Contemporary Financial Management14th Edition by Charles, James and Ramesh TEST BANK by ACADEMIAMILL

TEST BANK Contemporary Financial Management14th Edition by Charles Moyer, James McGuigan and Ramesh Rao

TABLE OF CONTENTS: Chapter 1. The Role and Objective of Financial Management Chapter 2. The Domestic and International Financial Marketplace Chapter 3. Evaluation of Financial Performance Chapter 4. Financial Planning and Forecasting Chapter 5. The Time Value of Money Chapter 6. Fixed-Income Securities: Characteristics and Valuation Chapter 7. Common Stock: Characteristics, Valuation, and Issuance Chapter 8. Analysis of Risk and Return Chapter 9. Capital Budgeting and Cash Flow Analysis Chapter 10. Capital Budgeting: Decision Criteria and Real Option Considerations Chapter 11. Capital Budgeting and Risk Chapter 12. The Cost of Capital Chapter 13. Capital Structure Concepts Chapter 14. Capital Structure Management in Practice Chapter 15. Dividend Policy Chapter 16. Working Capital Policy and Short-Term Financing Chapter 17. The Management of Cash and Marketable Securities

Chapter 18. The Management of Accounts Receivable and Inventories Chapter 19. Lease and Intermediate-Term Financing Chapter 20. Financing with Derivatives Chapter 21. Risk Management Chapter 22. International Financial Management Chapter 23. Corporate Restructuring

Chapter 1. The Role and Objective of Financial Management 1 : The primary objective of the firm is A : shareholder wealth maximization B : social responsibility C : long-run survival D : profit maximization

Correct Answer : A 2 : The shareholder wealth maximization goal states that management should seek to maximize the of the expected future returns to the owners of the firm. A : future value B : compound value C : percentage value D : present value Correct Answer : D 3 : Financial managers can take a variety of actions to influence the market value of a companys stock. All of the following are classifications of actions taken EXCEPT decisions. A : investing B : financing C : dividend D : tax implication Correct Answer : D 4 : Shareholder wealth is measured by the holdings. A : book B : market C : historic D : compound

value of the shareholders common stock

Correct Answer : B 5 : The limitations of the profit maximization goal include which of the following? A : It lacks a time dimension (i.e., it is static). B : It fails to consider risk with alternative decisions. C : The definition of profit is ambiguous. D : All the above are limitations. Correct Answer : D 6 : The objective of maximizing shareholder wealth, as measured by the market value of the firms stock, . A : does not consider the timing of the benefits received B : provides a way to consider the risk of the benefits expected C : benefits only certain stockholders D : does not provide a standard against which to judge actual decisions Browsegrades.net

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Correct Answer : B 7 : The two most important disciplines on which financial management relies are A : accounting and production B : accounting and marketing C : economics and marketing D : accounting and economics

Correct Answer : D 8 : Which of the following is NOT a professional certification for careers in the field of finance? A : Certified Financial Manager (CFM) B : Certified Financial Planner (CFP) C : Certified Financial Analyst (CFA) D : Certified Treasury Professional (CTP) Correct Answer : C 9 : When considering the risk of receiving cash flows, financial managers must be aware that investors . A : want higher returns for perceived greater risk B : want a lower valued firm to discourage future investors which might dilute their existing control C : expect dividends and capital gains regardless of the risks associated with achieving them D : always want lower returns so that the risk is minimized Correct Answer : A 10 : A major advantage of using the maximization of shareholder wealth as the primary goal of the firm is that this goal considers . A : the timing and the risk of the expected benefits to be received B : the investors consumption utility C : the value of closely held partnerships D : All of these are correct Correct Answer : A 11 : The primary reason for the divergence between the shareholder wealth maximization goal and the actual goals pursued by management has been attributed to . A : separation of social responsibility and stakeholders concerns B : separation of ownership and control C : separation of personal welfare and long-run profit goals D : the granting of golden parachute contracts Correct Answer : B 12 : Giving top management is one method that ensures managers will act in the interest of shareholders in merger decisions. A : golden parachute contracts B : excellent pay C : executive perks D : job security Browsegrades.net

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Correct Answer : A 13 : arise from the divergent objectives between owners and managers. A : Shareholder relationships B : Stakeholder problems C : Creditor problems D : Agency problems Correct Answer : D 14 : Agency costs include all of the following, EXCEPT . A : expenditures to monitor managements actions B : providing stock as part of managements compensation expenditures to structure the organization C : flotation costs D : bonding expenditures Correct Answer : C 15 : A potential agency conflict can arise between stockholders and creditors because owners may . A : increase the risk of a firms investments B : decrease the amount of debt outstanding C : decrease the risk of a firms investments D : increase the firms net worth Correct Answer : A 16 : Creditors have a fixed financial claim on a companys resources through all of the following EXCEPT . A : long term debt B : bank loans C : preferred stock D : commercial paper Correct Answer : C 17 : Agency problems may give rise to constraints that A : increase B : decrease C : do not affect D : are not important to

the market value of firms.

Correct Answer : B 18 : All of the following are problems with the microeconomic profit maximization model EXCEPT . A : the absence of a time dimension B : offers financial managers insights to a wide range of problems C : does not consider the risk of alternative decisions D : the problem of defining profits Browsegrades.net

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Correct Answer : B 19 : are largely outside of the direct control of managers. A : Investment strategies B : Economic environment factors C : Major policy decisions D : Dividend policies Correct Answer : B 20 : The success of a firm is linked to its stakeholders. This group includes A : communities in which they operate B : suppliers C : employees D : All of these are correct

Correct Answer : D 21 : Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include all of the following EXCEPT . A : collecting all the facts bearing on the problem B : clarifying the parameters of the problem C : involving all parties with a financial interest in the outcome D : seeking equity for those who may be affected Correct Answer : C 22 : Many entrepreneurs are A : poorly B : highly C : well D : 90%

diversified with respect to their personal wealth.

Correct Answer : A 23 : deals with economic decisions of individuals, households, and firms. A : Economic accounting B : Microeconomics C : Blue Chip econometrics D : Macroeconomics Correct Answer : B 24 : Financial management draws heavily on the following related disciplines: A : accounting B : macroeconomics C : microeconomics D : All of these disciplines are applicable Correct Answer : D 25 : The chief financial officer (CFO) normally has responsibility for all of the following EXCEPT . Browsegrades.net

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A : advertising strategy B : managing interest rate risk C : trading foreign currencies D : accounting functions Correct Answer : A 26 : The controller normally has responsibility for all normally concerned with . A : acquisition; data processing B : tax; cost accounting C : tax; financial accounting D : accounting; expenditure of funds

related activities, while the treasurer is

Correct Answer : D 27 : Per the shareholder wealth maximization goal, management should seek to maximize the of the to owners. A : present value; expected pretax cash flows B : future value; expected pretax cash flows C : present value; expected future returns D : future value; expected future returns Correct Answer : C 28 : Shareholder wealth is measured by the . A : book value of the shareholders common stock holdings B : market value of the shareholders common stock holdings C : book value of the companys assets D : market value of the companys assets Correct Answer : B 29 : Among the most important agency relationships in the context of finance is (are) the relationship(s) between . A : stockholders and creditors B : management and workers C : stockholders and creditors, and management and workers D : management and creditors Correct Answer : A 30 : Protective covenants in a companys bond indentures are used in agency relationships involving . A : stockholders and managers B : stockholders and creditors C : management and workers D : management and creditors Correct Answer : B 31 : The chief financial officer (CFO) of a corporation normally reports to the company. Browsegrades.net

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A : chairman of the board of directors B : chief operating officer C : controller D : chief executive officer Correct Answer : D 32 : The has a goal of serving as a bridge between academic study of finance and the application of financial principles by financial managers. A : Financial Executives Institute B : Financial Management Association C : American Finance Association D : Institution of Financial Analysts Correct Answer : B 33 : All of the following economic environment factors affect stock prices EXCEPT A : investment strategies B : competition C : tax rates D : currency exchange rates

Correct Answer : A 34 : The major factors that determine the market value of a companys shares of stock include all of the following EXCEPT . A : risk of its cash flows B : timing of its cash flows C : book value of its assets D : risk of its cash flows and the timing of its cash flows Correct Answer : C 35 : There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is . A : geographical dispersion of shareholders B : separation of ownership and control C : age differences between managers and shareholders D : that both have their own agendas Correct Answer : B 36 : The existence of divergent objectives between owners and managers is one example of a class of problems arising from . A : social responsibility concerns B : age differences between managers and owners C : agency relationships D : union-management relations Correct Answer : C 37 : The activities of the treasurer include all of the following EXCEPT A : financial planning Browsegrades.net

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B : tax preparation C : credit analysis D : pension fund management Correct Answer : B 38 : The most important objective of the firm is to A : make MC=MR B : maximize profits C : minimize agency costs D : None of these are correct

Correct Answer : D 39 : Firms normally recognize responsibilities to various constituencies, such as each of the following EXCEPT . A : To sustain an optimum return on investment for stockholders B : To be perceived by customers as a provider of quality service C : To demonstrate that investors are the firms most valuable resource D : To provide corporate leadership in the communities it serves Correct Answer : C 40 : One method of decreasing the cash outflows of a firm is to A : decrease depreciation B : increase capital expenditures C : decrease dividends D : increase debt repayment

Correct Answer : C 41 : Accounting is concerned primarily with matching A : cost-based revenues and expenses B : tax liability and future cash flows C : revenue and long-term debt D : inventory and cost of sales

Correct Answer : A 42 : The bottom-line earnings figure from the accounting system is misleading because A : it does not reflect actual cash inflows and outflows of the firm B : stock dividends are difficult to forecast C : depreciation is a cash outlay but is not reflected as such D : tax laws change regularly which cause the firm to misjudge its true tax obligation

Correct Answer : A 43 : The accountants role in the firm is to do all of the following EXCEPT A : prepare financial statements B : determine the feasibility of certain investment decisions C : determine the tax liability of the firm D : keep records of the firms performance Browsegrades.net

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Correct Answer : B 44 : The financial manager uses structure. A : accounting data B : employment benefit data C : federal regulations D : computer software design

when determining the firms most appropriate capital

Correct Answer : A 45 : The net present value rule provides appropriate guidance for financial decision makers when costs are incurred immediately but . A : future cash flows are not known with certainty B : marginal costs are equal to marginal revenue C : result in a stream of benefits over several future time periods D : marginal costs are greater than marginal revenue Correct Answer : C 46 : Corporate officers normally include all the following EXCEPT A : Secretary B : Chief operating officer C : Treasurer D : Financial analyst

Correct Answer : D 47 : The difference between a firms annual after-tax operating profit and its total annual cost of capital is known as . A : earned income B : Economic Value Added C : Managerial Value Added D : operating income Correct Answer : B 48 : equals the number of shares outstanding times the market price per share. A : Book value B : Stakeholders wealth C : Total shareholder wealth D : Economic value Correct Answer : C 49 : Concern for the interests of the stakeholders can be viewed as the means to the end of . A : maximizing long-term shareholder wealth B : diminishing marginal return C : maximizing risk D : continuing legal litigation Correct Answer : A Browsegrades.net

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50 : The net present value of an investment made by a firm represents the contribution of that investment to the of the firm. A : book value B : profit C : value D : cash flow Correct Answer : C 51 : A major advantage of the corporate form of business over both sole proprietorships and partnerships is the . A : limited liability B : reduction in taxes C : ease of formation D : ability to maintain ownership Correct Answer : A 52 : An advantage that the corporate form of business has over either the sole proprietorship or partnership is the . A : ability to raise capital B : ease of changing ownership C : limited liability D : All of these are correct Correct Answer : D 53 : A major disadvantage of a sole proprietorship is the fact that A : it is expensive to establish B : the owner has unlimited personal liability C : it is easy to finance growth D : the owner pays taxes on all the income

Correct Answer : B 54 : In a limited partnership, the limited partners may limit their A : tax liability B : liability C : tax write-off D : ability to attract new products

Correct Answer : B 55 : Corporate securities represent claims against the A : corporate officers of the firm B : agents of the corporation C : liabilities and net worth of the firm D : assets and future earnings of the firm

Correct Answer : D 56 :

is (are) referred to as a residual form of ownership in a corporation. Browsegrades.net

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A : Common stock B : Preferred stock C : Bonds D : Dividends Correct Answer : A 57 : The advantages of the corporate form of organization over both sole proprietorships and partnerships include . A : limited liability and lower tax rates B : permanency and lower tax rates C : limited liability and permanency D : lower tax rates and permanency Correct Answer : C 58 : Although this type of business generates 4.1% of the total U.S. business revenue, make up approximately 72% of all businesses. A : general partnerships B : corporations C : limited partnerships D : sole-proprietorships Correct Answer : D 59 : All of the following are advantages of the corporate form of business organization EXCEPT . A : permanent legal existence B : unlimited liability C : flexibility in ownership change D : ability to raise capital Correct Answer : B 60 : There are problems with using the profit maximization criterion. Which of the following is (are) correct? I. Profit maximization has an ambiguous definition of maximizing profits.II. Profit maximization fails to consider the risks associated with alternative decisions. A : Only statement I is correct B : Only statement II is correct C : Both statements I and II are correct D : Neither statement I nor II is correct Correct Answer : C 61 : Which of the following statements is (are) correct? I. Shareholders elect the Chairman of the Board.II. The board of directors has no control over whether dividends will be paid. A : Only statement I is correct B : Only statement II is correct C : Both statements I and II are correct D : Neither statement I nor II is correct Correct Answer : D Browsegrades.net

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62 : There are three major factors that determine the market value of a companys share of stock. All of the following are factors EXCEPT . A : amount of cash flows expected B : sales generated C : timing of cash flows D : risk taken to generate cash flows Correct Answer : B 63 : A microeconomic concept used in financial management is A : full utilization of data processing B : setting marginal costs equal to marginal revenues C : accrual basis of recognizing revenues and expenses D : target capital structure

Correct Answer : B 64 : All of the following are responsibilities of a controller EXCEPT A : financial accounting B : taxes C : data processing D : pension fund management

Correct Answer : D 65 : Which of the following forms of business organization have unlimited liability? I. CorporationII. General partnership A : Only statement I is correct B : Only statement II is correct C : Both statements I and II are correct D : Neither statement I nor II is correct Correct Answer : B 66 : The managerial decision rule that emerges from the microeconomic profit maximization model is . A : Marginal Costs < Marginal Revenues B : Marginal Costs = Profits C : Marginal Revenues > Marginal Costs D : Marginal Costs = Marginal Revenue Correct Answer : D 67 : Sole proprietorships, partnerships, and corporations are the three main forms of business organization. There are other types which are referred to as hybrids. Examples of hybrid business forms are . A : 10K & 14B Corporations B : section 8 and Subchapter S Corporations C : subchapter S and LLCs D : 10K Corporations and LLCs Correct Answer : C Browsegrades.net

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68 : The type of corporate security that pays periodic interest as well as the eventual return of principal is . A : preferred stock B : debt securities C : equity securities D : fixed asset loans Correct Answer : B 69 : What one of the following is a function of the CFO? A : Control of the marketing functions of the firm B : Effective communication with the investment community about the firms performance C : Oversight of engineering D : Determination of effective manufacturing strategies Correct Answer : B 70 : Per the Small Business Administration, what percent of all businesses are considered small businesses? A : >20% B : >75% C : >95% D : >50% Correct Answer : C 71 : Financial decisions should be consistent with the goal of shareholder wealth maximization. However, there may be a divergence between shareholder wealth maximization and the actual goals of management. The primary reason for this is which of the following? A : Management wants to ensure good public relations. B : The Board of Directors is becoming increasingly uninvolved within the corporation. C : Shareholders do not feel that wealth maximization is relevant. D : There is a separation of ownership and control in corporations. Correct Answer : D 72 : Because of accounting scandals, several methods have been developed to deal with the issues of corporate governance and include all the following EXCEPT . A : The Board must select only SEC approved consultants B : Chairman of the Board position should be split from the CEO position C : The majority of members on the Board of Directors should be independent directors D : The Board of Directors must disclose whether it has adopted a code of ethics for the CEO and senior financial officers Correct Answer : A 73 : Maximization of shareholder wealth is not an accounting concept. A corporations value should be based on value. A : liquidation B : book C : market D : stock Browsegrades.net

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Correct Answer : C 74 : A corporation that operates ethically will notice certain benefits as it applies to shareholder wealth maximization. With shareholder wealth maximization in mind, all of the following could be experienced by an ethical corporation EXCEPT . A : reduced litigation expense B : greater agency costs C : reduced damages expenses D : a more favorable impression by customers and investors Correct Answer : B 75 : Examples of agency costs incurred by shareholders to minimize agency problems are expenditures associated with . A : independent auditing B : SEC approval C : monitoring managements actions D : inventory control Correct Answer : C 76 : Choose the correct option below.I. Macroeconomics deals with the economic decisions of individuals, households, and firms.II. Microeconomics looks at the economy as a whole. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 77 : In recent years, front-page stories of ethical issues have exploded and focused attention on ethical practices. All of the following are a breach of financial ethics EXCEPT . A : collateralized mortgage obligation scandal B : treasury bond trading scandal C : insider stock trading scandal D : economic stimulus package scandal Correct Answer : D 78 : provide a direct measure of the success of decisions made by a firms managers. A : Profits B : Stock prices C : Sales D : Dividends per share Correct Answer : B

ESSAY 79 : Explain the organization and governance in a corporation.

