes is .
$90,000
$100,000
$135,000
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$150,000Chapter 3: The Time Value of MoneyJust click on the button next to each answer and you'll get immediate feedback.
1. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to
$32,000.
$39,272. Correct!
PVA = $4,000 (PVIFA at 8% for 20 periods) PVA = $4,000 (9.818) = $39,272
$40,000.
$80,000.
2. With continuous compounding at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to
$34,898.
$40,171. Correct!
FVA = $2,000 * e^(.10 * 30) FVA = $2,000 (20.0855) = $40,171
$164,500.
$328,282.
3. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would
fall.
rise.
remain unchanged.
cannot be determined without more information.
4. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?
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Year1 Year2 Year3 Year4
$400 $300 $200 $100
$100 $200 $300 $400
$250 $250 $250 $250
Any of the above, since they each sum to $1,000.
5. You are considering investing in a zero-coupon bond that sells for $250. At maturity in 16 years it will be redeemed for $1,000. What approximate annual rate of growth does this represent?
8 percent.
9 percent. Hint
$250 (FVIF at X% for 16 periods) = $1,000 (FVIF at approx. 9% for 16 periods) = $1,000/$250 = 4
OR -- noting that $250 doubles twice over 16 years to yield $1,000 we can use the Rule of 72 as follows: 72/(16/2) = 9 percent
12 percent.
25 percent.
6. To increase a given present value, the discount rate should be adjusted
upward.
downward.
True.
Fred.
7. For $1,000 you can purchase a 5-year ordinary annuity that will pay you a yearly payment of $263.80 for 5 years. The compound annual interest rate implied by this arrangement is closest to
8 percent.
9 percent.
10 percent. Hint
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$1,000 = $263.80 (PVIFA at X% for 5 periods) $1,000 / $263.80 = (PVIFA at X% for 5 periods) 3.791 = (PVIFA at 10% for 5 periods)
11 percent.
8. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years. (Payments include both principal and interest.) The annual payment that will fully pay off (amortize) the loan is closest to
$2,674.
$2,890.
$3,741. Correct!
PVA = R (PVIFA at 6% for 3 periods) $10,000 = R (2.673) R = $10,000 / 2.673 = $3,741
$4,020.
9. When n = 1, this interest factor equals one for any positive rate of interest.
PVIF
FVIF
PVIFA
FVIFA
None of the above (you can't fool me!)
10. (1 + i)n
PVIF
FVIF
PVIFA
FVIFA
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11. You can use to roughly estimate how many years a given sum of money must earn at a given compound annual interest rate in order to double that initial amount .
Rule 415
the Rule of 72
the Rule of 78
Rule 144
12. In a typical loan amortization schedule, the dollar amount of interest paid each period .
increases with each payment
decreases with each payment
remains constant with each payment
13. In a typical loan amortization schedule, the total dollar amount of money paid each period .
increases with each payment
decreases with each payment
remains constant with each paymentChapter 4: The Valuation of Long-Term SecuritiesJust click on the button next to each answer and you'll get immediate feedback.
1. What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?
More than its face value.
Less than its face value.
$1,000.
True.
2. If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion?
The stock has a low level of risk.
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The stock offers a high dividend payout ratio.
The market is undervaluing the stock.
The market is overvaluing the stock.
3. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:
a premium.
a discount.
cannot be determined without more information.
face value.
4. If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to
the coupon effect.
interest rate risk.
a perpetuity.
an indefinite maturity.
5. Virgo Airlines will pay a $4 dividend next year on its common stock, which is currently selling at $100 per share. What is the market's required return on this investment if the dividend is expected to grow at 5% forever?
4 percent.
5 percent.
7 percent.
9 percent. Correct!
ke = (D1/P0) + g ke = ($4/$100) + .05 = .09
6. If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond's yield to maturity.)
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P0 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.
7. Interest rates and bond prices
move in the same direction.
move in opposite directions.
sometimes move in the same direction, sometimes in opposite directions.
have no relationship with each other (i.e., they are independent).
8. In the formula ke = (D1/P0) + g, what does g represent?
the expected price appreciation yield from a common stock.
the expected dividend yield from a common stock.
the dividend yield from a preferred stock.
the interest payment from a bond.
9. In the United States, most bonds pay interest a year, while many European bonds pay interest a year.
once; twice
twice; once
once; once
twice; twice
10. The expected rate of return on a bond if bought at its current market price and held to maturity.
yield to maturity
current yield
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coupon yield
capital gains yieldChapter 5: Risk and ReturnJust click on the button next to each answer and you'll get immediate feedback.
1. This type of risk is avoidable through proper diversification.
portfolio risk
systematic risk
unsystematic risk
total risk
2. A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
coefficient of variation
variance
covariance
certainty equivalent
3. An "aggressive" common stock would have a "beta"
equal to zero.
greater than one.
equal to one.
less than one.
4. A line that describes the relationship between an individual security's returns and returns on the market portfolio.
characteristic line
security market line
capital market line
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beta
5. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
6. The risk-free security has a beta equal to , while the market portfolio's beta is equal to .
one; more than one.
one; less than one.
zero; one.
less than zero; more than zero.
7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value. Carrie shows
risk aversion.
risk preference.
risk indifference.
a strange outlook on life.
8. Beta is the slope of
the security market line.
the capital market line.
a characteristic line.
the CAPM.
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9. A measure of "risk per unit of expected return."
standard deviation
coefficient of variation
correlation coefficient
beta
10. The greater the beta, the of the security involved.
greater the unavoidable risk
greater the avoidable risk
less the unavoidable risk
less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be .
3.6 percent; 7.2 percent
9.6 percent; 13.2 percent CORRECT!
Plaid required return = 0.06 + [(0.90)(0.10 - 0.06)] = 0.096 Acme required return = 0.06 + [(1.8)(0.10 - 0.06)] = 0.132
9.0 percent; 18.0 percent
14.0 percent; 23.0 percent
12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be .
less than 0.75
more than 0.75, but less than 1.10 CORRECT!
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Merrill Lynch would adjust for the tendency of measured betas to revert toward the beta of the market portfolio or toward the beta of the industry to which the company is a part. So, its adjusted beta would end up higher than 0.75, but never more than 1.10.
equal to 1.10
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}Chapter 6: Financial Statement AnalysisJust click on the button next to each answer and you'll get immediate feedback.