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Correct Answer : The stockholders elect the board of directors. The board makes broad decisions affecting the direction of the company, leaving the day-to-day decisions to the corporate officers, who are selected by the board. Corporate officers are the chairman of the board, the chief executive officer, the chief operating officer, chief financial officer, president, vice-president(s), treasurer, and secretary. 80 : Identify the five competitive forces that influence an industrys structure. Correct Answer : 1. The threat of new entrants.2. The threat of substitute products3. The bargaining power of buyers4. The bargaining power of suppliers5. The rivalry among current competitors 81 : What are the shortcomings in the profit maximization objective as a managerial strategy? Correct Answer : 1.Profit maximization lacks a time dimension.2.There are many definitions of profit for a firm under GAAP. There is much latitude permitted in recognizing and accounting for costs and revenues.3.There is a question as to which of the following is to be maximized: total profit, rate of profit, or EPS.4.There is no direct way to consider the risk associated with alternative decisions. 82 : Preferred stock is considered priority stock. Explain this priority. Correct Answer : Common stock is a residual form of ownership. Preferred stock has priority over common stockholders regarding the firm’s earnings and assets. Preferred stockholders are paid cash dividends before common stockholders. In the event of bankruptcy or dissolution, preferred stockholders are ahead of common stockholders in the distribution of the corporation’s assets. 83 : What is the advantage of an LLC over an LLP business form? Correct Answer : An LLC (or limited liability company) has three advantages:1.It has better access to capital to finance growth.2.It enables broad employee ownership of the firm.3.It enables the firm to engage in strategic acquisitions. 84 : List examples of agency costs that are incurred by shareholders in trying to minimize agency problems. Correct Answer : 1. Expenditures to structure the organization in such a way as to minimize the incentives for management to take actions contrary to shareholders' interests2. Expenditures to monitor management’s actions, such as paying for audits of managerial performance and internal audits of the firm’s expenditures3. Bonding expenditures to protect the owners from managerial dishonesty4. The opportunity cost of lost profits arising from complex organizational structures that prevent management from making timely responses to opportunities

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Chapter 2. The Domestic and International Financial Marketplace 1 : A multinational corporation . A : has direct investments in manufacturing and/or distribution facilities in more than one country B : exports finished goods for sale in another country C : imports raw materials from another country D : has a manufacturing representative in another country Correct Answer : A 2 : The difference between merchandise exports and imports is known as the A : transaction exposure B : difference in purchasing power C : goods and services trade balance D : import/export reserve

Correct Answer : C 3 : The interest rate at which banks in the Eurocurrency market lend to each other is known as the . A : Eurocurrency currency rate (ECR) B : London interbank offered rate C : exchange rate D : interest rate parity Correct Answer : B 4 : From the perspective of a U.S. firm, an exchange rate quoted as $1.47 per British pound is known as a(n) quote. A : hedge B : direct C : futures D : indirect Correct Answer : B 5 : If Japanese yen are deposited in a bank in Paris, the deposits would be called A : Eurofrancs B : European Currency Unit C : Eurobond D : Euroyen Correct Answer : D 6 : If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637, the market is indicating that the Swiss franc is expected to . A : strengthen relative to the dollar B : weaken relative to the ECU C : lose value relative to the dollar over the next 6 months D : gain value relative to the dollar over the next 6 months Correct Answer : C Browsegrades.net

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7 : Which of the following is not a correct statement about foreign currency futures? A : futures contracts have a standardized maturity date B : futures contracts are an exchange-traded agreement C : futures contracts are not liquid D : futures contracts are marked to market daily Correct Answer : C 8 : The most important foreign currency futures market in the United States is the A : Chicago Board of Trade B : New York Mercantile Exchange C : Commodity Exchange D : Chicago Mercantile Exchange

Correct Answer : D 9 : The buyer of a foreign currency call option has the currency. A : right to sell B : right but not the obligation to buy C : obligation to buy, only at expiration, D : obligation to buy

a fixed amount of a foreign

Correct Answer : B 10 : Eurodollars are U.S. dollars that have been deposited in A : foreign banks B : foreign branches of U.S. banks C : foreign subsidiaries D : either foreign banks or foreign branches of U.S. banks

Correct Answer : D 11 : If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate from Canadian dollars to U.S. dollars is . A : $0.80 Canadian $/US dollar B : $1.25 Canadian $/US dollar C : $1.20 Canadian $/US dollar D : $8.00 Canadian $/US dollar Correct Answer : B 12 : If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchange rate from francs to dollars is . A : 0.20 francs/dollar B : 0.80 francs/dollar C : 5.0 francs/dollar D : 2.0 francs/dollar Correct Answer : C 13 : If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is Browsegrades.net

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0.00717, then the yen is trading at a(n) A : expected gain B : forward premium C : reciprocal D : forward discount

Correct Answer : B 14 : If the forward (direct quote) exchange rate is lower than the spot rate, then the currency is said to be trading at a . A : forward premium B : forward gain C : forward discount D : forward loss Correct Answer : C 15 : Financial middlemen include A : securities brokers B : securities dealers C : investment bankers D : All of these are correct

Correct Answer : D 16 : The New York Stock Exchange is an example of a A : money market B : capital market C : primary financial market D : secondary financial market

Correct Answer : D 17 : The Standard & Poors 500 Stock Price Index is a A : price weighted B : market value-weighted C : price average D : None of these are correct

index.

Correct Answer : B 18 : Securities not listed on exchanges are said to be traded A : on the AMEX B : as composite transactions C : over the counter D : on the regional exchanges Correct Answer : C 19 : Financial intermediaries include A : securities brokers B : commercial banks C : securities dealers

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D : All of these are correct Correct Answer : B 20 : markets deal in long-term securities having maturities greater than one year. A : Credit B : Money C : Commodity futures D : Capital Correct Answer : D 21 : markets deal in short-term securities having maturities of one year or less. A : Credit B : Money C : Capital D : Capital and credit Correct Answer : B 22 : Which of the following (if any) are not financial intermediaries? A : commercial bank B : thrift institution C : securities broker D : All of these are financial intermediaries Correct Answer : C 23 : In the market, the firm receives the proceeds from the sale of new securities. A : over-the-counter B : secondary financial C : fully integrated D : primary financial Correct Answer : D 24 : A savings and loan association is an example of which type of financial intermediary? A : commercial bank B : investment company C : finance company D : thrift institution Correct Answer : D 25 : In any economy as a whole, the actual savings for a given period of time must actual investments. A : be greater than B : be unrelated to C : equal D : be less than

the

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26 : Financial intermediaries . A : issue secondary claims to the lender B : are compensated for their services by fixed fees C : include both brokers and dealers D : issue primary claims to the lender Correct Answer : A 27 : The main purpose of the U.S. financial system is to facilitate the transfer of funds from . A : financial middlemen to financial intermediaries B : surplus spending units to deficit spending units C : primary claimholders to secondary claimholders D : lenders to financial intermediaries Correct Answer : B 28 : Money markets deal in securities having maturities of maturities . A : less than 18 months; greater than 18 months B : one year or less; greater than one year C : less than 9 months; greater than 9 months D : less than 6 months; greater than 6 months

; capital market securities have

Correct Answer : B 29 : Commercial banks are an important source of A : mortgage loans B : equity loans C : real estate loans D : short-term loans and term loans

Correct Answer : D 30 : Finance companies obtain funds by . A : issuing their own equity securities B : accepting both demand and time deposits C : issuing their own debt securities D : pooling funds Correct Answer : C 31 : Changes in the tax code that speed up depreciation the present value of investment cash flows and therefore make the investment desirable. A : decrease; more B : decrease; less C : increase; more D : increase; less Correct Answer : C 32 : The interest rate in the Eurodollar market is related to A : the DOW Browsegrades.net

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B : the stock market C : the LIBOR D : interest rates in the United States Correct Answer : C 33 : Capital markets in financially sophisticated economies are not perfectly efficient due to . A : anomalous events B : excessive extrapolation by investors C : refusal to sell losing stocks D : All of these are correct Correct Answer : D 34 : Commercial banks are a major source of term loans. These loans are best used for financing . A : the expansion of the business B : the establishment of overseas operations C : current assets such as inventory or accounts receivable D : the payment of dividends Correct Answer : C 35 : The Dow Jones Industrial Average is calculated using the A : total market value of 30 stocks B : stock price of 30 large, well-established industrial corporations C : a weighted index of 30 stocks D : industrial, railroad, financial, and utility stocks

Correct Answer : B 36 : Insider trading is defined as . A : an individual using proper trading rules B : an individual buying or selling using non-SEC disclosure rules C : an individual buying or selling on the basis of material nonpublic information D : a zero-plus game Correct Answer : C 37 : Capital markets are said to be efficient. This means . A : they process stock trades accurately and quickly B : the market provides quick access to a firms financial statements C : security prices quickly reflect all economically relevant information D : accurate stock quotes are quickly available to all investors Correct Answer : C 38 : Ex post returns differ from ex ante returns in that they represent values. A : estimated; actual B : accounting; economic C : actual; estimated Browsegrades.net

values rather than

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D : economic; accounting Correct Answer : C 39 : The fact that no investor can expect to earn excess returns based on an investment strategy using only historical stock price or return information is an example of market efficiency. A : strong-form B : weak-form C : semiweak-form D : semistrong-form Correct Answer : B 40 : With semistrong-form market efficiency, no investor can expect to earn excess returns based on an investment strategy using any information. A : past market price B : market value C : publicly available D : private Correct Answer : C 41 : In an efficient capital market, all security investments will have a(n) A : required rate of return that exceeds the cost of capital B : positive NPV C : required rate of return that is zero D : NPV of zero

Correct Answer : D 42 : In an efficient capital market, corporate diversification is A : unnecessary B : inexpensive C : detrimental to corporate managers D : of great benefit

Correct Answer : A 43 : The barriers to the free flow of capital among the major world capital markets include all of the following EXCEPT . A : low transaction costs B : taxation policies C : foreign exchange risks D : legal restrictions Correct Answer : A 44 : For the financial manager, taxes have important implications for A : capital expenditure decisions B : leasing decisions C : capital structure policy D : All of these are correct Browsegrades.net

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Correct Answer : D 45 : Changes in the tax code that slow down depreciation the present value of investment cash flows and therefore make the investment desirable. A : decrease; more B : decrease; less C : increase; more D : increase; less Correct Answer : B 46 : In an efficient capital market . A : required returns equal expected returns B : investors will have holding period returns equal to zero C : purchase of any security yields zero profit D : purchasing stocks is no better than gambling Correct Answer : A 47 : If the spot rate for the British pound is $1.5077 and the 180-day forward rate is $1.4934, what is the approximate annualized forward premium (discount)? A : premium of 1.90% B : premium of 0.97% C : discount of (-)1.90% D : discount of (-)0.97% Correct Answer : C 48 : If the spot rate for the Japanese yen is $0.009204 and the 90-day forward rate is $0.009227, what is the approximate annualized forward premium (discount)? A : premium of 1.00% B : premium of 0.50% C : discount of -0.99% D : premium of 0.25% Correct Answer : A 49 : Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return (round % to 2 decimals)? A : 2.08% B : 8.30% C : -6.30% D : 14.60% Correct Answer : A 50 : If an investor purchased 100 shares of Biggee stock for $30 per share six months ago, and then sold the stock today for $33 per share, what was the investors holding period return if a total of $1 per share in dividends was received over the six-month period (round % to 1 decimal)? A : 10.0% Browsegrades.net

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B : 27.1% C : 17.1% D : 13.3% Correct Answer : D 51 : What is the holding period return to an investor who bought 100 shares of Oil Slick stock nine months ago for $36 per share, received two $50 dividend checks, and sold the stock today at $38 a share (round % to 2 decimals)? A : 5.56% B : 8.33% C : 11.11% D : 6.94% Correct Answer : B 52 : If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the face value at maturity is $10,000, what is the holding period return (round % to 1 decimal)? A : 14.8% B : 5.8% C : 6.7% D : 12.6% Correct Answer : A 53 : You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return (round % to 2 decimals)? A : -25.14% B : -16.67% C : -12.57% D : 16.00% Correct Answer : C 54 : Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for $36 per share. The stock paid no dividend. What was Mahers holding period return? A : 40% B : 20% C : 10% D : 5% Correct Answer : B 55 : Two years ago you bought 100 shares of Big Bubba convertible preferred stock at $25 per share. The preferred stock had an annual dividend of $2.125 per share, and a total of $3.19 in dividends per share have been paid so far. Today the company announced that the stock is redeemable for $26.70 plus accrued and unpaid dividends, for a total of $27.76. Alternatively, holders may convert their shares of preferred stock at a conversion rate of 1.6393 shares of Big Bubba common stock for each share of preferred stock. If the closing price of Big Bubba common stock is $27.50, what is your holding period return on the conversion option (round % Browsegrades.net

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to 2 decimals)? A : 93.08% B : 23.80% C : 80.32% D : 64.60% Correct Answer : A 56 : If the spot rate (in U.S. dollars) for Japanese yen is 0.00703 and the 180-day forward rate is 0.00717, then the yen is trading at an annualized forward (round % to 2 decimals). A : premium of 4.04% B : premium of 3.98% C : premium of 3.91% D : discount of 3.89% Correct Answer : B 57 : Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock at $30 per share last year and sold them eleven months later for $24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25 per share in dividends last year, what is Lears holding period return (round to 2 decimals)? A : 61.67% B : -19.17% C : 21.67% D : 6.17% Correct Answer : A 58 : Which of the following reflect(s) the implications of income taxes for financial managers?I. Interest payments on debt incurred by the firm are not tax deductible for the firm.II. Preferred stock and common stock dividends are tax deductible for the firm and are used as often as possible to raise capital. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 59 : For a company with positive pre-tax earnings and a 35 percent income tax rate, a new debt issue that increases interest by $500,000 would cost the company . A : $175,000 B : $325,000 C : $500,000 D : $675,000 Correct Answer : B 60 : Which of the following is correct regarding the forms of market efficiency?I. In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise.II. In an efficient capital market, stock prices reflect a present value of the firms expected cash flows. A : Only statement I is correct B : Only statement II is correct Browsegrades.net

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C : Both statements I and II are correct D : Neither statement I nor II is correct Correct Answer : C 61 : Which of the following statements is (are) correct about financial intermediaries?I. Financial intermediaries primarily operate within the secondary market.II. Examples of financial intermediaries are: commercial banks, thrift Institutions and the Internal Revenue Service. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 62 : There are three degrees of market efficiency. All of the following statements are correct EXCEPT . A : The weak form efficiency states that no investor can earn excess returns based on historical price or return information. B : The strong form of efficiency states that no investor can consistently earn excess returns since all public and private information is reflected in stock prices. C : The semi-strong form of efficiency states that no investor can earn excess returns based on an investment strategy using publicly available information. D : Market efficiency is a hard and fast rule that has been verified in real-world situations. Correct Answer : D 63 : Most U.S. Treasury bonds are traded in A : The Wall Street Journal B : stock market indexes C : listed security exchanges D : over-the-counter markets

Correct Answer : D 64 : An example of a financial middleman is a(n) A : commercial bank B : stock-broker C : insurance company D : thrift institution

Correct Answer : B 65 : An example of a listed security exchange within the secondary market is A : OTC B : NYSE C : NASDAQ D : automated quotations

Correct Answer : B 66 : As a group, net savers are A : businesses

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B : households C : government D : partnerships Correct Answer : B 67 : Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents on behalf of their clients are . A : floor brokers B : exchange runners C : designated market makers D : SEC agents Correct Answer : A 68 : The difference between the bid price and the ask price on a security is the A : spread B : value C : asset factor D : commission

Correct Answer : A 69 : There are many reasons for the financial crisis in 2007. The most significant event closely associated with this crisis is . A : the stock market crash B : the U.S. real estate bubble C : government overspending D : the use of financial hedging Correct Answer : B 70 : In the financial crisis of 2007, there was cheap money coming from emerging markets. Examples of emerging markets are all of the following EXCEPT . A : South Korea B : Australia C : India D : China Correct Answer : B 71 : Although there was a financial crisis in 2007-2010, some firms were able to weather the crisis. These firms had all of the following characteristics that were directly responsible for their ability to survive the crisis EXCEPT . A : tight control over fixed and variable costs B : low business risk C : a business model that encouraged risk taking by management that paid off D : selling products that appealed to cost-conscious consumers Correct Answer : C 72 : The difference between a put option and a call option is that A : a call option is the option to buy Browsegrades.net

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B : a put option allows the purchase of extra stock C : a call option cannot be resold D : a put option requires the owner of the put option to sell on a specific date Correct Answer : A 73 : Foreign currency options reflect A : an obligation for B : an alternative to C : a delivery of D : a specific requirement of

forward and future contracts.

Correct Answer : B 74 : Foreign currency forward and future options provide a means for firms to control A : foreign government intervention B : foreign political problems C : foreign exchange risk D : the foreign transport of the goods

Correct Answer : C 75 : An investor decides to sell his stock based on information he received about some internal audit revealing that the company has severe financial problems. Trading on this information is called . A : private trading B : insider trading C : options trading D : information trading Correct Answer : B 76 : finance seeks to identify why some investors react irrationally when confronted with unexpected ups and downs in the market. A : Systematic B : Weak-form C : Asset evaluation D : Behavioral Correct Answer : D 77 : Each of the following markets, at some time in the past, has experienced a bubble that impacted the financial market EXCEPT . A : real estate B : stock market C : gold D : blue chip Correct Answer : D 78 : Each of the following contributed to the start of the financial crisis in 2007 EXCEPT A : the Gulf War B : the creation of complex mortgage-backed securities Browsegrades.net

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C : very low interest rates D : use of high leverage by individuals and corporations Correct Answer : A 79 : Each of the following has tax implications as it concerns financial management decisions EXCEPT . A : capital structure policy B : capital budgeting C : inventory control D : leasing Correct Answer : C 80 : Financial intermediaries are compensated for their services by A : the interest rate spread B : salary C : stock options D : preferred stock certificates

Correct Answer : A 81 : Financial assets include all of the following EXCEPT A : money B : debt securities C : equity securities D : inventory

Correct Answer : D

ESSAY 82 : What are the differences between the primary and secondary markets? Correct Answer : The primary market allows the investor to purchase new securities. Net proceeds from such sales go to the issuing corporation.?The secondary market allows the investor to purchase securities that are already in circulation. These are purchased through an organized security exchange (for example NYSE), or in the over-the-counter market, and none of the proceeds go to the issuing corporation. 83 : What is the purpose and importance of the stock market indexes? Correct Answer : Stock market indexes give a broad indication of how the stock market or a segment of it performed during a particular day. The most well-known index is the Dow Jones Industrial Average (DJIA), which is composed of 30 stocks. 84 : Explain the degrees of market efficiency and their applicability to the stock market. Correct Answer : 1. Weak-form market efficiency: No investor can earn excess returns based on historical price information or return information.2. Semistrong-form market efficiency: No investor can earn excess returns based on an investment strategy using any publicly Browsegrades.net

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available information. Stock prices consistently incorporate any new information about the stock or the issuing company.3. Strong-form market efficiency: No investor can consistently earn excess returns based on any public or private information. Stock prices reflect all information, both public and private.The number of investors who have traded with insider knowledge provides graphic evidence that the strong form efficiency does not hold. 85 : Define the differences between the money market and the capital market. Correct Answer : Money market securities are short-term with maturities of one year or less. Most large corporations participate in the money markets, especially when they have more cash on hand than needed to run their businesses.?Capital market securities are long-term with maturities greater than one year. Corporations enter the capital markets to obtain long-term funds, either debt or equity. Many corporations are unable to generate enough funds internally to satisfy their needs, so they raise additional funds externally in the capital markets. 86 : List the types of disclosure forms required by the SEC, and explain what information is contained in each form. Correct Answer : The various SEC forms listed in the text are:1. 10-K. This is the annual report to the SEC required from firms with publicly held securities.2. 10-Q. This form contains quarterly information that updates the 10-K.3. 14-A filing or Proxy Statement. This form is submitted prior to annual shareholder meetings detailing matters to be discussed and voted upon by the stockholders. 87 : List changes that have occurred within financial markets regulation as a result of the passage of the Sarbanes-Oxley Act of 2002. Correct Answer : The significant changes that have occurred are:1. Top management is directly responsible for the accuracy of their firm’s financial statements. They must personally certify the accuracy of the financial statements and internal control systems.2. The act strengthened the independence and accountability of the audit committee of the firm’s board of directors.3. The act creates the Public Company Accounting Standards Board to oversee the auditing industry to improve the independence and credibility of auditors and the auditing function.4. The act requires that auditors now certify a firm’s financial control system and report any material weaknesses.5. The act creates structural separation between financial analysts and investment bankers working for the same firm.6. The act institutes new rules to ensure independence of financial analysts. 88 : How did the mortgage market provide the impetus for the financial crisis that began in 2007? Correct Answer : Mortgage markets in the United States evolved to take advantage of easy money flowing in from around the world. Mortgages became securitized. Banks in the past were very cautious with regard to who they lent to and ensured that borrowers had sufficient income and collateral to repay their loans to the bank. Beginning in the 1980s, this changed. Banks and other mortgage brokers and lenders would originate the loans and then resell them to other financial institutions. These institutions would bundle the mortgages into a mortgage-backed security or bond and sell them to investors around the world. These bonds were perceived to be very safe. But in the early 2000s the demand exceeded the supply and investment banks found a way to expand supply by reaching into more risky mortgages (known as subprime). As long as real estate prices were going up and the economy and employment levels were high, these derivative securities enjoyed a great deal of popularity and the default risk on these bonds was very low. The increase in home prices was unsustainable, and in the end the owners of these Browsegrades.net

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derivatives suffered huge losses. There arose fear of lending money between banks, which eventually led to a liquidity crisis that resulted in banks and financial institutions being liquidated or taken over by a stronger financial institution.

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Chapter 3. Evaluation of Financial Performance 1 : Which of the following financial ratios is market-based? A : debt-to-equity B : price-to-earnings C : return on investment D : gross profit margin Correct Answer : B 2 : A low financial ratio may be caused by a A : low denominator; accounting error B : high denominator; accounting error C : low denominator; high numerator D : high denominator; low numerator

or a(n)

Correct Answer : D 3: indicate the ability of the firm to meet its short-term financial obligations. A : Activity ratios B : Liquidity ratios C : Leverage ratios D : Profitability ratios Correct Answer : B 4: indicate the firms capacity to meet its debt obligations, both short-term and long-term. A : Liquidity ratios B : Activity ratios C : Financial leverage management ratios D : Profitability ratios Correct Answer : C 5 : The current ratio is not the most stringent measure of liquidity, because it A : is difficult to calculate B : includes some items, such as inventory, that may not be readily liquid C : requires many years of past data D : includes many non-current items in its calculation

Correct Answer : B 6 : The quick ratio is similar to the current ratio except it does NOT include A : cash B : accounts receivable C : prepaid items D : inventories

Correct Answer : D 7 : The fixed asset turnover ratio is influenced by A : the length of time since acquisition

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B : the depreciation policies adopted by the firm C : the extent to which fixed assets are leased rather than owned D : All of these are correct Correct Answer : D 8 : The greater the amount of financial leverage used by a firm, the greater its things being equal. A : profitability B : liquidity C : risk D : size

, all other

Correct Answer : C 9 : The ratio measures the relative profitability of a firms sales after the cost of sales has been deducted. A : gross profit margin B : net profit margin C : return on investment D : return on stockholders equity Correct Answer : A 10 : A financial ratio is a(n) A : analysis B : theory C : management philosophy D : relationship

that indicates something about a companys activities.

Correct Answer : D 11 : A firms return on stockholders equity is a function of its net profit margin, multiplier. A : current ratio B : cost of goods C : total asset turnover D : fixed asset turnover

, and equity

Correct Answer : C 12 : Primary sources of comparative financial data include A : Dun and Bradstreet B : New York Times C : Richard Moore, Inc. D : Framingham Financial Library

Correct Answer : A 13 : The data from is especially useful when analyzing smaller firms. A : Prentice-Hall B : The Risk Management Association C : Dan Bradbury Ltd. Browsegrades.net

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D : the Securities and Exchange Commission Correct Answer : B 14 : In an inflationary period, a firm is likely to show short-lived profit increases because A : accounts receivable collections increase B : cash balances decline C : inventory profits are realized D : All of these are correct

Correct Answer : C 15 : If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times? A : FIFO B : LIFO C : FILO D : GIGO Correct Answer : A 16 : Financial ratios can be used to make a comparison of a companys financial condition from . A : day to day B : period to period C : purchase to purchase D : sale to sale Correct Answer : B 17 : The earnings per share figure . A : is a comparative ratio B : is the best measure of a firms profitability C : can be computed only if a firm has no debt D : is part of the price-to-earnings ratio Correct Answer : D 18 : A firm wants to receive cash earnings. Managements viewpoint is that cash earnings are . A : stock dividends B : high quality earnings C : retained earnings D : debt retirement Correct Answer : B 19 : Bondholders and other long-term creditors tend to prefer a provides a major financial problem. A : low; greater protection in the event of B : high; greater protection in the event of C : low; less likelihood of D : high; less likelihood of Browsegrades.net

debt ratio because it

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Correct Answer : A 20 : Current assets include the cash a firm already has on hand and in the bank plus any assets that can be converted into cash within a normal operating period of month(s). A:1 B:6 C : 12 D : 18 Correct Answer : C 21 : Which of the following is consistent with an increase in a firms return on investment? A : costs increase more than revenues do B : costs decrease less than revenues do C : an increase in the asset level required to maintain current sales volume D : an increase in sales revenue Correct Answer : D 22 : If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must . A : decrease its equity multiplier B : increase its equity multiplier C : increase sales and increase assets D : reduce sales and increase assets Correct Answer : B 23 : A fresh fruit wholesaler has high sales volume, with most selling prices not greatly exceeding costs. This wholesaler would normally be expected to have . A : high profit margin and high asset turnover B : low profit margin and low asset turnover C : low profit margin and high asset turnover D : high profit margin and low asset turnover Correct Answer : C 24 : The ratio group most likely to be used to indicate a firms ability to meet short-term financial obligations would be . A : liquidity ratios B : financial leverage ratios C : activity ratios D : profitability ratios Correct Answer : A 25 : Which of the following ratios would probably not be used to assess the profitability of a firm? A : return on stockholders equity B : return on investment C : times interest earned D : None of these are correct Browsegrades.net

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Correct Answer : C 26 : In general, firms with multiples. A : low; low B : high; low C : low; high D : high; high

risk and

earnings growth prospects will have higher P/E

Correct Answer : C 27 : The analysis of financial statements is affected by inflation because A : the value of long-term debt will increase B : the value of fixed assets may be understated C : the life of long-term assets is decreased D : inventory increases

Correct Answer : B 28 : An increase in the average collection period may suggest all of the following EXCEPT . A : the company caters to slow-paying customers B : customers are not paying their bills on time C : sales have decreased D : an overly liberal credit policy Correct Answer : C 29 : Asset management ratios indicate . A : how well a firm is using its assets to generate sales B : how efficiently a firm is allocating its liabilities C : the return on assets D : the profitability of the firm Correct Answer : A 30 : Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio? A : use cash to pay off notes payable B : collect some of her accounts receivables C : purchase additional inventory on credit D : borrow short-term funds to pay off some payables Correct Answer : C 31 : The major types of financial ratios include all of the following EXCEPT A : market-based B : liquidity C : financial leverage management D : equity Browsegrades.net

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Correct Answer : D 32 : Financial leverage management ratios measure the A : amount of interest paid by the firm B : firms use of fixed-charge financing C : amount of equity funds retired by the firm D : static ratio

Correct Answer : B 33 : ratios indicate how efficiently a firm is using its assets to generate sales. A : Liquidity B : Asset management C : Financial leverage D : Equity Correct Answer : B 34 : A common-size balance sheet shows the firms assets and liabilities as a percentage of . A : stockholders equity B : industry averages C : total assets D : net sales Correct Answer : C 35 : A common-size income statement shows the firms income and expense items as a percentage of . A : stockholders equity B : net sales C : industry averages D : total assets Correct Answer : B 36 : ;he ratio, sometimes called the acid test, is a more stringent measure of current ratio. A : quick; liquidity B : fixed-asset turnover; activity C : net profit margin; gross profit margin D : equity; activity

than the

Correct Answer : A 37 : Return on stockholders equity is equal to times A : net profit margin; fixed asset turnover; equity multiplier B : gross profit margin; total asset turnover; equity multiplier C : net profit margin; total asset turnover; equity multiplier D : net profit margin; total asset turnover; debt-to-equity ratio

times

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38 : When considering the quality of a firms earnings, high quality earnings tend to be A : cash earnings B : derived from infrequently recurring transactions C : earnings per sale D : earnings per share Correct Answer : A 39 : The fixed-charge coverage ratio includes all of the following in the denominator EXCEPT . A : lease payments B : preferred dividends before tax C : Before-tax sinking fund D : common stock dividends Correct Answer : D 40 : The ratio is a more severe measure of a firms ability to meet fixed financial obligations. A : acid test B : debt C : fixed-charge coverage D : debt-to-equity Correct Answer : C 41 : If a firms current ratio is 1.5, then . A : its current liabilities exceed its current assets B : it is possible for its quick ratio to be 2.0 C : it is possible for its quick ratio to be 1.0 D : its current assets equal its current liabilities Correct Answer : C 42 : If a firms total asset turnover ratio is 2.0, then . A : its annual sales are less than its total assets B : it is possible that its fixed asset turnover ratio is 1.5 C : its total assets are two times its annual sales D : its annual sales are two times its total assets Correct Answer : D 43 : If a firms return on investment (i.e., earnings after taxes divided by total assets) is 7% and the firm has no preferred stock financing, it is . A : possible that its return on stockholders equity is 10% B : possible that its return on stockholders equity is 5% C : impossible for its debt-to-equity ratio to be 1.0 D : impossible for its net profit margin to be 7% Correct Answer : A 44 : If a firms price to earnings (P/E) ratio is 10, . A : it is not possible for it to be paying dividends also Browsegrades.net

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B : its market to book ratio has to be at least 2.0 C : its net profit margin is positive D : its return on stockholders equity is negative Correct Answer : C 45 : The analysis of the financial performance and condition of a firm with sizable international operations is generally more complicated than analyzing a firm whose operations are largely domestic for all of the following reasons EXCEPT . A : problems with the translation of foreign operating results B : problems with definition of capital C : fluctuating exchange rates D : All of these are correct Correct Answer : B 46 : Which of the following is NOT true about generally accepted accounting principles (GAAP)? A : They are outlined in Statements of Financial Accounting Standards. B : In the United States, they are issued by the Financial Standards Accounting Board. C : They are stringent, giving firms little latitude in reporting financial situations. D : Two firms that both follow GAAP can still have significant differences in how they compute their financial outcomes. Correct Answer : C 47 : The Market Value Added (MVA) is . A : an indicator of how successful a firm has been at increasing its financing its assets B : the return on total capital minus cost of capital C : an indication of an increase in operating efficiency D : the present value of all expected future EVA Correct Answer : D 48 : Economic value added (EVA) is a measure of operating performance that indicates how successful a firm has been at . A : increasing the growth in earnings B : increasing the MVA of the enterprise in any given year C : increasing the rate of return on investment D : All of these are correct Correct Answer : B 49 : Firms with a positive economic value added (EVA) have a(n) A : increased growth in earnings B : increasing rate of return on investment C : return on capital greater than their cost of capital D : high return on book value

Correct Answer : C 50 : Income taxes on inventory profits can be deferred by A : different tax schedules B : different inventory valuation methods Browsegrades.net

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C : long-term equipment D : different cash flow methods Correct Answer : B 51 : The ratio indicates the percentage of a firms earnings that are distributed as dividends. A : dividend yield B : payout C : return on earnings D : earnings Correct Answer : B 52 : Which of the following firms would be most likely to pay out a high proportion of its earnings as dividends? A : a firm with a lot of ongoing high-return investment projects B : a firm with stable earnings C : a firm with volatile earnings D : All of these are equally likely to pay out a high proportion of their earnings as dividends Correct Answer : A 53 : Stocks with A : high; high B : low; low C : low; high D : high; low

dividend yield often indicate

expected future growth.

Correct Answer : C 54 : To increase the return on stockholders equity, management could increase the A : current ratio B : price-to-earnings ratio C : dividend yield D : equity multiplier

Correct Answer : D 55 : Although ratios can provide valuable information, they can also be misleading for which of the following reasons? A : Ratios are only as reliable as the accounting data on which they are based. B : Compilation of industry norms often does not report information about the distribution of values. C : Comparative analysis depends on the availability of data for appropriately defined industries. D : All of these are correct. Correct Answer : D 56 : A trend analysis indicates a firms performance A : more accurately than any other type of analysis B : over time C : at one given point in time Browsegrades.net

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D : without relying on financial ratios Correct Answer : B 57 : Companies can avoid paying income taxes on inventory profits by using the valuation method. A : LIFO B : FIFO C : Priced out D : Priced in

inventory

Correct Answer : A 58 : Nuking Gnats Pest Service, Inc. has a debt ratio of 50% and an equity multiplier of 2. What is Nuking Gnats stockholders equity if total debt is $100,000? A : $100,000 B : $150,000 C : $200,000 D : $50,000 Correct Answer : A 59 : Given the following information, calculate the inventory for Big Show Videos: Quick ratio = 1.2; Current assets = $12,000; Current ratio = 2.5 A : $4,800 B : $6,240 C : $7,200 D : $5,660 Correct Answer : B 60 : A firm with an equity multiplier of 4.0, will have a debt ratio of A : 0.25 B : 1.00 C : 0.75 D : 4.00

Correct Answer : C 61 : firm with a debt ratio of 0.75, will have an equity multiplier of A : 0.25 B : 1.00 C : 0.75 D : 4.00

Correct Answer : D 62 : What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and a dividend payout ratio of 0.4? A : $16.80 B : $42 C : $3 D : $28 Browsegrades.net

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Correct Answer : B 63 : What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4? A : 26.0% B : 16.9% C : 6.5% D : 4.6% Correct Answer : A 64 : What is the return on stockholders equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000? A : 8.48% B : 5.74% C : 15.27% D : 9.36% Correct Answer : C 65 : What is the cost of sales for a firm with a gross profit margin of 30 percent, a net profit margin of 4 percent, and earnings after taxes of $20,000? A : $200,000 B : $350,000 C : $150,000 D : $125,000 Correct Answer : B 66 : If a firm has a total asset turnover of 8 times and a return on investment of 15%, its net profit margin must be . A : 1.875% B : 1.95% C : 2.05% D : 2.25% Correct Answer : A 67 : A firms current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories? A : $ 5,000 B : $10,000 C : $15,000 D : $20,000 Correct Answer : A 68 : A firms price-to-earnings ratio is 8 and its market-to-book ratio is 2. If its earnings per share are $4.00, what is the book value per share? A : $ 8.00 B : $32.00 C : $64.00 Browsegrades.net

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D : $16.00 Correct Answer : D 69 : Trend analysis requires that . A : asset management ratios be excluded from the analysis B : financial ratios not be used at all C : the same ratio be plotted over several years D : many different ratios be calculated over several years Correct Answer : D 70 : A(n) calculates a firms total assets and total liabilities and stockholders equity, in dollars. A : income statement B : balance sheet C : common-size balance sheet D : common-size income statement Correct Answer : B 71 : A(n) calculates a firms earnings after taxes, in dollars. A : income statement B : balance sheet C : common-size balance sheet D : common-size income statement Correct Answer : A 72 : Trend analysis reveals whether a firms performance over a given time period has improved or deteriorated relative to . A : that firms likely performance in the future B : that firms performance in earlier time periods C : companies in other industries D : other companies in the same industry Correct Answer : D 73 : If a firm has interest expenses of $10,000 per year, sales of $700,000, a tax rate of 40%, and a net profit margin of 7%, what is the firms times interest earned ratio (round to two decimals)? A : 8.17 B : 4.90 C : 13.25 D : 9.17 Correct Answer : D 74 : How much cash and marketable securities does Gray Day Computer Co. have if the firm has a current ratio of 2.5, a quick ratio of 1.2, and current liabilities of $12,000? Grays credit sales are $98,000, and its average collection period is 40 days? (Assume 365 days per year.) A : $3,660 B : $14,440 Browsegrades.net

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C : $10,740 D : $12,660 Correct Answer : A 75 : What is the market price per share of Big Whoop Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market-to-book ratio of 1.5? A : $16.20 B : $10.80 C : $7.20 D : $12.40 Correct Answer : A 76 : If Power-On Inc. has a total asset turnover of 1.8, a fixed asset turnover of 3.2, a debt ratio of 0.5, and a total debt of $200,000, what would fixed assets be? A : $56,250 B : $711,111 C : $225,000 D : $62,250 Correct Answer : C 77 : What would be the times interest earned of a company if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent. A : 2.65 B : 1.1 C : 2.1 D : 1.2 Correct Answer : C 78 : Determine the cost of sales for a firm with the following financial ratios and data:Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times A : $2,000,000 B : $6,000,000 C : $3,000,000 D : $1,000,000 Correct Answer : B 79 : AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level. A : $10 million B : $ 6 million C : $ 1 million D : $5 million Browsegrades.net