1. Determine a firm's total asset turnover (TAT) if its net profit margin (NPM) is 5 percent, total assets are $8 million, and ROI is 8 percent.
1.60 Correct! = (ROI) / (NPM) = TAT (.08) / (.05) = 1.6
2.05
2.50
4.00
2. Felton Farm Supplies, Inc., has an 8 percent return on total assets of $300,000 and a net profit margin of 5 percent. What are its sales?
$3,750,000
$480,000 Correct! (ROI) / (NPM) = TAT (.08) / (.05) = 1.6 (TAT) (TA) = Sales (1.6) ($300,000) = $480,000
$300,000
$1,500,000
3. Which of the following would NOT improve the current ratio?
Borrow short term to finance additional fixed assets.
Issue long-term debt to buy inventory.
Sell common stock to reduce current liabilities.
Sell fixed assets to reduce accounts payable.
4. The gross profit margin is unchanged, but the net profit margin declined over the same period. This could have happened if
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cost of goods sold increased relative to sales.
sales increased relative to expenses.
the U.S. Congress increased the tax rate.
dividends were decreased.
5. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average of 1.4. This means that the company
will not experience any difficulty with its creditors.
has less liquidity than other firms in the industry.
will be viewed as having high creditworthiness.
has greater than average financial risk when compared to other firms in its industry.
6. Kanji Company had sales last year of $265 million, including cash sales of $25 million. If its average collection period was 36 days, its ending accounts receivable balance is closest to . (Assume a 365-day year.)
$26.1 million
$23.7 million Correct! = [($265M - $25M) / (365)] [36] = $23.67M
$7.4 million
$18.7 million
7. A company can improve (lower) its debt-to-total assets ratio by doing which of the following?
Borrow more.
Shift short-term to long-term debt.
Shift long-term to short-term debt.
Sell common stock.
8. Which of the following statements (in general) is correct?
A low receivables turnover is desirable.
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The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
An increase in net profit margin with no change in sales or assets means a poor ROI.
The higher the tax rate for a firm, the lower the interest coverage ratio.
9. Retained earnings for the "base year" equals 100.0 percent. You must be looking at
a common-size balance sheet.
a common-size income statement.
an indexed balance sheet.
an indexed income statement.
10. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
.2
.6
.667 Correct!
If (D/TA) = .4, then (E/TA) must equal .6. (D/TA) / (E/TA) = (D/E) (.4) / (.6) = .667
.333
11. A firm's operating cycle is equal to its inventory turnover in days (ITD)
plus its receivable turnover in days (RTD).
minus its RTD.
plus its RTD minus its payable turnover in days (PTD).
minus its RTD minus its PTD.
12. When doing an "index analysis," we should expect that changes in a number of the firm's current asset and liabilities accounts (e.g., cash, accounts receivable, and accounts payable) would move roughly together with for a normal, well-run company.
net sales CORRECT!
These accounts support sales activity and would typically move roughly with sales.
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cost of goods sold
earnings before interest and taxes (EBIT)
earnings before taxes (EBT)
The following item is NEW to the 13th edition.
13. The process of convergence of accounting standards around the world aims to .
narrow or remove national accounting differences
move non-US accounting standards towards US Generally Accepted Accounting Principles (US GAAP)
create one set of rules-based accounting standards for all countriesChapter 7: Funds Analysis, Cash Flow Analysis, and Financial PlanningJust click on the button next to each answer and you'll get immediate feedback.
1. According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?
cash inflow from interest income.
cash inflow from dividend income.
cash outflow to acquire fixed assets.
all of the above.
2. According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?
cash outflow to the government for taxes.
cash outflow to shareholders as dividends.
cash outflow to lenders as interest.
cash outflow to purchase bonds issued by another company.
3. If the following are balance sheet changes: $5,005 decrease in accounts receivable $7,000 decrease in cash $12,012 decrease in notes payable
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$10,001 increase in accounts payablea "use" of funds would be the:
$7,000 decrease in cash.
$5,005 decrease in accounts receivable.
$10,001 increase in accounts payable.
$12,012 decrease in notes payable.
4. On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears as
a cash flow from operating activities.
a cash flow from investing activities.
a cash flow from financing activities.
none of the above. Correct!
It is the net result of all the operating, investing, and financing cash inflows and outflows.
5. Uses of funds include a (an):
decrease in cash.
increase in any liability.
increase in fixed assets.
tax refund.
6. Which of the following would be included in a cash budget?
depreciation charges.
dividends.
goodwill.
patent amortization.
7. An examination of the sources and uses of funds statement is part of:
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a forecasting technique.
a funds flow analysis.
a ratio analysis.
calculations for preparing the balance sheet.
8. Which of the following is NOT a cash outflow for the firm?
depreciation.
dividends.
interest payments.
taxes.
9. Which of the following would be considered a use of funds?
a decrease in accounts receivable.
a decrease in cash.
an increase in account payable.
an increase in cash.
10. The cash flow statement in the United States is most likely to appear using
a "supplementary method."
a "direct method."
an "indirect method."
a "flow of funds method."
11. For a profitable firm, total sources of funds will always total uses of funds.
be equal to CORRECT!
Total sources must ALWAYS equal total uses. And, it makes no difference whether the firm is profitable or not
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be greater than
be less than
have no consistent relationship toChapter 8: Overview of Working Capital ManagementJust click on the button next to each answer and you'll get immediate feedback.
1. In finance, "working capital" means the same thing as
total assets.
fixed assets.
current assets.
current assets minus current liabilities.
2. Which of the following would be consistent with a more aggressive approach to financing working capital?
Financing short-term needs with short-term funds.
Financing permanent inventory buildup with long-term debt.
Financing seasonal needs with short-term funds.
Financing some long-term needs with short-term funds.
3. Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
Increasing current assets while lowering current liabilities.
Increasing current assets while incurring more current liabilities.
Reducing current assets, increasing current liabilities, and reducing long-term debt.
Replacing short-term debt with equity.
4. Which of the following illustrates the use of a hedging (or matching) approach to financing?
Short-term assets financed with long-term liabilities.
Permanent working capital financed with long-term liabilities.
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Short-term assets financed with equity.
All assets financed with a 50 percent equity, 50 percent long-term debt mixture.
5. In deciding the appropriate level of current assets for the firm, management is confronted with
a trade-off between profitability and risk.
a trade-off between liquidity and marketability.
a trade-off between equity and debt.
a trade-off between short-term versus long-term borrowing.