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Correct Answer : A 80 : Given the following information, determine Salem Companys fixed assets.Sales = $10,000,000Total asset turnover = 4 timesCurrent ratio = 2.40Current liabilities = $500,000Total assets = current assets + fixed assets A : $1,200,000 B : $4,800,000 C : $1,300,000 D : Cannot be determined Correct Answer : C 81 : Given the following information, determine Taylor Companys cash balance.Sales = $10,000,000 (all on credit)Current ratio = 3.0Current liabilities = $800,000Average collection period = 36.5 days (Assume 365 days/year)Quick ratio = 1.50Current assets = cash + accounts receivable + inventory A : $200,000 B : $1,400,000 C : $2,400,000 D : $500,000 Correct Answer : A 82 : What is the net profit margin for TJX Inc. if the current ratio = 2; total asset turnover =1.5; total assets = $100,000; and EBIT = $30,000? Assume the marginal tax rate for TJX is 40% and that interest expenses are $10,000. A : 20% B : 8% C : 12% D : 6% Correct Answer : B 83 : Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal $200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current ratio is 1.3 and the quick ratio is 0.625. What is the balance in the cash account? A : $ 75,000 B : $ 65,000 C : $135,000 D : $ 50,000 Correct Answer : A 84 : Wall Mart Pictures and Decor Company has a net profit margin of 10% and its inventory turnover is 9. What is its annual cost of sales? You also know that Wall Marts average inventory is $96,700, and its annual sales are $1,000,000. A : $870,000 B : $850,000 C : $870,300 D : $790,000 Browsegrades.net

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Correct Answer : C 85 : Wall Mart Pictures and Decor Company has a net profit margin of 10% and its inventory turnover is 9. What is its annual cost of sales? You also know that Wall Marts average inventory is $96,700, and its annual sales are $1,000,000. A : 12% B : 20% C : 15% D : 18% Correct Answer : D 86 : Given the following information, calculate the return on equity for Regrets Only Dating Services, Inc.:Net Profit margin = 5%Total asset turnover = 2Debt ratio = 0.73 A : 14% B : 7.3% C : 37% D : 21% Correct Answer : C 87 : All of the following are users of financial information EXCEPT A : customers B : bankers C : security analysts D : unions

Correct Answer : A 88 : Each of the following is true of successful financial ratio analysis EXCEPT . A : some industries use special ratios that are unique to the activities of firms in those industries B : a single ratio is all that is needed to indicate specific areas of weakness that must be addressed C : ratios are meaningful only when compared to a standard D : ratios must be used in conjunction with other data to obtain meaningful information Correct Answer : B 89 : If a firms common-size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money on . A : total assets as a percentage of long-term liabilities B : expenses as a percentage of current assets C : cost of sales as a percentage of net sales D : taxes paid as a percentage of stockholders equity Correct Answer : C 90 : The sales-to-inventory ratio is . A : superior to the inventory turnover ratio. B : a good comparison tool for determining financial performance C : technically inferior to other commonly used ratios D : satisfactory when used to make comparisons between the firm and the industry as a whole and was developed by the Dupont Corporation Browsegrades.net

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Correct Answer : C 91 : The type of ratio that indicates the firms ability to provide adequate returns in the form of dividends and share price appreciation is the . A : profitability ratios B : asset management ratios C : liquidity ratios D : financial leverage management ratios Correct Answer : A 92 : A firm has revenue of $60,000, its total operating costs (excluding depreciation) and cost of goods sold are $50,620, depreciation is $4,620, and its interest expense on outstanding loans is $2,000. What is the firms EBITDA? A : $55,380 B : $2,760 C : $9,380 D : $12,000 Correct Answer : C 93 : Market-based ratios can be which of the following: I. Price-to-earnings ratioII. Dividend yield A : Statement I only is correct. B : Statement II only is correct. C : Both statements I and II are correct D : Neither statement I nor statement II is correct. Correct Answer : A 94 : Nukin Gnats Pest Control is trying to determine its cash flow per share. It has revenue of $50,000, $35,000 of expenses, $4,000 of depreciation, and $3,000 of interest expense. The firm is in the 40% tax bracket. The firm has 75,000 shares of common stock outstanding. Its cash flow per share is . A : $0.08 B : $0.12 C : $0.92 D : $0.46 Correct Answer : B 95 : Most analysts prefer using price to free cash flow rather than price-to-earnings (P/E) ratio because price to free cash flow is . A : easier to compute B : more accurate than cash flow per share C : a stricter measure that reduces the cash flow by the amount of capital expenditures D : more reliable as a measure of performance Correct Answer : C 96 : Nukin Gnats Pest Control is trying to determine its cash flow per share. It has revenue of $50,000, $35,000 of expenses, $4,000 of depreciation, and $3,000 of interest expense. The firm is in the 40% tax bracket. The firm has 75,000 shares of common stock outstanding. The firm Browsegrades.net

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has a $15 stock price per share. Its stock price to cash flow is A : 150 B : 75 C : 100 D : 125

Correct Answer : D 97 : Heavily using debt to finance assets results in higher A : return on sales B : return on stockholders equity C : return on assets D : times interest earned

as compared to ROI.

Correct Answer : B 98 : The financial analysis tool that takes into account the entire capital structure of the firm is the . A : EBITDA multiple B : price-to-book ratio C : P/E ratio D : total asset turnover ratio Correct Answer : A 99 : When using financial ratios to analyze a companys ability to maximize shareholders wealth, all of the following cautions should be considered EXCEPT . A : financial ratios are flags indicating potential areas of strength or weakness B : a financial ratio must be dissected to discover its true meaning C : a financial ratio must be compared to some standard D : although there may be accounting differences between companies, these differences do not impact financial ratios Correct Answer : D 100 : How does a firm determine its enterprise value? A : price per share of its stock X the common shares outstanding. B : sales X (1 + growth rate in sales) C : EBIT X (1 - tax rate) D : net income + depreciation Correct Answer : A 101 : Common stock prices are dependent on the amount and stability of a firms cash flows so common stockholders are especially interested in . A : profitability measurements B : accounting profits C : earnings after tax D : NOPAT Correct Answer : A 102 : Stockholders equity is also known by another name, which is Browsegrades.net

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A : dividend liability B : equity earnings C : net worth D : cash flow Correct Answer : C

ESSAY 103 : What is the main purpose of financial analysis and what does it identify? Correct Answer : Financial analysis identifies the major strengths and weaknesses of a business. It indicates whether a firm has enough cash to meet obligations; a reasonable accounts receivable collection period; an efficient inventory management policy; sufficient plant, property and equipment; and an adequate capital structure. These are necessary in determining whether or not the firm is maximizing shareholder wealth. 104 : List the major financial ratio groups and briefly indicate what they analyze. Correct Answer : 1. Liquidity ratios - they indicate the firm’s ability to meet short-term financial obligations and whether or not the company can pay its day-to-day bills.2.Asset management ratios - they indicate how efficiently a firm is using its assets to generate sales.3.Financial leverage ratios - they indicate a firm’s capacity to meet its short-term and longterm debt obligations.4.Profitability ratios - they measure how effectively a firm’s management generates profits on sales, assets, and stockholder’s investments.5.Market-based ratios - they measure the financial market's evaluation of the firm’s performance.6.Dividend policy ratios they indicate the dividend practices of the firm. 105 : What information can be determined by common-size financial statements? Correct Answer : A common-size balance sheet shows the firm's assets and liabilities and stockholders' equity as a percentage of total assets, rather than in dollar amounts. A commonsize income statement lists the firm's income and expense in items as a percentage of net sales, rather than in dollar amounts. 106 : What information can asset management ratios provide? Correct Answer : Asset management ratios indicate:1.how much a firm has invested in a particular type of asset relative to the revenue being produced by the asset.2.how efficiently the firm is allocating its resources.3.whether or not the firm has achieved an effective asset structure in generating sales revenue.4.whether or not the firm has achieved the best mix of cash, receivables, inventories, plant, property and equipment (total assets). 107 : What factors make it possible for firms with virtually identical plants to have significantly different fixed-asset turnover ratios? Correct Answer : The following factors make is possible for identical firms to have different fixedasset turnover ratios:1. Cost of the assets when acquired2. Length of time since acquisition3. Depreciation policies adopted by the firm4. Extent to which fixed assets are leased rather than owned

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108 : There are numerous sources that provide financial analysis via the Internet. List some of those resources. Correct Answer : Some Internet data sources for financial analysis are:1. Standard & Poor's Capital IQ Platform2. Thomson Reuters Worldscope3. The University of Chicao CRSP4. Thomson Reuters Datastream5. Value Line6. Yahoo7. Google8. Thomson ONE - Business School Edition 109 : List various earnings management tricks used by some companies. Correct Answer : Some of the tricks used by companies are:1. Timing storage openings and asset sales in a way that keeps earnings growing at a smooth rate2. Acceleration (or delay) of shipments at the end of a quarterly reporting period to either increase sales in a weak quarter or defer sales into the next quarter when the current quarter’s numbers are especially strong3. Capitalizing normal operating expenses4. Extending depreciable life of assets5. Taking “big bath” write-offs and using “spin” control for bad earnings6. Increasing reserves in good times and drawing down on them in bad times7. Focusing on adjusted (nonGAAP) earnings rather than traditional or GAAP earnings

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Chapter 4. Financial Planning and Forecasting 1 : The percentage of sales forecasting method assumes which of the following? A : present asset levels are suboptimal with respect to present sales B : present asset levels are optimal with respect to present sales C : most items on the balance sheet are indirectly proportional to sales D : none of these are correct Correct Answer : B 2 : In the percentage of sales forecasting method, which of the following is assumed to increase proportionately with sales? A : cash B : accounts receivable C : accounts payable D : All these are correct Correct Answer : D 3 : Which type of financial model yields a distribution of possibilities rather than a single value? A : static B : deterministic C : probabilistic D : optimization Correct Answer : C 4 : Pro forma financial statements are used to A : find the contribution margin B : show the results of some assumed event C : predict the sensitivity of different output variables D : show the results of an actual event

Correct Answer : B 5 : The percentage of sales forecasting method is used by management to forecast the amount of . A : profit expected for a given percentage increase in sales B : capital financing needed to promote marketing efforts C : cash needed to finance future sales growth D : debt financing needed Correct Answer : C 6 : In using the percentage of sales forecasting method, the assumption is that . A : there is a direct relationship between long-term debt and sales B : inventories will increase proportionately with sales C : there is a direct relationship between notes payable and sales D : accounts payable will not increase proportionally with sales Correct Answer : B Browsegrades.net

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7 : To decrease the additional financing needed to support an increase in sales, management can . A : decrease notes payable B : retire common stock C : increase the dividend payout D : cut dividends Correct Answer : D 8 : Cash budgeting can be employed effectively by management to A : identify potential cash flow problems in advance B : aid them in capital budgeting C : control retained earnings D : coordinate cash and deferred expenses

Correct Answer : A 9 : The first step in cash budget preparation is the A : estimation of credit sales B : estimation of the expected cash disbursements C : scheduling of disbursements D : estimation of cash receipts

Correct Answer : D 10 : Computerized financial planning models may be classified as any of the following EXCEPT . A : deterministic B : optimistic C : probabilistic D : None of these are correct Correct Answer : B 11 : The main advantage of deterministic models is that they A : provide the user with more useful information than other models B : allow the user to maximize some objective function C : allow the user to perform sensitivity analyses quickly D : allow the user to maximize or minimize some objective function

Correct Answer : C 12 : All the following current liabilities normally vary directly with sales EXCEPT . A : accounts payable B : notes payable C : accrued wages D : accrued taxes Correct Answer : B 13 : Pro forma financial statements show the results of some Browsegrades.net

event rather than a(n) 2 / 13

event. A : actual; assumed B : assumed; actual C : deterministic; probabilistic D : None of these are correct Correct Answer : B 14 : Each of the following is used to forecast the amount of additional financing (i.e., cash) a company will need in some future period EXCEPT: A : percentage of sales forecasting method B : pro forma statement of cash flows C : after-tax cash flow D : None of these are correct Correct Answer : C 15 : financial planning models seek to maximize (or minimize) the value of some objective function, such as profits (or costs). A : Deterministic B : Optimization C : Probabilistic D : None of these are correct Correct Answer : B 16 : In 1998, Hepler Companys sales were $26 million and its total assets were $10 million. Current liabilities were $4 million, and total equity was $2 million. Hepler Companys sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales, and dividends of $800,000 are expected to be paid. Assuming that the ratios assets to sales and current liabilities to sales in 1998 remain the same in 1999, determine the approximate amount of additional financing required. A : $1,746,154 B : $1,446,154 C : $6,946,154 D : $946,154 Correct Answer : D 17 : Peerless believes that its sales next year will increase 20 percent from the current level of $800,000. Management calculates that assets must increase $110,000 to support the new sales level, and current liabilities will increase $70,000. What total financing will be needed? A : $40,000 B : $1,600 C : $33,600 D : $8,000 Correct Answer : A 18 : ECG Monitors is forecasting that sales next year will be $8,640,000, a 20 percent increase over current sales. ECG has total assets of $3,840,000 and all assets will increase proportionately with sales. Of the current liabilities, only accounts payable (now $740,000) will increase with sales. What total financing will be needed by ECG to support the expected sales Browsegrades.net

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increase? A : $317,600 B : $620,000 C : $465,600 D : $840,400 Correct Answer : B 19 : ICU, an eyeglass manufacturer, has current assets of $800,000 and net fixed assets of $1,400,000. The firm expects its sales to climb 25 percent next year from its current level of $3,500,000. ICUs only current liability is accounts payable of $1,200,000. If both current assets and current liabilities will increase proportionately with sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin of 6 percent. An increase in net fixed assets of $500,000 will be required. The firm pays out 50 percent of its earnings as dividends. A : $400,000 B : $358,750 C : $178,750 D : $268,750 Correct Answer : D 20 : CU Tech expects sales next year will be $4.8 million, a 25% increase over current sales. CU has total assets of $2.24 million, and all assets will increase proportionately with sales. CU has $1.49 million in current liabilities and a current ratio of 1.60 to 1. What total financing will CU need to support the expected sales increase? A : No financing needed, surplus of $139,700 B : $187,500 C : $48,800 D : $234,400 Correct Answer : B 21 : Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends. A : $339,600 B : $283,200 C : No financing needed, surplus of $224,400 D : No financing needed, surplus of $524,400 Correct Answer : C 22 : Calculate Uniteds total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable, $30,000 in notes payable, and $100,000 in long-term debt. The company is operating at full capacity. A : $393,333 B : $590,000 C : $226,667 Browsegrades.net

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D : $616,000 Correct Answer : A 23 : Calculate Uniteds total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable, $30,000 in notes payable, and $100,000 in long-term debt. The company is operating at full capacity. A : $750,000 B : $250,000 C : $1,000,000 D : None of these are correct Correct Answer : B 24 : The Danville Company is considering a $50 million expansion (capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. The company expects to earn $25 million after interest and taxes next year. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year, and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year. A : $30 million B : $43 million C : $32 million D : $22 million Correct Answer : A 25 : Ship-to-Shore earned $280,000 after taxes last year. Its expenses included depreciation of $55,000, interest expenses of $40,000, and deferred taxes of $20,000. The company also purchased two new fresh water fishing boats for $40,000 ($20,000) each. What is Ship-toShores after-tax cash flow for last year? A : $395,000 B : $355,000 C : $315,000 D : $280,000 Correct Answer : B 26 : Scorch & Burn Fire Extinguishers, Inc. had an operating income (EBIT) of $260,000 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses and $60,000 in selling, general, and administrative expenses. If Scorch & Burn has a marginal tax rate of 40%, what was its after-tax cash flow for last year? A : $165,000 B : $129,000 C : $174,000 D : $147,000 Correct Answer : A Browsegrades.net

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27 : Last year Curative Technologies Inc. reported after-tax earnings of $23 million. Included in the expenses were depreciation of $3.7 million and interest expenses of $2.9 million. The yearend balance sheets shows an increase in deferred taxes of $2.6 million to a total of $14.2 million. What is Curative Technologies after-tax cash flow for last year? Assume a marginal tax rate of 40%. A : $20.1 million B : $32.2 million C : $29.3 million D : $26.4 million Correct Answer : C 28 : Last year Molexs net cash provided by operating activities was $14.1 million, and its net cash used by investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million, what was the net increase (or decrease) in cash and cash equivalents during the year? Molex started the year with $2.1 million in cash. A : $44.6 million B : $3.2 million C : $25.0 million D : $5.3 million Correct Answer : B 29 : The financial statement that shows the effects of a companys operating, investing, and financing activities on its cash balance is known as the . A : cash budget statement B : pro forma financial statement C : statement of cash flows D : breakeven analysis Correct Answer : C 30 : The Financial Accounting Standard Board (FASB) encourages companies to prepare their statement of cash flows using the . A : indirect method B : direct method C : reconciliation method D : None of these are correct Correct Answer : B 31 : Generally, which of the following non-cash charges is (are) added to after-tax earnings to calculate the after-tax cash flow? I. DepreciationII. Deferred taxes A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 32 : Which of the following would indicate how much actual cash the firm has on hand? A : income statement B : balance sheet Browsegrades.net

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C : statement of cash flows D : None of these are correct Correct Answer : C 33 : In preparing a statement of cash flows, the method involves adjusting net income to reconcile it to net cash flows from operating activities. A : direct B : indirect C : accrual D : None of these are correct Correct Answer : B 34 : After-tax cash flow equals . A : earnings after tax plus non-cash charges B : net earnings plus deferred expenses C : net earnings plus depreciation D : earnings after tax Correct Answer : A 35 : Which of the following is defined as the systematic allocation of the cost of an asset over more than one year? A : Deferral B : Expensing C : Optimization D : Depreciation Correct Answer : D 36 : A downside of financing expansion by selling new shares of stock is that do so . A : dilutes ownership in the firm B : incurs higher financial risk C : reduces the prosperity of the firm D : All of these are correct Correct Answer : A 37 : A downside of financing expansion by selling new shares of stock is that do so . A : $3,350 surplus -- no additional financing needed B : $1,650 C : $3,650 D : None of these are correct Correct Answer : B 38 : A downside of financing expansion by selling new shares of stock is that do so . A : 6.53% B : 1.09% Browsegrades.net