6. varies inversely with profitability.
Liquidity.
Risk.
Blue.
False.
7. Spontaneous financing includes
accounts receivable.
accounts payable.
short-term loans.
a line of credit.
8. Permanent working capital
varies with seasonal needs.
includes fixed assets.
is the amount of current assets required to meet a firm's long-term minimum needs.
includes accounts payable.
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9. Financing a long-lived asset with short-term financing would be
an example of "moderate risk -- moderate (potential) profitability" asset financing.
an example of "low risk -- low (potential) profitability" asset financing.
an example of "high risk -- high (potential) profitability" asset financing.
an example of the "hedging approach" to financing.
10. Net working capital refers to
total assets minus fixed assets.
current assets minus current liabilities.
current assets minus inventories.
current assets.Chapter 9: Cash and Marketable Securities ManagementJust click on the button next to each answer and you'll get immediate feedback.
1. Marketable securities are primarily
short-term debt instruments.
short-term equity securities.
long-term debt instruments.
long-term equity securities.
2. Time consumed in clearing a check through the banking system.
Processing float
Deposit float
Collection float
Availability float
3. Commercial paper is essentially
another term for a junk bond.
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a short-term unsecured corporate IOU.
an intermediate-term corporate bond.
a certificate that may be exchanged for a share of common stock at a specified future date.
4. Concentration banking
increases idle balances.
moves excess funds from a concentration bank to regional banks.
is less important during periods of rising interest rates.
improves control over corporate cash.
5. Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?
A long- term Aaa-rated corporate bond with a current annual yield of 9.4 percent.
A 30- year Treasury bond with a current annual yield of 8.7 percent.
Ninety- day commercial paper with a current annual yield of 6.2 percent.
Common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5 percent annual yield.
6. Which of the following marketable securities is the obligation of a commercial bank?
Commercial paper
Negotiable certificate of deposit
Repurchase agreement
T-bills
7. The movement of business data electronically in a structured, computer-readable format.
EFT
EDI
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SWIFT
CHIPS
8. That portion of a firm's total marketable securities portfolio held to take care of probable deficiencies in the firm's cash account.
Free cash segment
Controllable cash segment
Ready cash segment
None of the above
9. The most basic requirement for a firm's marketable securities.
Safety
Yield
Marketability
New York.
10. A non-negotiable check payable to a company account at a concentration bank
Payable through draft (PTD)
Depository transfer check (DTC)
ACH transfer
Repo
11. According to the Bond Equivalent Yield (BEY) method, the yield on a $1,000, 13-week US Treasury bill purchased for $960 would be closest to .
16.0 percent
16.7 percent CORRECT!
[($1,000 - $960) / $960] x [365 / 91] = 0.167
17.0 percent
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17.8 percent
The following items are NEW to the 13th edition.
12. US Treasury bills are now sold in minimum amounts of and multiples of above the minimum.
$10,000; $10,000
$10,000; $1,000
$1,000; $1,000
$1,000; $100
$100; $100
13. Accounts receivable conversion (a.k.a., check conversion) is the conversion of a paper check to .
an electronic check image
a "substitute check"
an ACH debit transaction
a foreign currency
14. The US Federal National Mortgage Association (FNMA, "Fannie Mae") and the US Federal Home Loan Mortgage Corporation (FHLMC, "Freddie Mac") are . Interest and principal on debt securities that they issue explicity guaranteed by the US government.
federal agencies; are
federal agencies; are not
government sponsored entities (GSEs); are
government sponsored enterprises (GSEs); are notChapter 10: Accounts Receivable and Inventory ManagementJust click on the button next to each answer and you'll get immediate feedback.
1. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory. In fact,
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$160,000 is released.
$100,000 is additionally invested.
$60,000 is additionally invested.
$60,000 is released. Correct!
IT = 5 = $800,000/ INVENTORY (old) Therefore, INVENTORY (old) = $800,000/5 = $160,000
IT = 8 = $800,000/ INVENTORY (new) Therefore, INVENTORY (new) = $800,000/8 = $100,000
$160,000 - $100,000 = $60,000 released (i.e., Source of Funds)
2. Ninety-percent of Vogel Bird Seed's total sales of $600,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables are, respectively:
365 days and $108,000.
73 days and $120,000.
73 days and $108,000. Correct!
RTD = 365 days/5 = 73 days (.9)$600,000 = $540,000 in credit sales RT = 5 = $540,000/Receivables Therefore, Receivables = $540,000/5 = $108,000
81 days and $108,000.
3. If EOQ = 360 units, order costs are $5 per order, and carrying costs are $.20 per unit, what is the usage in units?
129,600 units
2,592 units Correct!
EOQ = SQRT[ (2)(O)(S)/(C) ] 360 = SQRT[ (2)($5)(S)/($.20) ] 360 = SQRT[ (50)(S) ] (360)(360) = 129,600 = (50)(S) S = 129,600/50 = 2,592
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25,920 units
18,720 units
4. Costs of not carrying enough inventory include:
lost sales.
customer disappointment.
possible worker layoffs.
all of these.
5. Which of the following relationships hold true for safety stock?
the greater the risk of running out of stock, the smaller the safety of stock.
the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
the higher the profit margin per unit, the higher the safety stock necessary.
6. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
an increase in the average collection period.
a decrease in bad debt losses.
an increase in sales.
higher profits.
7. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?
Lower than the present level.
No change from the present level.
Higher than the present level.
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Unable to determine without more information.
8. An increase in the firm's receivable turnover ratio means that:
it is collecting credit sales more quickly than before.
cash sales have decreased.
it has initiated more liberal credit terms.
inventories have increased.
9. Receiving a required inventory item at the exact time needed.
ABC
JIT
FOB
PERT
10. EOQ is the order quantity that over our planning horizon.
minimizes total ordering costs
minimizes total carrying costs
minimizes total inventory costs
the required safety stock
11. A B2B exchange is a Internet marketplace that matches supply and demand by real-time auction bidding.
buyer-to-business
business-to-business
business-to-buyer
buyer-to-buyerChapter 11: Short-Term FinancingJust click on the button next to each answer and you'll get immediate feedback.
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1. Under COD terms, the seller:
extends credit to the buyer on open account.
extends credit to the buyer subject to bank approval.
requires the buyer to make partial payment at fixed intervals.
bears the risk of the buyer's refusing the goods shipped.
2. The type of business most likely to use trust receipt financing would be:
a forest products company.
an oil refinery.
an automobile dealership.
a grocery store chain.
3. The trade terms "2/15, net 30" indicate that:
a 2% discount is offered if payment is made within 15 days.
a 15% discount is offered if payment is made within 30 days.
a 2% discount is offered if payment is made within 30 days.
a 30% discount is offered if payment is made within 15 days.
4. If credit terms of "2/10, net 40" are offered, the approximate cost of not taking the discount and paying at the end of the credit period would be closest to which of the following? (Assume a 365-day year.)
18.6%
24.3%
24.8% Correct!
[2/(100-2)]*[365/(40-10)] = .248
30.0%
5. If a discount date is missed for some reason, when should a rational manager pay the bill?
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As soon as possible after the discount date so as to not upset the supplier.
No sooner than six months so as to maximize the use of "free" trade credit financing.
On the final due date.
None of the above.
6. If MetroPulse Media receives an invoice for purchases dated 10/21/X5 subject to credit terms of "3/10, net 30 EOM," what is the last possible day the payment should be made (1) if the discount is taken and (2) if the discount is not taken?
November 1 and November 20, respectively.
November 10 and November 20, respectively.
November 10 and November 30, respectively.
December 10 and December 30, respectively.
7. When a firm needs short-term funds for a specific purpose, the bank loan will likely be a:
compensating balance arrangement.
revolving credit agreement.
transaction loan.
line of credit.
8. Inventory is in the possession of a third party under which of the following methods?
Floating lien
Terminal warehouse receipts
Chattel mortgage
Trust receipts
9. The Houser Company has negotiated a $500,000 revolving credit agreement with Chitwood National Bank. The agreement calls for an interest rate of 10% on fund used, a 15% compensating balance, and a commitment fee of 1% on the unused amount of the credit line. Assuming that the compensating balance would not otherwise be maintained, the effective annual interest cost if the firm borrows $200,000 for one year is closest to
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11.5 percent.
15 percent.
26.5 percent.
13.53 percent. Correct!
Interest = .10($200,000) = $20,000
Commitment fee = .01 ($500,000 - $200,000) = $3,000
Amount of useable loan funds = $200,000 - (.15 * $200,000) = $170,000
Annual percentage cost = ($20,000 + $3,000)/$170,000 = .1353 or 13.53%
10. A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.
Letter of credit
Revolving credit agreement
Line of credit
Trade credit
11. The type(s) of collateral generally used for a secured short-term loan is(are) .
inventory and/or receivables
common stock and/or bonds
real estate
machineryChapter 12: Capital Budgeting and Estimating Cash FlowsJust click on the button next to each answer and you'll get immediate feedback.
1. All of the following influence capital budgeting cash flows EXCEPT:accelerated depreciation.
salvage value.
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tax rate changes.
method of project financing used.
2. In proper capital budgeting analysis we evaluate incremental
accounting income.
cash flow.
earnings.
operating profit.
3. The estimated benefits from a project are expressed as cash flows instead of income flows because:
it is simpler to calculate cash flows than income flows.
it is cash, not accounting income, that is central to the firm's capital budgeting decision.
this is required by the Internal Revenue Service.
this is required by the Securities and Exchange Commission.
4. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:
sunk costs.
opportunity costs.
changes in working capital resulting from the project, net of spontaneous changes in current liabilities.
effects of inflation.
5. A capital investment is one that
has the prospect of long-term benefits.
has the prospect of short-term benefits.
is only undertaken by large corporations.
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applies only to investment in fixed assets.
6. Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes. This amount is called the asset's
cost of capital.
initial cash outlay.
depreciable basis.
sunk cost.
7. Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to
$280,000.
$380,000.
$480,000. Correct!
$475,000 + $5,000 = $480,000
$580,000.
8. (See information in Question #7 above.) The "cost" of this asset that, by law, may be written off over time "for tax purposes" is closest to
$280,000.
$380,000.
$480,000. Correct!
$475,000 + $5,000 = $480,000
Note: Under U.S. tax law the asset´s depreciable basis is NOT reduced by the estimated salvage value of the asset.
$580,000.
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9. In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book value, any amount realized in excess of book value but less than the asset's depreciable basis is considered a
"capital gain" and is taxed at the corporate capital gains tax.
"recapture of depreciation" and is taxed at the corporate capital gains rate.
"capital gain" and is taxed at a rate equal to the firm's ordinary tax rate, or a maximum of 35 percent.
"recapture of depreciation" and is taxed at the firm's ordinary income tax rate.
10. Under the Modified Accelerated Cost Recovery System (MACRS), an asset in the "5-year property class" would typically be depreciated over years.
four
five
six
sevenChapter 13: Capital Budgeting TechniquesJust click on the button next to each answer and you'll get immediate feedback.
1. A profitability index of .85 for a project means that:
the present value of benefits is 85% greater than the project's costs.
the project's NPV is greater than zero.
the project returns 85 cents in present value for each current dollar invested.
the payback period is less than one year.
2. BackInSoon, Inc., has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the tenth year. Assuming that these cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent, calculate the initial cash outlay. (Hint: With a desired IRR of 8%, use the IRR formula: ICO = discounted cash flows.)
$16,775
$19,090 Correct!
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($2,500)(PVIFA at 8% for 10 periods) + ($5,000)(PVIF at 8% for 10 periods) = ($2,500)(6.710) + ($5,000)(.463) = $19,090
$25,000
$30,000
3. Woatich Windmill Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project? [(Hint: The cash f lows from the project are an annuity so you can solve for i in the equation PVA = R(PVIFAi,10).]
6 percent
7 percent
8 percent
9 percent Correct!
$50,000 = $7,791(PVIFA at i% for 10 periods) $50,000/$7,791 = 6.418
From the PVIFA table in the book, 6.418 is the PVIFA at 9% for 10 periods.
4. Which of the following statements is correct?
If the NPV of a project is greater than 0, its PI will equal 0.
If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
If the PI of a project is less than 1, its NPV should be less than 0.
If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.
5. Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If the net present value of this proposal is greater than zero and the firm is not under the constraint of capital rationing, then the firm should:
calculate the IRR of this investment to be certain that the IRR is greater than the cost of capital.
compare the profitability index of the investment to those of other possible investments.
calculate the payback period to make certain that the initial cash outlay can be recovered within an appropriate period of time.