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C : 11.97% D : 13.50% Correct Answer : A 39 : A downside of financing expansion by selling new shares of stock is that do so . A : $2,125 B : $4,625 C : $1,500 D : $375 surplus -- no financing needed. Correct Answer : B 40 : Jones Companys sales last year were $25 million, and its total assets were $8 million. Accounts payable were $2 million, and common stock and retained earnings were $5 million. Jones sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required. A : $550,000 B : $1,200,000 C : $300,000 D : None of these are correct Correct Answer : A 41 : Operational plans are generally conducted at two levels. Which length of time is typically considered long-term? A : 2 years B : 12-18 months C : 5 years D : 10 years Correct Answer : C 42 : Which of the following statements is (are) correct about deferred taxes? I. Deferred taxes can occur because of geographical problems with the location of corporate headquarters.II. Deferred taxes can occur because some companies use the straight-line depreciation method to calculate income reported to stockholders and accelerated depreciation to calculate taxable income. This practice reduces taxes owed. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 43 : In those industries in which capacity can be added only in discrete or lumpy increments, fixed assets are increased in a manner as sales increase. A : proportional B : stepwise C : direct relationship Browsegrades.net

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D : discriminant Correct Answer : B 44 : Which of the following is an example of a deterministic model? A : profit optimization model B : budget simulator C : probabilistic set D : discriminant model Correct Answer : B 45 : is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined groups based on certain characteristics of the observation. A : Deterministic analysis B : Sensitivity analysis C : Discriminant analysis D : Optimization Correct Answer : C 46 : In considering financial planning, the type of planning that focuses more on the overall direction of the business and the industry is . A : deterministic B : strategic C : operational D : probabilistic Correct Answer : B 47 : Short-term operational plans are generally conducted over what time frame? A : 3-6 months B : 8-12 months C : 12-18 months D : 2-5 years Correct Answer : C 48 : The valuation of debt and equity securities is based upon the A : type of investment vehicle B : growth potential of the asset C : accounting method used for recording the asset D : present value of the cash flows that the securities are expected to provide

Correct Answer : D 49 : Which of the following is an advantage of a cash budget over the percentage of sales method? I. A cash budget can more precisely estimate the amount of financing needed.II. A cash budget can better estimate the timing of financing needs. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Browsegrades.net

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Correct Answer : C 50 : The third step in the preparation of a cash budget is the determination of A : future spending B : asset value C : cash receipts D : desired monthly beginning cash balance

Correct Answer : D 51 : An example of an investing activity is A : issuing new corporate stock B : paying corporate income taxes C : buying new computers D : taking out a new loan

Correct Answer : C 52 : Cash and cash equivalents include which of the following? I. Highly liquid investmentsII. Currency on hand A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 53 : Cash budgets are typically prepared on a(n) . A : monthly; weeks B : monthly; days C : annual; quarters D : annual; months

basis and subdivided into

Correct Answer : D 54 : A good operational plan incorporates a plan for A : the unionization of its business B : a solid organizational chart with detailed job descriptions C : the resources a firm will need to obtain its objectives D : All of these are correct

Correct Answer : C 55 : Strategic planning for a firm deals with which of the following items? I. The overall direction of the firmII. Marketing and production needs A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A Browsegrades.net

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56 : A firms operational plan states objectives that define where the firm wants to be at the end of the planning period. These objectives must be . A : specific B : flexible C : vague D : agreed upon by the union workers Correct Answer : A 57 : The financial plan that is a blueprint detailing where the firm wants to be at some future point in time is the . A : Executive Manifest B : Strategic Plan C : FASB Plan D : Operational Plan Correct Answer : D 58 : Dippity Doo-Dah Party Dips has revenues of $50,000, general & administrative expenses of $35,000, interest expense of $4,000, and depreciation expense of $4,200. The firm is in the 38% tax bracket. What would be the firms cash flow from operations? A : $4,216 B : $4,000 C : $8,416 D : $6,800 Correct Answer : C 59 : Unlike long-term financial forecasts, short-term financial forecasts (one year or less) tend to be more . A : strategic B : detailed C : helpful D : speculative Correct Answer : B 60 : What is the difference between the direct method and the indirect method of presenting the cash flow from operations? A : The direct method is more reliable since it adjusts net income to reflect the cash flow from operations B : The indirect method lists all cash-in versus cash-out accounts in determining the cash flow from operations C : The direct method is the most popular method of determining the cash flow from operations. D : The indirect method adjusts net income to reconcile it to net cash flow from operating activities. Correct Answer : D 61 : When preparing a cash budget, once a firm has estimated its cash receipts the firm must . A : plan a pro forma statement Browsegrades.net

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B : schedule disbursements C : determine the desired cash balance D : pay dividends to its stockholders Correct Answer : B 62 : financial planning models are becoming increasingly popular because they often provide financial decision makers with more useful information than other models. A : Deterministic B : Probabilistic C : Optimization D : Sensitivity analysis Correct Answer : B 63 : The kind of analysis that consists of rerunning the model to determine the effect on the output variables of changes in the input variables is . A : simulation B : scenario analysis C : sensitivity analysis D : probabilitistic analysis Correct Answer : C 64 : A firm that keeps current asset balances too high . A : sacrifices shareholder wealth B : incurs higher risk C : is not able to offer timely and profitable responses to prospective customers needs D : All of these are correct Correct Answer : A

ESSAY 65 : An operational plan is necessary to determine what the firm wants to be at some future point in time. What does an operational plan consist of? Correct Answer : 1. marketing plan2. production plan3. human resource plan4. financial plan 66 : What is the purpose of a financial plan? Correct Answer : The financial plan lays out the financial resources that are needed to achieve the operational (including the financial) objectives of the firm. It also includes financial forecasts. 67 : Financial planning models have two classifications. What are they and how do they differ from each other? Correct Answer : The two models are deterministic and probabilistic.Deterministic give a singlenumber forecast of a financial variable or variables without stating anything about its probability of occurrence.?Probabilistic models provide output in the form of a probability distribution which gives the company's decision makers more useful information than a deterministic model. Browsegrades.net

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However, more input is needed for a probabilistic model. 68 : Explain the cash flow generation process: Correct Answer : Financial managers are concerned with raising funds that can be used by the firm and investing those funds into assets that can be converted into a stream of cash flows that can accrue for the firm and its owners. If the stream of cash flows generated by the assets is greater than the cost of those assets, the investments of the firm will add value to the firm. In the process of acquiring funds and directing those funds, the financial manager must balance the risk and timing of the expected cash flow stream against the magnitude of the expected returns. 69 : Why would a firm experience cash flow difficulties immediately after a good sales period? Correct Answer : Inventory has been sold and must be replenished. However, cash is low because many sales have been conducted on an accounts receivable basis and collections have not yet been received. In addition, accounts payable may become due before cash is actually received. All of this leads to cash flow difficulties. 70 : In developing a firms financial plan, the firm develops a strategic plan and an operational plan. What is the difference between a strategic plan and an operational plan? Correct Answer : A strategic plan is long range in nature and deals with the overall direction of the firm. It concerns anticipating significant new developments and changes that will have a major impact on the industry and the firm. The operational plan begins with a series of operational objectives that define where the firm wants to be at the end of the planning period. These objectives are very specific. Operational plans can be both long-range and short-range and are designed as a blueprint detailing where the firm wants to be at the end of the planning period and what resources are needed to get there. 71 : Why would a firm want to develop a cash budget since it is only a projection of cash inflows and outflows over some future period of time? Correct Answer : Cash budgets are useful in determining the amount of short-term funds the firm may need to borrow to cover any projected cash shortages. Short-term borrowed funds are almost always easier to obtain when the need for them is anticipated. In addition to planning for any cash shortages, the budget also indicates the periods when the firm may have cash surpluses. This information is helpful in managing the firm’s marketable securities investments. Cash budgets can be a useful financial forecasting tool, and they can be useful for control and coordination purposes.

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Chapter 5. The Time Value of Money 1 : The amount of simple interest is equal to the product of the principal times A : (1 + rate per time period); the number of time periods B : (1 + rate per time period); (the number of time periods - 1) C : rate per time period; the number of time periods D : rate per time period; (the number of time periods - 1)

times

Correct Answer : C 2 : The present value of a single payment can be represented as A : PV0 = FVn(PVIFi,n) B : PV0 = FVn(PVIFAi,n) C : PV0 = FVn[1/(1 - i)n] D : None of these are correct

Correct Answer : A 3 : The future value of a single payment equation is given by A : FVn = PV0(PVIFi,n) B : FVn = PV0(FVIFAi,n) C : FVn = PV0(1/(1 + i)n) D : FVn = PV0(FVIFi,n)

Correct Answer : D 4 : The process of finding present values is frequently called A : annualizing B : compounding C : discounting D : leasing

Correct Answer : C 5 : The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by the ordinary annuity interest factor by . A : dividing; (1 + i) B : dividing; (1 + i)n C : multiplying; (1 + i) D : multiplying; (1 + i)n Correct Answer : C 6 : A(n) is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e., forever). A : annuity B : annuity due C : sinking fund D : perpetuity Correct Answer : D Browsegrades.net

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7 : Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the . A : future value of an annuity B : future value of an annuity due C : present value of an annuity D : present value of an annuity due Correct Answer : C 8 : Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the . A : future value of an annuity B : present value of an annuity C : future value of an annuity due D : present value of an annuity due Correct Answer : C 9 : When using a present value of an annuity table (e.g., Table IV at the back of the book), . A : payments are assumed to be made at the beginning of each period B : PVIFA factors decrease with an increase in the interest rate C : PVIFA factors decrease with an increase in the number of periods D : All of these are correct Correct Answer : B 10 : When using a future value of an annuity table (e.g., Table III at the back of the book), . A : payments are assumed to be made at the end of each period B : FVIFA factors increase with an increase in the interest rate C : FVIFA factors increase with an increase in the number of periods D : All of these are correct Correct Answer : D 11 : An annuity due is one in which . A : payments or receipts occur at the end of each period B : payments or receipts occur at the beginning of each period C : payments or receipts occur forever D : cash flows occur continuously Correct Answer : B 12 : You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years? A : It will be worth less. B : It will be worth more. C : It will not change. D : It will increase during the first ten years. Correct Answer : A Browsegrades.net

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13 : The present value of a single payment can be represented as A : PV0 = FVn ÷ (PVIFi,n) B : PV0 = FVn(PVIFAi,n) C : PV0 = FVn [1/(1 + i)n] D : None of these are correct

Correct Answer : C 14 : If the present value of a given sum is equal to its future value, then A : the discount rate must be very high B : there is no inflation C : the discount rate must be zero D : None of these are correct

Correct Answer : C 15 : Using the Rule of 72, about how long will it take a sum of money to double in value if the annual interest rate is 9 percent? A : 9 years B : 7 years C : 8 years D : 10 years Correct Answer : C 16 : The present value of an ordinary annuity is the . A : sum of the present value of a series of equal periodic payments B : future value of an equal series of payments C : receipt of equal cash flows for a specified amount of time D : sum of the future value of an equal series of payments Correct Answer : A 17 : When a loan is amortized over a five-year term, the A : rate of interest is reduced each year B : amount of interest paid is reduced each year C : payment is reduced each year D : balance is paid as a balloon payment in the fifth year

Correct Answer : B 18 : Annuity due calculations are especially important when dealing with A : term loans B : lease contracts C : capital investments D : capital recovery problems

Correct Answer : B 19 : The more frequent the compounding, the A : greater the present value B : greater the amount deposited

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C : greater the effective interest rate D : lesser the future value Correct Answer : C 20 : The effective rate of interest will always be A : greater than B : equal to C : less than D : equal to or greater than

the nominal rate.

Correct Answer : D 21 : interest is paid not only on the principal but also on any interest earned but not withdrawn during earlier periods. A : Basic B : Simple C : Future D : Compound Correct Answer : D 22 : Which of the following is worth more? A : Future value of an ordinary annuity of PMT dollars per year for n years discounted at i percent B : Future value of an annuity due of PMT dollars per year for n years discounted at i percent C : Both are worth the same amount D : Cannot be determined from the information given Correct Answer : B 23 : The annual effective rate of interest (ieff) is a function of . A : the annual nominal rate of interest (inom) only B : the number of compounding intervals per year (m) only C : the number of years (n) only D : both the nominal rate of interest and the number of compounding periods per year Correct Answer : D 24 : More frequent compounding results in future values and does less frequent compounding at the same interest rate. A : higher; higher B : lower; higher C : higher; lower D : lower; lower

present values than

Correct Answer : C 25 : The present value of a(n) interest rate. A : annuity B : annuity due C : perpetuity

is determined by dividing the annual cash flow by the

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D : lease Correct Answer : C 26 : An annuity that begins more than 1 year in the future is referred to as a(n) A : perpetuity B : annuity due C : uneven annuity D : deferred annuity

Correct Answer : D 27 : The of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal to . A : present value; PMT/i B : present value; PMT × i C : future value; PMT/i D : future value; PMT × i Correct Answer : A 28 : Annuity due calculations are common when dealing with A : cash dividends B : loan repayments C : rental contracts D : interest payments

Correct Answer : C 29 : The payment or receipt of a series of equal cash flows per period, at the end of each period, for a specified amount of time is called a(n) . A : annuity due B : perpetuity C : ordinary annuity D : simple interest Correct Answer : C 30 : The difference between an ordinary annuity and an annuity due is the A : interest rate B : timing of the payments C : amount of the payments D : number of periods

Correct Answer : B 31 : is the return earned by someone who has forgone current consumption. A : The present value B : Principle C : An annuity D : Interest Correct Answer : D Browsegrades.net

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32 : Determine how much $1,000 deposited in a savings account paying 8% (compounded annually) will be worth after 5 years. A : $5,526 B : $784 C : $1,400 D : $1,469 Correct Answer : D 33 : The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine-year time period. Determine the compound annual growth rate. A : 11.1% B : 8% C : 22.2% D : 100% Correct Answer : B 34 : Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by Mr. Moore. A : $212,850 B : $23,449 C : $2,164 D : $8,514 Correct Answer : C 35 : Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment. A : 16.3% B : 62.7% C : 10% D : 20% Correct Answer : C 36 : Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e., a perpetuity), assuming you require an 8 percent rate of return on this investment. A : $480 B : $743 C : $1,000 D : $750 Correct Answer : D 37 : Air Atlantic (AA) has been offered a 3-year-old jet airliner under a 12-year lease Browsegrades.net

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arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent. A : $2,830,000 B : $13,635,500 C : $6,000,000 D : $3,226,200 Correct Answer : D 38 : If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years. A : $13,600 B : $45,730 C : $14,640 D : $15,958 Correct Answer : C 39 : You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago. Determine the average annual rate of return on your investment, assuming the stock paid no dividends. A : 25% B : 8.33% C : 150% D : 7% Correct Answer : D 40 : Your grandparents put $1,000 into a savings account for you when you were born 20 years ago. This account has been earning interest at a compound rate of 7 percent. What is its value today? A : $3,870 B : $1,967 C : $3,026 D : $3,583 Correct Answer : A 41 : Baggos has seen its EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggoss EPS? A : about 30% B : about 40% C : about 20% D : about 10% Correct Answer : B 42 : You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is 10%, what is the present value of your bond? A : $7,450 B : $8,175 C : $8,900 Browsegrades.net

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D : $1,490 Correct Answer : A 43 : BBC bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate is the bank charging you? A : 10% B : 11% C : 12% D : 13% Correct Answer : C 44 : The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years. What is the future value of this lottery if you plan to put each payment in an account earning 9 percent? A : $2.28 million B : $12.79 million C : $14.32 million D : $ 5.00 million Correct Answer : B 45 : Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40-year working life and then retire. What will Billy have if the account will earn 10 percent compounded annually? A : $394,786 B : $23,470 C : $1,062,223 D : $810,917 Correct Answer : C 46 : Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000? A : $25,116 B : $3,115 C : $10,000 D : $3,492 Correct Answer : B 47 : Many IRA fund managers argue that investors should invest at the beginning of the year rather than at the end. What is the difference to an investor who invests $2,000 per year at 11 percent over a 30-year period? A : $43,785 B : $36,189 C : $54,244 D : There is no difference Correct Answer : A Browsegrades.net

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48 : An insurance company offers you an end-of-year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity? A : $429,600 B : $438,192 C : $408,672 D : $398,144 Correct Answer : B 49 : New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return? A : 8% B : 9% C : 7% D : 10% Correct Answer : C 50 : Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end-of-the-year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments? A : $5,547.85 B : $3,148.12 C : $6,000 D : $1,666.67 Correct Answer : A 51 : Idlewild Bank has granted you a seven-year loan for $50,000. If your seven annual end-ofthe-year payments are $11,660.45, what is the rate of interest Idlewild is charging? A : 14% B : 23% C : 12.6% D : 11% Correct Answer : A 52 : Your firm, New Sunrise, has just leased a $28,000 BMW for you. The lease requires six beginning-of-the-year payments that will fully amortize the cost of the car. What is the amount of the payments if the interest rate is 12 percent? A : $6,810.99 B : $7,766.99 C : $6,423.74 D : $6,081.25 Correct Answer : D 53 : The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments? A : $130,872 Browsegrades.net

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B : $149,194 C : $142,710 D : $264,000 Correct Answer : B 54 : Alabama Power has preferred stock that pays an annual dividend of $9.44. If the security has no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of return? A : $84.96 B : $104.89 C : $95.34 D : $94.40 Correct Answer : B 55 : Designs Now is opening a showcase office to display and sell its computer-designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash flows? A : $429,720 B : $457,620 C : $456,000 D : $424,820 Correct Answer : A 56 : In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years? A : $29,744.65 B : $29,783.76 C : $17,878.80 D : $21,651.10 Correct Answer : C 57 : What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years? A : $17,623.42 B : $18,170 C : $16,105.10 D : $16,122.26 Correct Answer : B 58 : What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly? A : 9.93% B : 9.74% C : 10.02% D : 9.86% Correct Answer : A Browsegrades.net