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accept the proposal, since the acceptance of value-creating investments should increase shareholder wealth.
6. A project's profitability index is equal to the ratio of the of a project's future cash flows to the project's .
present value; initial cash outlay
net present value; initial cash outlay
present value; depreciable basis
net present value; depreciable basis
7. The discount rate at which two projects have identical is referred to as Fisher's rate of intersection.
present values
net present values
IRRs
profitability indexes
8. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods give contradictory results.
will never
will always
may
will generally
9. If capital is to be rationed for only the current period, a firm should probably first consider selecting projects by descending order of .
net present value
payback period
internal rate of return
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profitability index
10. The method provides correct rankings of mutually exclusive projects, when the firm is not subject to capital rationing.
net present value
internal rate of return
payback period
profitability index
11. In an NPV sensitivity graph, a steep sensitivity line for a particular input variable means that a in that variable results in a in NPV.
small percentage change; large change
large percentage change; small change
12. One potential problem with sensitivity analysis is that it generally looks at sensitivity "one variable at a time." However, one way to judge the sensitivity of results to simultaneous changes in two variables, at least, is to construct an .
NPV profile
NPV sensitivity matrix
NPV sensitivity graphChapter 14: Risk and Managerial Options in Capital BudgetingJust click on the button next to each answer and you'll get immediate feedback.
1. The investment proposal with the greatest relative risk would have
the highest standard deviation of net present value.
the highest coefficient of variation of net present value.
the highest expected value of net present value.
the lowest opportunity loss likelihood.
2. Probability-tree analysis is best used when cash flows are expected to be
independent over time.
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risk-free.
related to the cash flows in previous periods.
known with certainty.
3. You are considering two mutually exclusive investment proposals, project A and project B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that
Project A dominates project B.
Project B dominates project A.
Project A is more risky and should offer greater expected value.
Each project is high on one variable, so the two are basically equal.
4. If two projects are completely independent (or unrelated), the measure of correlation between them is:
0
.5
1
-1
5. Managerial options can be viewed as
methods for reducing agency risk through the use of incentives.
methods for reducing total firm risk through diversification.
strategies for increasing management compensation.
opportunities for altering management decisions in the future.
6. A managerial option, in effect,
limits the flexibility of management's decision-making.
limits the downside risk of an investment project.
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limits the profit potential of a proposed project.
applies only to new projects.
7. When using a probability tree approach, we discount the various cash flows to their present value at
the firm's weighted-average cost of capital.
the project's required rate of return.
the risk-free rate.
the after-tax cost of the firm's long-term debt.
8. The presence of managerial, or real, options the worth of an investment project.
increases
decreases
does not affect
increase or decreasesChapter 15: Required Returns and the Cost of CapitalJust click on the button next to each answer and you'll get immediate feedback.
1. A single, overall cost of capital is often used to evaluate projects because:
it avoids the problem of computing the required rate of return for each investment proposal.
it is the only way to measure a firm's required return.
it acknowledges that most new investment projects have about the same degree of risk.
it acknowledges that most new investment projects offer about the same expected return.
2. The cost of equity capital is all of the following EXCEPT:the minimum rate that a firm should earn on the equity-financed part of an investment.
a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
by far the most difficult component cost to estimate.
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generally lower than the before-tax cost of debt.
3. In calculating the proportional amount of equity financing employed by a firm, we should use:
the common stock equity account on the firm's balance sheet.
the sum of common stock and preferred stock on the balance sheet.
the book value of the firm.
the current market price per share of common stock times the number of shares outstanding.
4. To compute the required rate of return for equity in a company using the CAPM, it is necessary to know all of the following EXCEPT:
the risk-free rate.
the beta for the firm.
the earnings for the next time period.
the market return expected for the time period.
5. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
common stock.
debt.
preferred stock.
none of the above.
6. The common stock of a company must provide a higher expected return than the debt of the same company because
there is less demand for stock than for bonds.
there is greater demand for stock than for bonds.
there is more systematic risk involved for the common stock.
there is a market premium required for bonds.
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7. A quick approximation of the typical firm's cost of equity may be calculated by
adding a 5 percent risk premium to the firm's before-tax cost of debt.
adding a 5 percent risk premium to the firm's after-tax cost of debt.
subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
8. Market values are often used in computing the weighted average cost of capital because
this is the simplest way to do the calculation.
this is consistent with the goal of maximizing shareholder value.
this is required in the U.S. by the Securities and Exchange Commission.
this is a very common mistake.
9. For an all-equity financed firm, a project whose expected rate of return plots should be rejected.
above the characteristic line
above the security market line
below the security market line
below the characteristic line
10. Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this fact, it is best if the firm
adjusts its hurdle rate (i.e., cost of capital) upward to compensate for this fact.
adjusts its hurdle rate (i.e., cost of capital) downward to compensate for this fact.
does not adjust its hurdle rate up or down regardless of this fact.
raises its prices to compensate for this fact.
11. The Tchotchke Knick-Knack Company relies on preferred stock, bonds, and common stock for its long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of the Tchotchke Company's long-term financing.
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1 = bonds; 2 = common stock; 3 = preferred stock.
1 = bonds; 2 = preferred stock; 3 = common stock.
1 = common stock; 2 = preferred stock; 3 = bonds.
1 = preferred stock; 2 = common stock; 3 = bonds.
12. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .
6 percent
6.25 percent
10 percent
10.4 percent Correct!
$10/$96 = .1042
Remember, dividends are not a tax deductible expense so we do NOT multiply $10 by one minus the tax rate before continuing our calculation.
13. David Ding is evaluating two conventional, independent capital budgeting projects (X and Y) by making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X and Y have internal rates of return of 16 percent and 12 percent, respectively. The RADR appropriate to Project X is 18 percent, while Project Y's RADR is only 10 percent. The company's overall, weighted-average cost of capital is 14 percent. David should .
accept Project X and accept Project Y.
accept Project X and reject Project Y.
reject Project X and accept Project Y. Correct!
The IRR of Project X (16%) is less than its RADR (18%), therefore reject. The IRR of Project Y (12%) is greater than its RADR (10%), therefore accept
reject Project X and reject Project Y.
14. One way to visualize the RADR approach is to make (new) use of an "old friend," the .
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Security Market Line (SML)
characteristic line
NPV profile CORRECT!
The NPV profile for a project can be used to highlight the NPV for a project at any number of alternative risk-adjusted discount rates -- including the weighted-average cost of capital (WACC) for the firm.Chapter 16: Operating and Financial LeverageJust click on the button next to each answer and you'll get immediate feedback.
1. If I believe in the basic principle of a risk-reward relationship, my conclusion regarding security ratings and yields between an Aaa bond and a Baa bond would be that:
the Aaa bond would have the lower yield.
the Aaa bond would have the higher yield.
the Baa bond would have lower default risk.
default risks would differ but yields would be equal.
2. A firm's degree of operating leverage (DOL) depends primarily upon its
sales variability.
level of fixed operating costs.
closeness to its operating break-even point.
debt-to-equity ratio.
3. An EBIT-EPS indifference analysis chart is used for
evaluating the effects of business risk on EPS.
examining EPS results for alternative financing plans at varying EBIT levels.
determining the impact of a change in sales on EBIT.
showing the changes in EPS quality over time.
4. EBIT is usually the same thing as:
funds provided by operations.
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earnings before taxes.
net income.
operating profit.
5. In the context of operating leverage break-even analysis, if selling price per unit rises and all other variables remain constant, the operating break-even point in units will:
fall.
rise.
stay the same.
still be indeterminate until interest and preferred dividends paid are known.
6. If a firm has a DOL of 5 at Q units, this tell us that:
if sales rise by 5%, EBIT will rise by 5%.
if sales rise by 1%, EBIT will rise by 1%.
if sales rise by 5%, EBIT will fall by 25%.
if sales rise by 1%, EBIT will rise by 5%.
7. This statistic can be used as a quantitative measure of relative "financial risk."
coefficient of variation of earnings per share (CVEPS)
coefficient of variation of operating income (CVEBIT)
(CVEPS - CVEBIT)
(CVEPS + CVEBIT)
8. A firm's degree of total leverage (DTL) is equal to its degree of operating leverage its degree of financial leverage (DFL).
plus
minus
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divided by
multiplied by
9. The further a firm operates above its operating break-even point, the closer its degree of operating leverage (DOL) measure approaches
minus one.
zero.
one.
infinity.Chapter 17: Capital Structure DeterminationJust click on the button next to each answer and you'll get immediate feedback.
1. The term "capital structure" refers to:
long-term debt, preferred stock, and common stock equity.
current assets and current liabilities.
total assets minus liabilities.
shareholders' equity.
2. A critical assumption of the net operating income (NOI) approach to valuation is:
that debt and equity levels remain unchanged.
that dividends increase at a constant rate.
that ko remains constant regardless of changes in leverage.
that interest expense and taxes are included in the calculation.
3. The traditional approach towards the valuation of a company assumes:
that the overall capitalization rate holds constant with changes in financial leverage.
that there is an optimum capital structure.
that total risk is not altered by changes in the capital structure.
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that markets are perfect.
4. Two firms that are virtually identical except for their capital structure are selling in the market at different values. According to M&M
one will be at greater risk of bankruptcy.
the firm with greater financial leverage will have the higher value.
this proves that markets cannot be efficient.
this will not continue because arbitrage will eventually cause the firms to sell at the same value.
5. The cost of monitoring management is considered to be a (an):
bankruptcy cost.
transaction cost.
agency cost.
institutional cost.
6. What is the value of the tax shield if the value of the firm is $5 million, its value if unlevered would be $4.78 million, and the present value of bankruptcy and agency costs is $360,000?
$140,000
$220,000
$360,000
$580,000 Correct!
$5M - $4.78M + $0.36M = $0.58M
7. According to the concept of financial signaling, management behavior results in new debt issues being regarded as " news" by investors.
good
bad
non-event
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risk-neutral
8. The cost of capital for a firm -- when we allow for taxes, bankruptcy, and agency costs --
remains constant with increasing levels of financial leverage.
first declines and then ultimately rises with increasing levels of financial leverage.
increases with increasing levels of financial leverage.
decreases with increasing levels of financial leverage.
9. When sequential long-term financing is involved, the choice of debt or equity influences the future financial of the firm.
timing
flexibility
liquidityChapter 18: Dividend PolicyJust click on the button next to each answer and you'll get immediate feedback.
1. Retained earning are
an indication of a company's liquidity.
the same as cash in the bank.
not important when determining dividends.
the cumulative earnings of the company after dividends.
2. Which of the following is an argument for the relevance of dividends?
Informational content.
Reduction of uncertainty.
Some investors' preference for current income.
All of the above.
3. All of the following are true of stock splits EXCEPT:
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market price per share is reduced after the split.
the number of outstanding shares is increased.
retained earnings are changed.
proportional ownership is unchanged.
4. If Ian O'Connor Enterprises, Inc., repurchased 50 percent of its outstanding common stock from the open (secondary) market, the result would be
a decline in EPS.
an increase in cash.
a decrease in total assets.
an increase in the number of stockholders.
5. On May 7, Melbourne Mining declared a $.50-per-share quarterly dividend payable June 28 to stockholders of record on Friday, June 7. What is the latest date by which you could purchase the stock and still get the recently declared dividend?
June 3
June 4
June 5
June 6
6. An offer by a firm to repurchase some of its own shares is known as
a DRIP.
a self-tender offer.
a reverse split.
7. If an individual stockholder reinvests dividends under a company's dividend reinvestment plan, the reinvested dividends are
not taxable to the shareholder.
taxable to the shareholder.
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8. The dividend-payout ratio is equal to
the dividend yield plus the capital gains yield.
dividends per share divided by earnings per share.
dividends per share divided by par value per share.
dividends per share divided by current price per share.Chapter 19: The Capital MarketJust click on the button next to each answer and you'll get immediate feedback.
1. Letter stock is
a handwritten certificate representing a corporate IOU.
a mass mailing offering a security for sale.
securities issued by the United States Postal Service.
privately placed common stock that cannot be immediately resold to the general public.
2. A preliminary prospectus is known as a
golden parachute.
red herring.
blue sky.
green shoe.
3. If an investment banker has agreed to sell a new issue of securities on a best-efforts basis, the issue
most likely involves an unusually large stock offering.
most likely involves bonds instead of common stock.
results in no assumption of underwriting risk by the investment banker.
most likely involves a well-established, large company.
4. The actual market value of a right will differ from its theoretical value for all of the following reasons EXCEPT for:
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the size of the firm's marginal tax rate.
the amount of transactions costs incurred.
investor speculation.
the irregular exercise and sale of rights over the subscription period.