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59 : John is 25 years old and wishes to retire in 30 years. His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55. How much must he invest at the end of each year to achieve this goal? A : $7,499.96 B : $5,024.60 C : $4,143.65 D : $33,333.33 Correct Answer : C 60 : Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer? A : less than 1% B : 15% C : 18% D : 12% Correct Answer : B 61 : A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar). A : $2,000 B : $3,100 C : $2,706 D : $1,100 Correct Answer : C 62 : When using a financial calculator, n stands for the A : interest rate per period B : number of periods C : present value amount D : future value amount

Correct Answer : B 63 : If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years? A : $909,090 B : $930,510 C : $783,879 D : $510,285 Correct Answer : B 64 : Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%. A : $153,900 Browsegrades.net

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B : $68,100 C : $65,000 D : $70,800 Correct Answer : C 65 : You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the rate of return on your investment? A : 12% B : 11% C : 10% D : 9% Correct Answer : A 66 : You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the rate of return on your investment? A : $58,580 B : $104,135 C : $68,105 D : $40,000 Correct Answer : C 67 : Seebee makes quarterly (end-of-period) payments of $30,000 into a pension fund earning 12 percent per year compounded quarterly for 10 years. How much interest will it have earned in 10 years? A : $2,262,030 B : $2,105,880 C : $905,880 D : $1,062,030 Correct Answer : D 68 : John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end-of-year payments, how much total interest will he pay? A : $7,173.90 B : $2,717.39 C : $12,000.00 D : $25,924.23 Correct Answer : A 69 : Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old. If the fund earns 10 percent interest compounded annually, what is the value of the fund today? A : $104,602 B : $6,575 C : $5,975 D : $6,875 Correct Answer : C Browsegrades.net

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70 : When using a financial calculator, PV stands for the A : interest rate per period B : number of periods C : present value amount D : future value amount

Correct Answer : C 71 : Jackie plans to open her own bookstore in 10 years. To raise the seed money, she has committed the $10,000 she now has in a mutual fund. In addition, she plans to save $2,000 per year (end of year) for the next 5 years and $3,000 per year (end of year) for the following 5 years. How much seed money will Jackie have in 10 years if the investments earn 10 percent per year compounded annually? A : $76,129 B : $63,925 C : $44,255 D : $159,370 Correct Answer : B 72 : You just purchased a new $25,000 car and agreed to pay for the car in 50 monthly payments. If the monthly interest rate is 1 percent, what is your total financing cost? A : $637.82 B : $12,500 C : $574.25 D : $6,891 Correct Answer : D 73 : When using a financial calculator, FV stands for the A : interest rate per period B : number of periods C : present value amount D : future value amount

Correct Answer : D 74 : Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20-year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually? A : $16,000 B : $19,046 C : $1,120 D : $944.10 Correct Answer : C 75 : Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that is compounded annually. Browsegrades.net

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A : $6,050 B : $0 C : $310 D : $220 Correct Answer : C 76 : How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an account that is paying a nominal 12 percent per year, compounded monthly? A : $16,334 B : $15,247 C : $16,497 D : $15,817 Correct Answer : A 77 : You wish to save $500,000 in the next 25 years. You put your savings into a corporate bond fund that earns about 11 percent per year. How much must you save each year to obtain your goal? A : $20,000.00 B : $3,749.98 C : $4,370.13 D : $2,000.00 Correct Answer : C 78 : When using a financial calculator, i stands for the A : interest rate per period B : number of periods C : present value amount D : future value amount

Correct Answer : A 79 : When using a financial calculator, i stands for the A : $151,400 B : $86,462 C : $144,037 D : $79,252

Correct Answer : B 80 : When using a financial calculator, i stands for the A : $144,618 B : $127,923 C : $127,197 D : $90,537

Correct Answer : D 81 : You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85). You are now 40 years old. How much must you save each year for the next 25 years if Browsegrades.net

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you assume your savings will earn 12% annually? A : $560.17 B : $1,499.99 C : $5,403.87 D : None of these are correct Correct Answer : A 82 : You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85). You are now 40 years old. How much must you save each year for the next 25 years if you assume your savings will earn 12% annually? A : $217,675 B : $153,895 C : $322,130 D : $167,515 Correct Answer : B 83 : The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for a new air conditioning system. The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both principal and interest on the outstanding balance. What will be the outstanding balance after the third payment? A : $60,000 B : $20,865 C : $45,788 D : $50,866 Correct Answer : C 84 : Keith Stone has a 10-year-old daughter, Kate, who will be entering college in 8 years. Keith estimates college costs to be $16,000, $17,000, $18,000, and $19,000 payable at the beginning of each of Kates four years in college. How much must Keith save each year (assume end-ofyear payments) for each of the next 8 years to have enough savings to pay for Kates education? Assume Keith can earn 9% on his savings. A : $5,569 B : $7,720 C : $5,108 D : $7,677 Correct Answer : A 85 : 1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you? A : 10.38% B : 10.42% C : 10.45% D : 10.47% Correct Answer : D 86 : Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card? A : 18.00% Browsegrades.net

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B : 18.64% C : 19.56% D : 29.74% Correct Answer : C 87 : What monthly rate of interest will yield an annual effective rate of interest of 14%? A : 1.17% B : 1.10% C : 1.08% D : 1.14% Correct Answer : B 88 : What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded monthly? A : $842 B : $914 C : $833 D : $836 Correct Answer : D 89 : Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter? A : $12,107 B : $11,465 C : $9,901 D : $14,727 Correct Answer : B 90 : Al Corbin is 25 years old today and wishes to accumulate enough money over the next 35 years to provide for a 20-year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday. He can save $2,000 at the end of each of the next 10 years and $3,000 each year for the following 10 years. How much must he save each year at the end of years 21 through 35 to obtain his goal? Assume that the average rate of return over the entire period will be 10%. A : $9,642 B : $26,969 C : $12,321 D : $24,289 Correct Answer : C 91 : If a 16-year-old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of 9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20-65) at 9%. A : $442,014 B : $386,616 C : $1,767,995 Browsegrades.net

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D : $9,146 Correct Answer : A 92 : If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (ages 16, 17, 18, and 19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year? (Assume end-of-year payments.) A : $1,569,758 B : $ 68,613 C : $3,457,169 D : $1,148,958 Correct Answer : A 93 : What is the value in 10 years of $10,000 deposited in an account earning 8% compounded monthly? A : $33,004 B : $22,285 C : $102,530 D : $21,589 Correct Answer : B 94 : Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is your monthly payment? A : $917.77 B : $733.76 C : $666.67 D : $878.14 Correct Answer : B 95 : Inco purchased a computer for $200,000, and this machine is expected to generate annual cash flows of $48,271 over the next 5 years. What is the expected rate of return on this investment? A : 8.84% B : 26.58% C : 6.61% D : None of these are correct Correct Answer : C 96 : When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17 for 5 years. What rate of interest is the bank charging you? A : 9.82% B : 5.00% C : 25.39% D : 10.00% Correct Answer : A 97 : When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment? Browsegrades.net

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A : $153.33 B : $637.86 C : $584.12 D : $559.78 Correct Answer : B 98 : When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for 3 years. What is your monthly payment? A : $25,370 B : $19,813 C : $21,225 D : $18,750 Correct Answer : B 99 : Which of the following statements is (are) correct? I. At 6% interest, the present value of $400 for the first year, $600 for the second year, and $800 for the third year is $1,603.II. The future value of the following mixed cash flow stream (if it is from an annuity due at 6% interest) $400 for the first year, $600 for the second year, and $800 for the third year is $1,999 (rounded). A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : B 100 : Based on the Rule of 72, what interest rate do you need to earn to double your money in 6 years? A : 8% B : 12% C : 7% D : 6% Correct Answer : B 101 : Approximately how long would it take to double my money if I invest it now at 18%? A : 6 years B : 4 years C : 12 years D : Cannot be determined Correct Answer : B 102 : Jenny Genius wants to purchase a new car. She knows that she can afford to pay $250 per month and that her bank will charge her 8% interest on the car loan. She intends to pay off the car in five years. Interest will be compounded monthly. Of the following, which is the most expensive vehicle in her price range that she could consider? A : A Taurus selling for $11,900 B : A Malibu selling for $12,320 C : A Civic selling for $14,670 D : A Celica selling for $17,500 Browsegrades.net

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Correct Answer : B 103 : Bill Swill decides to try his luck at Powerball where the projected winnings are $12,000,000. If he wins, he can choose the annuity option (to be paid over 20 years) or a lump sum settlement that he can invest at 8% interest. How much must the lump sum option be to make the lump sum option equal to the annuity option (rounded)? A : $2,574,578 B : $1,743,620 C : $1,130,668 D : $1,200,000 Correct Answer : A 104 : Nukin Gnats Pest Control wants to offer a contract to its customers that would protect the property of their existing customers against termite infestation. Should termites invade a customers home, Nukin Gnats will pay for the repairs to the home provided the customer has maintained service with Nukin Gnats. The corporation must develop an account with a value of $500,000. They will accumulate this account over three years, after which they will offer this new contract provision. How much must be deposited annually (rounded amount) to accumulate the needed funds if they can get 5% interest at their local bank? A : $275,026 B : $158,604 C : $80,255 D : $97,985 Correct Answer : B 105 : Sherry Smart is buying a $350,000 home and will pay the mortgage monthly for 30 years. She has a good credit score and has qualified for a 5.125% loan interest. How much will she be paying monthly for the home? A : $2,013.67 B : $1,572.72 C : $1,318.69 D : $975.88 Correct Answer : C

ESSAY 106 : What is (are) the difference(s) between simple interest and compound interest? Correct Answer : Simple interest is earned or paid on principal only.?Compound interest is earned or paid on both principal and interest that has not been previously withdrawn. Compounding provides a greater return and results in a higher effective interest rate. 107 : What is the difference between the nominal interest rate and the effective interest rate? Correct Answer : The effective interest rate is the actual rate of interest earned by the lender and is generally the most economically relevant definition of interest rates. The effective interest rate is affected by the frequency of compounding.The nominal interest rate is the stated annual Browsegrades.net

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interest rate at the time of the loan. 108 : Why does an annuity due have a greater future value than a regular annuity, all things being equal? Correct Answer : An ordinary annuity assumes that payments are made at the end of each period. An annuity due assumes that payments are made at the beginning of each period. In essence, the annuity due earns one extra period of interest as opposed to the regular annuity when using the same time period. 109 : Explain the concept of interest and compare it to rate of interest. Correct Answer : Interest is the return earned by or the amount paid to someone who has forgone current consumption or alternative investment opportunities and “rented” money in a creditor relationship. The rate of interest is the percentage on the principal that the borrower pays the lender per time period as compensation for forgoing other investment or consumption opportunities. 110 : Identify the five basic keys of a financial calculator and note the guidelines for effective financial calculator usage. Correct Answer : The five basic keys are n, i, PV, FV, and PMT, and they represent number of periods, interest rate per period, present value, future value, and payment, respectively.Prior to using a financial calculator, the following should be done:?1. Set number of payments per year to 1.2. Clear the time value of money registers so that values held over from a previous problem do not affect your current calculations.3. Set payments to end-of-period mode.4. Set the display to floating-decimal. 111 : Explain a perpetuity, and list some investment vehicles that can be perpetuities. Correct Answer : A perpetuity is a financial instrument that promises to pay an equal cash flow per period forever. It will provide an infinite series of payments. Some bonds and some preferred stocks take the form of a perpetuity because they never mature - there is no redemption of these investments at their face value anytime in the future. 112 : Explain the sinking fund problem. Correct Answer : The sinking fund problem results from trying to determine how money must be invested into an annuity to produce a specified future value. The purpose is to accumulate an amount of money in the future that can be used to pay off a lump sum future obligation or to retire corporate bonds. 113 : What is the net present value rule? Correct Answer : The net present value of an investment is equal to the present value of the expected future cash flows generated by the investment minus the initial outlay. The future cash flows are discounted back to the present at a required rate of return that reflects the perceived risk of the investment. The net present value of an investment made by a firm represents the contribution of that investment to the value of the firm and, as such, to the wealth of the shareholders.

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Chapter 6. Fixed-Income Securities: Characteristics and Valuation 1 : In the continuous compounding equation, e is the A : natural log to the base 10 B : base number in natural logarithms C : natural log to the base 1 D : None of these are correct

Correct Answer : B 2 : With continuous compounding, the . A : effective rate is higher than the nominal rate B : effective rate is higher than the logarithmic rate C : base e is the effective rate D : All of these are correct Correct Answer : A 3 : Determine the value of $10,000 at the end of 3 years invested at 8 percent assuming continuous compounding. A : $12,712 B : $12,400 C : $32,460 D : $12,600 Correct Answer : A 4 : Determine the present value of $5,000 to be received 4 years from now at the continuously discounted rate of 8 percent. A : $6,886 B : $3,631 C : $4,616 D : None of these are correct Correct Answer : B 5 : First Texas National Bank is offering a one-year CD with a nominal rate of 9.5 percent. If compounding occurs continuously, what is the effective annual rate? A : 9.97% B : 16.76% C : 9.66% D : 22.06% Correct Answer : A 6 : What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously? A : $112,088 B : $120,993 C : $108,894 D : $147,781 Browsegrades.net

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Correct Answer : B 7 : Calculate the effective annual rate if the nominal annual rate is 9 percent compounded continuously. A : 9.74% B : 9.29% C : 9.42% D : 9.54% Correct Answer : C 8 : What is the present value of $100,000 that will be received 20 years from now if the nominal discount rate is 11 percent, discounted continuously? A : $21,240 B : $11,080 C : $16,421 D : None of these are correct Correct Answer : B 9 : You have just won a lottery that promises to pay you $1,000,000 in 5 years. What is the present value of this lottery win at the continuously discounted rate of 10%? A : $621,000 B : $606,531 C : $648,720 D : $904,837 Correct Answer : B 10 : Fred deposited $5,000 in an account that promised a nominal interest rate of 8% compounded continuously for his daughter who will be going to college in 18 years. How much will she have in the account in 18 years? A : $19,980 B : $20,054 C : $21,103 D : $21,694 Correct Answer : C 11 : Vida has just won a jackpot that will pay her $10,000 now, $10,000 in one year, and $10,000 in 2 years. What is the present value of this jackpot at the continuously discounted rate of 9%? A : $27,515 B : $28,345 C : $24,516 D : $27,492 Correct Answer : D 12 : City Bank offers a 7-year CD with a nominal rate of interest of 7.0%. If compounding occurs continuously, what is the effective annual rate? A : 7.25% B : 6.77% Browsegrades.net

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C : 7.32% D : 7.00% Correct Answer : A 13 : What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 8.25%? A : 8.60% B : 7.93% C : 8.25% D : 7.70% Correct Answer : B 14 : What is the value of $10,000 invested for 1 year at 8% compounded continuously? A : $10,800 B : $10,833 C : $10,824 D : $11,268 Correct Answer : B 15 : What is the value of $10,000 invested for 5 years at 8% compounded continuously? A : $14,693 B : $14,928 C : $14,918 D : $13,064 Correct Answer : C 16 : Friendly Bank offers you a loan at an annual interest rate of 10% compounded monthly. What is the effective rate the bank is charging you? A : 12.68% B : 10.00% C : 10.47% D : 10.83% Correct Answer : C 17 : Jane deposited $1,000 into a savings account paying 12% interest compounded continuously. After 45 years, how much money did she have in the account? A : $25, 759.09 B : $157,896.32 C : $221,405.61 D : $257,895.78 Correct Answer : C 18 : Paula invested $25 into a savings account when she was 6 years old. She is now 35. Her money grew at 2% compounded continuously. How much money does she have? A : $106.58 B : $85.19 C : $270.82 Browsegrades.net

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D : $44.65 Correct Answer : D 19 : Jack invested $25,000 into an account paying 6% compounded continuously. In five years how much money will he have? A : $92,190.45 B : $215,905.42 C : $65,871.15 D : $33,746.50 Correct Answer : D 20 : If interest is at 8% and it is compounded continuously, what is the effective interest rate? A : 7.25% B : 5.14% C : 8.33% D : 9.76% Correct Answer : C 21 : What is the effective interest rate on 12% if interest is compounded continuously? A : 15.11% B : 16.25% C : 14.11% D : 12.75% Correct Answer : D 22 : What is the effective interest rate on 10% if interest is compounded continuously? A : 10.52% B : 10.97% C : 11.06% D : 10.11% Correct Answer : A 23 : Brad deposited $5,250 into an account that earns 7% interest compounded continuously. How much money will he have in 15 years? A : $15,002.66 B : $12,175.90 C : $13,957.14 D : $14,964.25 Correct Answer : A 24 : Moneybag Bank & Trust is offering $200,000 loans at 5% compounded continuously. Before you decide to borrow using that interest rate, what amount would need to be paid back if the loan is for 10 years? A : $329,744.00 B : $275,187.36 C : $301,150.15 D : $227,198.05 Browsegrades.net

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Correct Answer : A 25 : What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 6.15%? A : 5.97% B : 6.32% C : 4.11% D : 8.24% Correct Answer : A 26 : What continuously compounded effective rate of interest will yield the same present value of a future cash flow as an annual rate of interest of 2.25%? A : 2.23% B : 3.15% C : 0.95% D : 1.28% Correct Answer : A 27 : The nominal interest rate and the effective interest rate are equivalent when compounding occurs . A : once a year at the end of the year B : every quarter C : semiannually D : monthly Correct Answer : A

ESSAY 28 : With continuous compounding, why is the effective rate higher than the nominal rate? Correct Answer : The effective rate is higher than the nominal rate because, with continuous compounding, the money is working harder; that is, interest is being accumulated more frequently, and this accumulated interest is available to earn its own interest on an on-going basis.