5. In a common stock rights offering the subscription price is generally:
set equal to the current market price of the stock.
set below the current market price of the stock.
set above the current market price of the stock.
set after the stock goes "ex-rights."
6. When the investment banker bears the risk of not being able to sell a new security at the established price, this is known as:
a best efforts offering.
underwriting.
shelf registration.
making a market.
7. To say that there is "asymmetric information" in the issuing of common stock or debt means that
investors have nearly perfect information.
the markets have nearly perfect information.
investors have more accurate information than management has.
management has more accurate information than investors have.
8. In calculating the value of one right when the stock is selling "rights-on," the analyst needs to know the number of rights needed to buy one share of stock and:
the subscription price per share.
the transactions costs involved.
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the price-earnings ratio of the firm's stock.
the length of the rights offering period.
9. A best efforts offering is sometimes used in connection with a of new, long-term securities.
private placement
privileged subscription
public issue
all of the above
10. permits what is known as a shelf registration.
SEC Rule 144
SEC Rule 144a
SEC Rule 415
SEC Form 13D
11. A company can ensure the complete success of a rights offering by making use of a
standby arrangement.
oversubscription privilege.
green shoe provision.
shelf registration.
12. The market price of K-T-Lew Corporation's common stock is $60 per share, and each share gives its owner one subscription right. Four rights are required to purchase an additional share of common stock at the subscription price of $54 per share. If the common stock is currently selling "rights-on," the theoretical value of a right is closest to
$0.96
$1.20 Correct!
($60 - $54)/(4+1) = $1.20
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$1.50
$6.00
13. (See Question 12 above.) The theoretical value of one share of K-T-Lew common stock when it goes "ex-rights" is closest to
$54.00
$58.50
$58.80 Correct!
[($60)(4) + $54]/(4+1) = $58.80
$59.04
14. Financial intermediaries .
do not invest in new long-term securities
include insurance companies and pension funds
include the national and regional stock exchanges
are usually underwriting syndicates
15. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
a series of corporate and accounting frauds involving Enron, Arthur Andersen, WorldCom, and numerous others.
a dramatic rise in the US trade deficit.
charges of excessive compensation to top corporate executives.
rising complaints by investors and security analysts over the financial accounting for stock options.
The following item is NEW to the 13th edition.
16. Because of US "Securities Offering Reform" can take advantage of a special streamlined "shelf registration" process that provides for automatic effectiveness of a registration statement upon filing with the SEC (i.e., no SEC review).
only unseasoned issuers
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only seasoned issuers
only well-known seasoned issuers (WKSIs)
only seasoned issuers and well-known seasoned issuers (WKSIs)Chapter 20: Long-Term Debt, Preferred Stock, and Common StockJust click on the button next to each answer and you'll get immediate feedback.
1. A bond issue may be retired by:
calling the bonds if there is a call feature.
converting the bonds (if convertible) into common stock.
making a single-sum payment at final maturity.
all of the above.
2. Protective covenants are:
to protect employees.
to protect the interests of the company.
to protect shareholders.
to protect bondholders.
3. Which of the following bonds offer the investor the most protection?
First-mortgage bonds
Debentures
Subordinated debentures
Income bonds
4. A company refunds its bonds for any of the following reasons EXCEPT for:
to eliminate restrictive covenants.
to reduce interest costs.
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to show higher reported profits.
to issue new bonds at higher rate of interest.
5. The call-option value of a callable bond is likely to be high when
interest rates are volatile.
interest rates are low and expected to remain low.
interest rate are high and expected to remain high.
markets are inefficient.
6. Treasury stock is:
common stock issued by the U.S. government.
preferred stock issued by the U.S. government.
common stock that has been repurchased and is being held by the issuing company.
a corporation's common stock outstanding.
7. A call provision, a sinking fund, and/or conversion are used to retire
bonds and preferred stock.
bonds and common stock.
preferred stock and common stock.
only common stock.
8. Preferred shareholders' claims on assets and income of a firm come those of creditors those of common shareholders.
before; and also before
after; but before
after; and also after
equal to; and equal to
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9. Dual classes of are common in new ventures where promotional usually goes to the founders.
bonds; bonds
preferred stock; preferred stock
common stock; common stock
warrants; warrantsChapter 21: Term Loans and LeasesJust click on the button next to each answer and you'll get immediate feedback.
1. One difference between a financial lease and operating lease is that:
there is a often a call option in a financial lease.
there is often an option to buy in an operating lease.
an operating lease is often cancellable by the lessee.
a financial lease is often cancellable by the lessee.
2. The principal reason for the existence of leasing is that:
intermediate-term loans are difficult to obtain.
this is a type of financing unaffected by changes in tax law.
companies, financial institutions, and individuals derive different benefits from owning assets.
leasing is a renewable source of intermediate-term funds.
3. A way to analyze whether debt or lease financing would be preferable is to:
compare the net present values under each alternative, using the cost of capital as the discount rate.
compare the net present values under each alternative, using the after-tax cost of borrowing as the discount rate.
compare the payback periods for each alternative.
compare the effective interest costs involved for each alternative.
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4. A conventional revolving credit agreement allows a firm:
to borrow a fixed amount for the entire commitment period.
to borrow for a short-period with a right to renew the loan during the commitment period.
to possibly include a provision to convert the credit agreement into a term loan contract at maturity.
to do all of the above.
5. The type of lease that includes a third party, a lender, is called a(n):
sale and leaseback.
direct leasing arrangement.
leveraged lease.
operating lease.
6. One advantage of a financial lease is that:
it has a shorter maturity than term loans.
it never appears as a liability on the balance sheet.
it eliminate the needs to make periodic payments.
it provides a way to indirectly depreciate land.
7. Medium-term notes (MTNs) have maturities that range up to
one year (but no more).
two years (but no more).
ten years (but no more).
thirty years (or more) Correct!
That´s why MEDIUM-TERM is a bit of a misnomer.
8. A direct lease, a sale and leaseback, and a leveraged lease are all examples of
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operating leases.
financial leases.
full-service leases.
"off-balance sheet" methods of financing.Chapter 22: Convertibles, Exchangeables, and WarrantsJust click on the button next to each answer and you'll get immediate feedback.
1. A $500 par-value convertible debenture is selling at $520. If the conversion ratio is 20, what is the conversion price?
$19.23
$20.18
$25.00 Correct!
Conversion ratio = (Face value) / (Conversion price) Conversion price = $500 / 20 = $25
$26.00
2. A company has just issued convertible bonds with $1,000 par value and a conversion ratio of 40. Which of the following is most likely to be the market price per share of the company's common stock at present?
Under $25. Correct!
At the time of issuance, the convertible security will be priced higher than its conversion value. Conversion value equals conversion ratio times the current market price per share of common stock. For $1,000 to be greater than 40 times the current market price per share of common stock, the stock must be under $25 per share.
$25.
Between $25 and $30.
Above $30.
3. If a warrant carries a right to buy one share of common stock and is exercisable at $20 per common share while the market price of a share is $30, the theoretical value of the warrant is:
$20.
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$10. Correct!
(1)($30) - $20 = $10
$5.
$0.
4. An exchangeable bond:
can be exchanged for another bond of a different company.
can be exchanged for another bond of the same company.
involves the common stock of another company.
is the same thing as a convertible bond.
5. The call price of a convertible bond is generally
equal to the conversion ratio times the market price per share of common stock.
greater than the face value of the bond.
equal to the face value of the bond divided by the conversion ratio.
equal to the value at maturity.
6. A(n) is a bond that may be exchanged for common stock of the same corporation.
exchangeable bond
debenture
convertible bond
warrant
7. A warrant is a relatively option to purchase at a specified exercise price over a specified period of time.
short-term; bonds
long-term; bonds
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short-term; common stock
long-term; common stock
8. Some options have a current theoretical value and yet .
that is negative; sell for positive prices
that is positive; have a zero current price
of zero; sell for positive prices
all of the aboveChapter 23: Mergers and Other Forms of Corporate RestructuringJust click on the button next to each answer and you'll get immediate feedback.
1. Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:
.667
1.0
1.125
1.5
2. The restructuring of a corporation should be undertaken if
the restructuring can prevent an unwanted takeover.
the restructuring is expected to create value for shareholders.
the restructuring is expected to increase the firm's revenue.
the interests of bondholders are not negatively affected.
3. The "information effect" refers to the notion that
a corporation's actions may convey information about its future prospects.
management is reluctant to provide financial information that is not required by law.
agents incur costs in trying to obtain information.
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the financial manager should attempt to manage sensitive information about the firm.
4. In the long run, a successful acquisition is one that:
enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.
enables the acquirer to diversify its asset base.
increases the market price of the acquirer's stock over what it would have been without the acquisition.
increases financial leverage.
5. Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders
have too little information to make an optimal decision.
have big egos and this impedes rational decision-making.
have difficulty in thinking strategically over the long-term.
are overly influenced by the tax consequences of an acquisition.
6. A tender offer is
a goodwill gesture by a "white knight."
a would-be acquirer's friendly takeover attempt.
a would-be acquirer's offer to buy stock directly from shareholders.
viewed as sexual harassment when it occurs in the workplace.
7. The public sale of common stock in a subsidiary in which the parent usually retains majority control is called
a pure play.
a spin-off.
a partial sell-off.
an equity carve-out.
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8. In the United States, goodwill charges arising from a current acquisition are generally deductible for "tax purposes" over
15 years.
20 years.
40 years.
no years (i.e., these goodwill charges are not deductible for "tax purposes").
9. Empirical evidence on acquisitions indicates excess returns on average to the shareholders of the selling company, and e xcess returns on average to those of the buying company.
no; no
substantial; no
no; substantial
substantial; substantial
10. One means for a company to "go private" is
divestiture.
the pure play.
the leveraged buyout (LBO).
the prepackaged reorganization.
11. Recent accounting changes in the US .
eliminated the purchase method, allowing only the pooling-of-interests method for mergers and acquisitions
eliminated the pooling-of-interests method, allowing only the purchase method for mergers and acquisitions
allow for both the purchase method and the pooling-of-interests method for mergers and acquisitions
outlawed the recording of goodwill for any merger or acquisition
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Bottom of Form
Chapter 24: International Financial ManagementJust click on the button next to each answer and you'll get immediate feedback.
Note: Your browser must support JavaScript in order to use this quiz.
1. Which of the following is a legitimate reason for international investment?
Dividends from a foreign subsidiary are tax exempt in the United States.
Most governments do not tax foreign corporations.
There are possible benefits from international diversification.
International investments have less political risk than domestic investments.
2. Interest-rate parity refers to the concept that, where market imperfections are few,
the same goods must sell for the same price across countries.
interest rates across countries will eventually be the same.
there is an offsetting relationship between interest rate differentials and differentials in the forward spot exchange market.
there is an offsetting relationship provided by costs and revenues in similar market environments.
3. The forward market is especially well-suited to offer hedging protection against
translation risk exposure.
transactions risk exposure.
political risk exposure.
taxation.
4. Suppose that the Japanese yen is selling at a forward discount in the forward-exchange market. This implies that most likely
this currency has low exchange-rate risk.
this currency is gaining strength in relation to the dollar.
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interest rates are higher in Japan than in the United States.
interest rates are declining in Japan.
5. Following FASB Statement No. 52, gains or losses from currency translation are shown:
on the income statement as currency gains (or losses).
on the balance sheet as an adjustment to owners' equity.
on the balance sheet as an adjustment to cash.
nowhere because gains or losses from currency changes need not be shown..
6. All of the following are hedges against exchange-rate risk EXCEPT
balancing monetary assets and liabilities.
use of spot market.
foreign-currency swaps.
adjustment of funds commitments between countries.
7. A multinational can centralize cash management and attempt to reduce exchange rate risk exposure through the use of
a reinvoicing center.
a bill of lading.
a time draft.
countertrade.
8. Forfaiting most closely resembles
export factoring.
countertrade.
netting.
reinvoicing.
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9. The euro is the name for
a currency deposited outside its country of origin.
a bond sold internationally outside of the country in whose currency the bond is denominated.
a common European currency.
a type of sandwich.
10. Assume that a Big Mac hamburger is selling for £1.99 in the United Kingdom, the same hamburger is selling for $2.71 in the United States, and the actual exchange rate (to buy $1.00 with British pounds) is 0.63. According to , the British pound is the US dollar.
purchasing-power parity; undervalued
interest-rate parity; undervalued
purchasing-power parity; overvalued
interest-rate parity; overvalued
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