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Chapter 7. Common Stock: Characteristics, Valuation, and Issuance 1 : Which of the following types of debt securities protect investors against interest rate risk? A : floating rate bonds B : extendible notes C : original issue deep discount bonds D : floating rate bonds and extendible notes Correct Answer : D 2 : Zero coupon bonds are an example of A : original issue deep discount bonds B : extendible notes C : convertible bonds D : floating rate notes

Correct Answer : A 3 : Original issue deep discount bonds have decreased in popularity over the last several years due to: A : changes in tax laws B : issuance by brokerage firms of higher risk substitutes C : increased interest in equity securities D : None of these are correct Correct Answer : A 4 : Extendable notes are redeemable at par at the option of the A : holder only B : company only C : trustee only D : holder and trustee

Correct Answer : A 5 : If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at . A : a rate less than 8% B : 8% C : a rate greater than 8% D : Cannot be determined Correct Answer : C 6 : When the market for an asset is in equilibrium, the expected rate of return on the asset is equal to the . A : risk-free rate B : marginal investors required rate of return C : historical cost of capital D : perpetual capitalization rate Correct Answer : B Browsegrades.net

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7 : The the investors required rate of return on a bond, the bond to the investor. A : lower; higher B : higher; higher C : lower; lower D : higher; lower

will be the value of the

Correct Answer : A 8 : The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables EXCEPT the . A : current price B : required rate of return on the bond C : uniform annual interest payments D : maturity value Correct Answer : B 9 : The value of a perpetual bond is equal to the annual interest payment divided by the . A : risk-free rate B : required rate of return C : bank interest rate D : after-tax historical cost of capital Correct Answer : B 10 : Which of the following statements concerning preferred stocks is true? A : Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders. B : Preferred stock dividends per share are normally increased as the earnings of the firm increase. C : Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems. D : The par value of a stock is always the same as the initial selling price. Correct Answer : C 11 : Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock, and bonds of a firm. A : preferred stock, bonds, common stock B : bonds, common stock, preferred stock C : common stock, preferred stock, bonds D : bonds, preferred stock, common stock Correct Answer : D 12 : Potential sellers of an asset can be represented as a schedule showing the prices at which they are willing to sell given quantities of the asset. A : supply; maximum B : demand; maximum C : supply; minimum Browsegrades.net

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D : supply; average Correct Answer : C 13 : By the capitalization of cash flow method, the value of an asset is a function of . A : the book value of the asset B : required rate of return C : the age of the asset D : All of these are correct Correct Answer : B 14 : Which of the following is NOT a characteristic of long-term debt? A : Interest paid to bondholders is a tax-deductible expense to the firm. B : The firm is not legally required to pay interest to bondholders. C : It usually has a specific maturity. D : Its holders have a fixed claim on the firms assets in the event of bankruptcy. Correct Answer : B 15 : The quality of a debenture depends on the A : general credit-worthiness of the issuing company B : value of the assets used as collateral C : coupon rate of the debenture D : length of time to maturity

Correct Answer : A 16 : The indenture is a contract between the issuer and lenders that does all the following EXCEPT . A : specify the manner in which the principal must be repaid B : detail the nature of the debt issue C : give managements expectations about return of the proceeds D : list any restrictive covenants Correct Answer : C 17 : The call feature of a long-term bond . A : is an optional retirement provision B : states the call price C : allows the issuer to replace a high coupon bond with a lower coupon bond D : All of these are correct Correct Answer : D 18 : A sinking fund allows the issuer to . A : redeem an entire debt issue prior to maturity B : purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption C : call the entire debt issue D : accumulate interest expenses into a sinking fund account Browsegrades.net

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Correct Answer : B 19 : Normally the coupon rates on new bonds . A : do not change over the life of the issue B : are set equal to the market rate plus an inflation premium C : float with changes in the prime rate D : are set just over the prevailing prime rate Correct Answer : A 20 : Junk bonds are . A : usually rated Ba or higher by Moodys B : issued by firms with a high debt ratio C : issued with coupon rates at least 8 percentage points or more above the highest quality issues D : issued by firms with a low debt ratio Correct Answer : B 21 : Large companies build up short-term debt over the period of 1 to 2 years and then sell longterm debt using a portion of the proceeds to repay the short-term borrowings. This procedure is called . A : drawing down long-term credit B : funding short-term debt C : reducing the tax bite D : extending the rates Correct Answer : B 22 : The major advantages of long-term debt include all the following EXCEPT A : decreased financial risk B : relatively low after-tax cost C : firm owners ability to maintain control over their firm D : increased earnings per share through financial leverage

Correct Answer : A 23 : The value of a 15-year bond will change return than will the value of a 5 year bond. A : more B : less C : the same percentage D : exactly the same

for a given change in the required rate of

Correct Answer : A 24 : When the required rate of return is A : less than B : greater than C : the same as D : not equal to

the coupon rate, the bond will sell at a discount.

Correct Answer : B Browsegrades.net

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25 : Equipment trust certificates are used mainly by A : equipment manufacturers B : oil drilling companies C : state governments D : railroad and trucking companies

Correct Answer : D 26 : All of the following types of bonds are secured EXCEPT A : collateral trust B : mortgage C : debentures D : equipment trust certificates

Correct Answer : C 27 : The call feature is an advantage to the issuing firm if A : the bond has a floating rate B : interest rates decline C : the bond has a low par value D : interest rates increase

Correct Answer : B 28 : Which of the following is the highest risk debt issue? A : senior debt B : mortgage bond C : equipment trust certificate D : debenture Correct Answer : D 29 : There is a(n) A : direct B : distant C : inverse D : turgid

relationship between the value of a bond and its required rate of return.

Correct Answer : C 30 : The represents the debtholders in dealings with the issuing company. A : trustee B : stakeholders C : broker D : investment banker Correct Answer : A 31 : If an American Water Company bond has a coupon rate of 9 percent and is selling for $920, then the yield to maturity must be . A : greater than 9% B : equal to 9% Browsegrades.net

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C : less than 9% D : Cannot be determined Correct Answer : A 32 : Junk bond is a term used to describe a bond that A : is in default B : is rated Ba or lower by Moodys C : is currently paying interest D : has been downgraded by Moodys

Correct Answer : B 33 : The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the the time to maturity, the the change in value. A : shorter; greater B : longer; smaller C : longer; greater D : shorter; smaller Correct Answer : C 34 : Preferred stock has a priority over common stock with regard to the companys A : assets only B : voting rights only C : dividends only D : assets and dividends

Correct Answer : D 35 : The principal disadvantage of preferred stock financing is A : its high after-tax cost as compared with long-term debt B : the decrease in the firms degree of financial leverage C : the required payment of dividends D : the reduction in control

Correct Answer : A 36 : are not secured by specific assets. A : Equipment trust certificates B : Mortgage bonds C : Debentures D : Collateral trust bonds Correct Answer : C 37 : A zero coupon bond is NOT an example of a(n) A : fixed income security B : original issue deep discount bond C : tax-exempt bond D : All of these are correct

Correct Answer : C Browsegrades.net

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38 : Junk bonds (i.e., bonds issued by companies with weak financial positions) are rated or lower by Standard & Poors. A : Baa B : BB C : Ba D : CCC Correct Answer : B 39 : The required rate of return on an asset is NOT a function of the A : risk associated with the asset B : risk-free interest rate C : age of the asset D : All of these are correct

Correct Answer : C 40 : Common stock is a(n) A : variable B : fixed C : after-tax D : split

-income security.

Correct Answer : A 41 : Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation? A : sinking fund B : call feature C : floating coupon rates D : poison put covenant Correct Answer : C 42 : The of a debt issue is equal to the difference between the A : call price; market price; par value B : call price; market price; call premium C : call premium; call price; par value D : call premium; market price; par value

and the

Correct Answer : C 43 : bonds normally are denominated in the currency of the country of sale. A : Eurodollar B : International C : Foreign D : LIBOR Correct Answer : C 44 : A zero coupon bond is a bond that A : originally sells at a discount

. Browsegrades.net

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B : will sell for a premium C : is a premium value bond D : has a high current yield Correct Answer : A 45 : The following bond quotation indicates that the holder expects to receive annually:PACEI 11s 09 11.6 20 95 -1 A : $90 B : $116 C : $95 D : $110

in interest

Correct Answer : D 46 : The following bond quotation indicates that the holder expects to receive annually:PACEI 11s 09 11.6 20 95 -1 A : bid B : asked C : yield D : None of these are correct

in interest

Correct Answer : B 47 : Treasury bills . A : have a stated interest rate B : pay no explicit interest C : are sold for exactly $10,000 D : are quoted in terms of yield to maturity Correct Answer : B 48 : Treasury notes typically have initial maturities ranging from A : 1 to 3 years B : 1 to 5 years C : 1 to 10 years D : 10 to 30 years

Correct Answer : C 49 : An AT&T 5½05 bond with a current yield of 6.2% must be selling A : above B : at C : below D : All of these are correct

its face value.

Correct Answer : C 50 : In reading price quotes on U.S. Treasury bills, you would price higher than the bid. A : always B : never C : sometimes Browsegrades.net

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D : seldom Correct Answer : B 51 : Users of preferred stock include . A : utility companies B : capital-intensive companies undergoing expansion C : large commercial banks D : All of these are correct Correct Answer : D 52 : What is the yield to maturity for a Poughkeepsie Gypsy Fortune Tellers zero coupon bond that matures in 14 years if the bond is selling for $530? A : 5.84% B : 4.64% C : 4.28% D : 5.49% Correct Answer : B 53 : If an Allied Chemical zero coupon bond due in 12 years is selling for $420, what is its yield to maturity? A : 7.50% B : 4.64% C : 6.51% D : 5.26% Correct Answer : A 54 : The State of New York issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment. A : $25 B : $5 C : $10 D : $50 Correct Answer : D 55 : A General Electric 7½ bond closed at 98. What is the current yield? A : 7.65% B : 7.81% C : 7.50% D : 7.34% Correct Answer : A 56 : The State of Adaven issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the rate of return or current yield on these bonds if they are purchased at the current price of $40. A : 12.5% B : 8.0% Browsegrades.net

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C : 5.0% D : 1.25% Correct Answer : A 57 : A Treasury bill with 182 days to maturity is quoted at 5.62 bid, 5.60 asked, and an asked yield of 5.84. How much would you pay for this security? A : $9,440 B : $9,720 C : $9,708 D : $9,438 Correct Answer : B 58 : How much would you have to pay for a U.S. Government bond ($1,000 maturity value) scheduled to mature in February 2020 and quoted at 118:07 bid and 118:15 asked? A : $1,182.19 B : $1,181.50 C : $1,184.69 D : $1,180.70 Correct Answer : C 59 : A Treasury bill with a July 11 maturity date is quoted today at 8.46 bid and 8.40 asked. How much would you pay today (January 11) for one bill? A : $9,577 B : $9,580 C : $9,588 D : $8,400 Correct Answer : B 60 : Two years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1,000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities. A : $626 B : $463 C : $897 D : $270 Correct Answer : C 61 : Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield-to-maturity (to the nearest tenth of one percent). A : 13.2% B : 5.6% C : 13.7% D : 12.0% Correct Answer : C Browsegrades.net

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62 : Assume that the dividend on Central Power Companys $3.25 preferred stock issue is paid annually at the end of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of return. A : $3.25 B : $39 C : $12 D : $27.08 Correct Answer : D 63 : An Allied Northern preferred stock pays a $3.84 annual dividend. What is the value of the stock to an investor who requires a 9.5 percent return? A : $40.42 B : $42.67 C : $38.40 D : $37.60 Correct Answer : A 64 : What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10? A : 8.20% B : 11.34% C : 8.82% D : 12.20% Correct Answer : C 65 : A refrigerator manufacturer, Zero King, issued a zero coupon bond with 10 years to maturity. What is the yield-to-maturity of this bond if it is sold for $352? A : 12.2% B : 10% C : 11% D : 9% Correct Answer : C 66 : What is the value of a $1,000 par value Consul perpetual bond with a 6 percent coupon rate if the required rate of return is 9 percent? A : $1,000.00 B : $666.67 C : $333.33 D : $540.00 Correct Answer : B 67 : Marko needs to raise capital through a zero coupon bond debt offering. If the bonds will have 12 years to maturity and the rate of return on a bond in Markos risk class is 11 percent, what will be the selling price of the bond? A : $302.50 B : $335.50 C : $269.50 D : $286.00 Browsegrades.net

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Correct Answer : D 68 : Five years ago, the city of Baltimore sold at par a $1,000 bond with a coupon rate of 8 percent and 20 years to maturity. If this bond pays interest semiannually, what is the value of this bond to an investor who requires an 8 percent rate of return? A : $607.72 B : $692.00 C : $1,000.00 D : $1,080.00 Correct Answer : C 69 : Up in Smoke Tobacco Shops bond carries a 9 percent coupon, pays interest semiannually, and has 10 years to maturity. What is the bonds yield to maturity if the bond is selling for $937.75 (rounded to the nearest whole percent)? A : 8.0% B : 10.0% C : 9.0% D : 7.0% Correct Answer : B 70 : Determine the yield to maturity to the nearest tenth of 1 percent of a zero coupon bond with 8 years to maturity that is currently selling for $404. A : 11.3% B : 12.3% C : 11.7% D : 12.0% Correct Answer : D 71 : What is the value of an Orion bond that has a 10 percent coupon, pays interest semiannually, and has 10 years to maturity, if the required rate of return is 12 percent? A : $1,200.00 B : $885.50 C : $895.27 D : $1,000.00 Correct Answer : B 72 : Determine the yield-to-call (to the nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of $140, and is currently selling for $1,154. A : 12.0% B : 16.2% C : 13.7% D : 14% Correct Answer : A 73 : What is the value of a Northern Pacific bond with an 11 percent coupon, maturing in 15 years? Assume the market rate for this bond is 14 percent and that the interest is paid Browsegrades.net

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semiannually. A : $1,000.00 B : $790.74 C : $813.50 D : $853.30 Correct Answer : C 74 : What is the market value of a zero coupon bond with 5 years to maturity? The bond was originally sold with a yield to maturity equal to 11 percent, but the market rate today is 9 percent. A : $593 B : $650 C : $621 D : $577 Correct Answer : B 75 : What is the value of a PacTen bond with a 10 percent coupon that matures in 15 years? Assume the current market rate for this bond is 16 percent and that interest is paid semiannually. A : $661.90 B : $1,227.78 C : $1,000.00 D : $875.51 Correct Answer : A 76 : What is the required rate of return to the investor who is willing to purchase a Duke Power preferred stock with a $8.70 dividend, a par value of $100, and a current market price of $87? A : 10.7% B : 8.7% C : 9.4% D : 10.0% Correct Answer : D 77 : ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest. Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625. A : 5.0% B : 8.0% C : 3.1% D : 6.25% Correct Answer : B 78 : Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000 par value) that is currently selling for $521. A : 6.0% B : 11.5% C : 7.9% D : 8.5% Browsegrades.net

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Correct Answer : D 79 : occurs when a firm calls a relatively high interest rate issue and replaces it with a lower interest rate issue. A : A call feature B : A sinking fund C : Bond refunding D : Indenture refinancing Correct Answer : C 80 : Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semiannually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality? A : $943 B : $1059 C : $954 D : $1,000 Correct Answer : A 81 : Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay interest semi-annually, will mature in 15 years, but the firm has the option to call the bond in 10 years at a premium of 106. You believe that Rascal will call the bonds in 10 years. If you require a pre-tax return of 9.5% on bonds of this risk, how much would you pay for one of these bonds today? A : $1,000 B : $1,094 C : $1,034 D : $1,058 Correct Answer : B 82 : Zimmer Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price. A : 19.0% B : 11.4% C : 10.9% D : 11.7% Correct Answer : D 83 : Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%? A : $352 B : $404 C : $413 D : $163 Correct Answer : B 84 : Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 Browsegrades.net

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to an investor who requires a 9.5% rate of return on a security with this risk. A : $65.79 B : $49.37 C : $75.00 D : $114.00 Correct Answer : B 85 : Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years. In 2008 (today) the required return on bonds of this risk was 11%. The bonds pay interest semiannually. What would you be willing to pay for one of these bonds today if you believe the bond will be called today? A : $1,188.00 B : $832.25 C : $1,100.00 D : $1,246.98 Correct Answer : C 86 : At what price will Gohm have to sell a 10-year zero coupon bond that will yield 8.75% if held to maturity? A : $453.00 B : $875.00 C : $87.50 D : $432.00 Correct Answer : D 87 : What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%? A : $250.00 B : $362.31 C : $335.62 D : $1,000.00 Correct Answer : C 88 : A U.S. Government bond was quoted at 95:13 bid and 95:15 asked. How much would you have to pay for one of these $1,000.00 face value bonds? A : $951.50 B : $950.13 C : $950.15 D : $954.69 Correct Answer : D 89 : What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00. A : $85.71 B : $38.14 C : $59.33 D : $60.00 Browsegrades.net

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Correct Answer : B 90 : UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000 and that it pays interest semiannually. A : $1,170 B : $999 C : $1,095 D : $1,173 Correct Answer : D 91 : National Medical has a zero coupon bond outstanding that sells for $242.60 and has 15 years to maturity. What is the yield to maturity on the bond to the nearest tenth of one percent? A : 10.5% B : 9.1% C : 9.9% D : 11.0% Correct Answer : C 92 : An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity (to the nearest tenth of 1 percent)? A : 9.2% B : 8.8% C : 9.8% D : 10.2% Correct Answer : A 93 : The current required rate of return on a bond issued by Who LTD is 11 percent. Who has a bond issue outstanding that pays interest semiannually, is selling for $845, and matures in 8 years. What is the approximate coupon rate on the outstanding bond? A : 4.00% B : 8.00% C : 10.68% D : 6.05% Correct Answer : B 94 : An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity? A : 8.3% B : 16.1% C : 16.6% D : 14.3% Correct Answer : C 95 : How many semiannual interest payments remain on a bond that is selling for $917.25? The coupon rate of the bond is 8 percent, interest is payable semiannually, and the current market Browsegrades.net

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rate of return on a similar risk bond is 10 percent. A:5 B : 10 C : 11 D:7 Correct Answer : C 96 : CUP Company 8% bonds are currently selling for $950. These bonds (par value of $1,000) mature in one year and pay interest annually. Determine the yield to maturity (to the nearest tenth of 1 percent) on this bond issue. A : 13.7% B : 13.0% C : 13.3% D : 5.0% Correct Answer : A 97 : What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semiannually, has 12 years to maturity, and sells for $871.50? A : 11.3% B : 11.5% C : 11.8% D : 12.1% Correct Answer : B 98 : Grace Corp. has a zero-coupon bond outstanding that matures in 15 years. This bond is selling for $327.50 today and will pay $1,000 at maturity. What is the yield to maturity to the investor who buys the bond and holds it until maturity? A : 7.73% B : 9.33% C : 9.23% D : 9.77% Correct Answer : A 99 : WPI has a bond issue outstanding that has a coupon rate of 10% and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semiannually and has 10 years to mature? A : $941 B : $1,021 C : $1,000 D : $885 Correct Answer : D 100 : What is the yield to maturity of a bond with 10 years to maturity and a coupon of 15%? The current price of this bond is $1,109. Assume interest is paid annually. A : 12.0% B : 12.5% C : 13.0% D : 13.5% Browsegrades.net

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Correct Answer : C 101 : What is the yield-to-maturity of an Acme bond selling for $1,107.50 with 5 years to maturity, a 12 1/2% coupon, and semiannual compounding? A : 10.36% B : 11.29% C : 9.74% D : 10.20% Correct Answer : C 102 : WXAM has an outstanding bond issue with a coupon rate of 6 1/8% and a current yield of 6.9%. The yield to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and has 12 years to maturity? A : $883.42 B : $937.45 C : $943.65 D : $1,000.00 Correct Answer : A 103 : What is the yield-to-maturity of a Viacom bond that is selling for $948.75 with 6 years to maturity and a 7% coupon? A : 7.01% B : 8.11% C : 8.38% D : 7.38% Correct Answer : B 104 : Approximately what would a GMA 6% coupon bond maturing in 14 years sell for if the current yield is 6.8633% and the yield-to-maturity is 7.48%? A : $950.20 B : $920.02 C : $1051.54 D : $874.21 Correct Answer : D 105 : Which of the following is NOT one of the many differences between long-term debt and preferred stock? A : Long-term debt pays interest, which is tax-deductible to the borrower. B : Preferred stockholders are paid before creditors if the company bankrupts. C : Preferred stockholders are considered non-voting owners of the company. D : The firm is not legally required to pay preferred stock dividends but must pay interest to creditors. Correct Answer : B 106 : A is an option to purchase shares of a companys common stock at a specified price during a given time period. A : warrant Browsegrades.net

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B : call option C : call premium D : debenture Correct Answer : A 107 : Which of the following is (are) correct regarding the maturity date on securities? I. Longterm debt has a shorter maturity date than preferred stock.II. Preferred stock can have no specific maturity date, so it can be perpetual. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 108 : Debt is usually issued with a par value of A : $500 B : $0 C : $1,000 D : $5,000

Correct Answer : C 109 : Which of the following is NOT one of the various types of long-term debt? A : junior debentures B : secured loans C : senior debentures D : preferred stock Correct Answer : D 110 : The largest user of mortgage bonds is A : credit unions B : commercial banks C : utility companies D : small companies

Correct Answer : C 111 : Which of the following statements is (are) correct about long-term loans? I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds.II. The quality of a debenture depends on the general creditworthiness of the issuing company. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : B 112 : An indenture on long-term debt does all of the following EXCEPT it A : lists restrictions placed on the borrower by the lender B : specifies the manner in which the principal must be repaid Browsegrades.net

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C : allows the borrower to borrow extensively so that the interest may be regularly paid D : details the nature of the debt issue Correct Answer : C 113 : Mighty Mollusk Inc. issued a 30-year bond that is callable in 8 years. It has a coupon rate of 5.5% payable semiannually, a yield to maturity of 8%, and a call premium of one years interest. What is the yield to call? A : 6.75% B : 13,67% C : 4.82% D : 11.42% Correct Answer : D 114 : An advantage of preferred stock financing is preferred . A : stockholders can vote for the Board of Directors and be an integral part of the direction of the company B : stock dividends are tax-deductible for the investor C : stock dividends are flexible, and the penalties for not paying a dividend are not severe D : stock is the most preferred method of raising capital Correct Answer : C 115 : Unsecured income bonds are considered A : strong B : government C : weak D : noncorruptible

securities.

Correct Answer : C 116 : There are various types of government debt securities. Which of the following is considered a long-term government debt instrument? A : Treasury bills B : Treasury notes C : Treasury bonds D : Debentures Correct Answer : C 117 : Yummy Tummy Bakeries has issued a 30-year par value bond that is callable in 5 years. If the coupon rate is 5.5% payable semiannually, what is the bonds yield to call if the yield to maturity is 8% and the call premium is one years interest? A : 12.65% B : 18.91% C : 14.42% D : 10.62% Correct Answer : C 118 : A eurobond is a bond issued . A : in Europe and sold in the United States Browsegrades.net

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B : in Japan and sold in Europe C : by a U.S. corporation and sold to investors in Europe D : by U.S. corporations, denominated in euros, and sold to investors in the United States Correct Answer : C 119 : Foreign bonds have all of the following characteristics EXCEPT . A : they are underwritten by an investment banking syndicate B : they are denominated in the currency of the country of sale C : they are denominated in euros D : the bond issuer is from a country other than the country in which the bonds are being issued Correct Answer : C 120 : The length of time that an investor keeps an asset is called A : the retention period B : the holding period C : the maintenance period D : None of these are correct

Correct Answer : B 121 : When an investor is trying to find the market value of an asset, he or she is trying to determine the . A : exchange rate B : par value C : interest payment D : market price Correct Answer : D 122 : When does market equilibrium for an asset exist? A : when there is no tendency for the price of the asset to move higher or lower B : when the bid price equals the ask price C : when the asset can be resold at a profit D : when the asset can be bought at a discount Correct Answer : A 123 : A unique characteristic of bearer bonds is . A : the name and country of the bond owner is on the bond B : the name and country of the bond owner is not on the bond C : the name and country of the bond owner is on the bond, but the owner does not need to pay taxes on interest received D : the bond is heavily regulated and requires full disclosure to avoid fraud Correct Answer : B 124 : All of the following are characteristics of leveraged buyouts EXCEPT . A : a large amount of the purchase price is borrowed B : the purchased assets of the bought firm are used as collateral for the buyout C : LBOs have led to enormous wealth increases for the common stockholders of the acquired firm Browsegrades.net

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D : the impact of most LBOs has been an increase in the bond ratings of the acquired firm because of the decrease in perceived risk Correct Answer : D 125 : Penny Pincher Discount Grocers has issued a bond with a coupon rate of 11%. It recently closed at a price of $1023.75. What is the bonds current yield? A : 10.75% B : 3.25%% C : 12.8% D : 8.9% Correct Answer : A

ESSAY 126 : List the restrictions that an indenture places on the borrower of long-term debt. Correct Answer : 1. It thoroughly details the nature of the debt issue.2.It specifies the manner in which the principal must be repaid.3.It lists any covenants that are placed on the borrower. Among these are: a.A minimum interest coverage ratio that must be maintained. b.A minimum level of working capital that must be maintained. c.The maximum amount of dividends that the firm can pay on its preferred and common stock. d.Restrictions on further leasing or borrowing that the firm may utilize. 127 : What is the collateral used in collateral trust bonds and who is its primary user? Correct Answer : Collateral trust bonds are backed by stocks or bonds of other corporations. This type of financing is principally used by holding companies whereby it pledges the stocks and/or bonds of its subsidiaries as collateral. 128 : List the advantages and disadvantages of long-term debt financing: Correct Answer : Advantages:1. The firm has a relatively low after-tax cost due to the tax deductibility of interest.2. The firm has increased earnings per share possible through financial leverage.3. This type of financing allows the firm’s owners to maintain greater control over the firm.Disadvantages:1. This type of financing can increase the financial risk of the firm.2. It may require that restrictions be placed on the firm by the lenders. 129 : How does a firm value an asset? Correct Answer : The value of an asset is based on the expected future benefits that the owner will receive over the life of the asset. The cash flows are derived from increased revenues and/or reduced costs plus any salvage value received from the sale of the asset.?The value of a financial asset is based on the expected cash flows the asset will generate for the owner during the holding period. These payments are usually dividend payments or interest received while the asset is owned plus any money received when the asset is sold. 130 : What is a payment-in-kind bond and why is it considered a weak security? Correct Answer : PIK bonds allow a cash-strapped company to issue more debt to bondholders Browsegrades.net

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in lieu of cash interest payments. Companies add more to their debt obligations in order to conserve cash during lean times. PIK bonds are considered weak because they are unsecured. 131 : Explain a sinking fund. Correct Answer : Lenders require that the borrowing company gradually reduce the outstanding balance of a debt issue over its life instead of paying the entire principal when it comes due in 20 or 30 years. The usual method of providing for the gradual pay-down of the principal is with a sinking fund where money is set aside annually into a “sinking fund account.”

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Chapter 8. Analysis of Risk and Return 1 : Which of the following is NOT a characteristic of common stock? A : It has no maturity date. B : It is considered a permanent form of long-term financing. C : It has claims on assets prior to those of preferred stock. D : It is a residual form of ownership. Correct Answer : C 2 : Stockholders equity includes all of the following EXCEPT A : common stock B : treasury stock C : contributed capital in excess of par D : preferred stock

Correct Answer : B 3 : The book value per share of common stock is calculated by dividing shares outstanding. A : market value of common stock B : total assets C : total stockholders equity plus preferred stock D : total common stockholders equity

by the number of

Correct Answer : D 4 : The market value of common stock is primarily based on A : the firms future earnings B : book value C : total assets D : retained earnings

Correct Answer : A 5 : Common stockholders have a number of general rights, including all of the following EXCEPT : A : voting rights B : management rights C : asset rights D : dividend rights Correct Answer : B 6 : Which of the four common stockholder rights exists in only a minority of firms? A : dividend rights B : asset rights C : preemptive rights D : voting rights Correct Answer : C Browsegrades.net

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7 : In a reverse stock split, . A : the number of shares are decreased B : the market value is decreased C : retained earnings decrease D : par value decreases Correct Answer : A 8 : Which of the following is NOT an advantage of common stock financing? A : no fixed dividend obligation B : lowers the firms weighted cost of capital C : a greater degree of flexibility for the firm in financial planning D : relatively high flotation costs Correct Answer : D 9 : AVIX has 6.8 million shares outstanding and the firms charter provides for a majority voting procedure. The company has seven directors up for reelection. What is the minimum number of shares needed to ensure the election of one director? A : 850,001 B : 5,950,001 C : 3,400,001 D : None of these are correct Correct Answer : C 10 : Management usually opposes cumulative voting because this type of voting . A : is over twice as likely as majority voting to result in a proxy fight B : is more complicated than majority voting and takes longer to process C : often leaves the stockholders who hold minority viewpoints with no representation on the board of directors D : makes it easier for stockholders with minority viewpoints to elect sympathetic board members Correct Answer : D 11 : In the constant growth dividend valuation model, the required rate of return must be the dividend growth rate in order for the formula price to be meaningful. A : less than B : equal to C : greater than D : proportional to Correct Answer : C 12 : In the constant growth dividend valuation model, the required rate of return on a common stock can be shown to be equal to the sum of the dividend yield plus . A : yield-to-maturity B : cost of capital C : present value yield D : price appreciation yield Correct Answer : D Browsegrades.net

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13 : Each of the following is a reason why the valuation of common stock is considerably more complicated than that of bonds or preferred stocks EXCEPT . A : the returns can take two forms: annual cash payments and price appreciation B : the cash flows from common stocks are generally more uncertain than the cash flows from other types of securities C : the returns from common stocks are generally larger and more certain than the returns from bonds and preferred stocks D : None of these are correct Correct Answer : C 14 : Many preferred stocks are treated as A : fixed assets B : perpetuities C : convertible securities D : constant growth securities

in determining their values.

Correct Answer : B 15 : In the valuation of common stock, the simple annuity and perpetuity formulas used in the valuation of bonds and preferred stock are not generally applicable because . A : investors buy common stock for much different reasons than they buy bonds or preferred stock B : returns accruing to common stock should never be capitalized (discounted) in order to determine a price C : unlike bonds and preferred stock, common stock is a short-term investment D : unlike payments on most bonds and preferred stock, common stock dividends are normally expected to grow over time Correct Answer : D 16 : One of the assumptions of the constant growth dividend valuation model is that the A : investors required rate of return is equal to the expected dividend yield B : required rate of return is greater than the dividend growth rate C : required rate of return increases at a constant rate D : dividend rate (in dollars) will remain constant

Correct Answer : B 17 : The most important factor to be considered in the valuation of a closely held firm is A : earnings growth B : book value of the firm C : earnings capacity D : the general economic outlook

Correct Answer : C 18 : Stockholders equity includes . A : both preferred stock and common stock B : total claims C : additional paid-in capital plus capital surplus D : total liabilities and total surplus Browsegrades.net

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Correct Answer : A 19 : A common stocks book value is calculated A : as a multiple of the stocks price / earnings ratio B : on the basis of income statement ratios C : on the basis of balance sheet figures D : on the value of income statement figures

Correct Answer : C 20 : When a stock is split 2 for 1, then the A : value of the common stock B : par value C : capital surplus D : retained earnings

figure on the firms balance sheet is cut in half.

Correct Answer : B 21 : From an accounting standpoint, stock dividends involve a transfer from the A : common stock account B : cash account C : retained earnings account D : capital surplus account

Correct Answer : C 22 : Which one of the following is NOT a reason a firm may decide to repurchase its own stock? A : future corporate needs B : financial restructuring C : investment D : disposition of excess warrants Correct Answer : D 23 : Which one of the following is NOT a reason a firm may decide to repurchase its own stock? A : $12,252,000 B : $14,000,000 C : $4,752,000 D : $3,500,000 Correct Answer : C 24 : The returns investors receive from holding common stocks may be in two forms. They are . A : cash dividend payments and capital gains B : future earnings and treasury stock C : stock splits and stock dividends D : cash dividends and stock dividends Correct Answer : A 25 : The constant growth dividend valuation model does not hold when Browsegrades.net

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A : ke is greater than g B : dividends are growing faster than 4 percent C : g is greater than ke D : the current dividend is known Correct Answer : C 26 : Proxy fights typically occur when . A : stockholders receive more than one proxy statement B : a firm is performing poorly C : a firm is in the middle of a takeover attempt D : All of these are correct Correct Answer : D 27 : Some corporations issue dual classes of stock with unequal voting power. One justification offered by supporters of the dual class system is that it . A : favors long-term business health over short-term profits B : is more democratic than most single class systems C : is more positively correlated with business success than are other systems D : induces a greater number of investors to purchase stock in the firm Correct Answer : A 28 : The zero growth dividend valuation model is used when a firms future dividends are expected to remain constant . A : so the value of the firm should also remain constant B : so the required rate of return should also remain constant C : and the firm cannot be valued D : forever Correct Answer : D 29 : When evaluating a firm based on price/earnings multiples, the evaluator must determine the price/earnings multiple for . A : the general market B : the S&P 500 C : firms in the same industry D : small capitalization firms Correct Answer : C 30 : The rights of stockholders to share equally on a per-share basis in any distributions of corporate earnings is known as rights. A : preemptive B : voting C : asset D : dividend Correct Answer : D 31 : result in what is known as treasury stock. A : Stock dividends Browsegrades.net

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B : Stock repurchases C : Stock splits D : Reverse stock splits Correct Answer : B 32 : A firm that wishes to raise additional equity capital by selling a portion of the existing owners stock while maintaining control of the firm should consider a . A : stock split B : stock dividend C : share repurchase D : separate class of nonvoting stock Correct Answer : D 33 : A firm may use a stock repurchase A : as part of a financial restructuring B : to dispose of excess cash C : to reduce takeover risk D : All of these are correct

Correct Answer : D 34 : In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the sum of the . A : capital gains yield and cost of capital B : present value yield and dividend yield C : cost of capital and dividend yield D : capital gains yield and dividend yield Correct Answer : D 35 : In the constant growth dividend valuation model, it is assumed that the . A : dividend growth rate exceeds the required rate of return B : firms future dividend payments are expected to grow at a constant rate forever C : dividend cannot be forecast for any future time D : firm is experiencing a period of poor performance, after which normal growth is expected Correct Answer : B 36 : An arrangement whereby an investment banker agrees to purchase an entire new issue of securities is called . A : competitive bidding B : syndication C : a negotiated bid D : underwriting Correct Answer : D 37 : The difference between the selling price to the public of a new issue and the net the issuing firm actually receives is known as the . A : negotiating spread B : underwriting spread Browsegrades.net

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C : bid spread D : SEC cost Correct Answer : B 38 : A is a group of underwriters who agree to underwrite a new issue in order to spread the risk. A : purchasing syndicate B : cartel C : bidding group D : financial institution Correct Answer : A 39 : All of the following are advantages of private security placements (over a public offering) EXCEPT . A : reduced flotation costs B : greater flexibility C : lower interest rates D : fewer delays Correct Answer : C 40 : A firm may sell its common stock directly to its existing stockholders through a A : private placement B : cash offering C : rights offering D : direct placement

Correct Answer : C 41 : Direct issuance costs are . A : higher for common stock than for preferred stock issues B : dependent on the quality of the issue C : dependent on the size of the issue D : All of these are correct Correct Answer : D 42 : In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a favorable price in each of the following cases EXCEPT . A : a best efforts offering B : a negotiated underwriting C : a competitively bid underwriting D : All of these cases have the assumption of risk Correct Answer : A 43 : An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following EXCEPT . A : long-range financial planning B : the marketing of securities C : the timing of securities Browsegrades.net

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D : the firms new product marketing decisions Correct Answer : D 44 : In addition to direct costs, there are other costs associated with new security offerings. These other costs include all of the following EXCEPT . A : incentives such as the Green Shoe option B : overpricing C : stock price declines D : management time Correct Answer : B 45 : A procedure that allows a firm to file a master registration statement with the SEC and then sell an offering of common stock in small increments is known as . A : a Green Shoe option B : an IPO C : rule 215 D : a shelf registration Correct Answer : D 46 : Which of the following are reasons a large multinational corporation might sell equity in international markets rather than selling stock only in the country in which they are domiciled? A : Global equity offerings resulting in higher price per share B : The existence of a 12-hour per day trading schedule C : Higher positive returns around the time of the announcement to sell in global markets D : Private placements not being an option Correct Answer : A 47 : The P/E ratio indicates . A : how much investors are willing to pay for $1 of current earnings B : the current yield C : the current price D : how risky the stock is Correct Answer : A 48 : Common stock dividends normally are paid A : monthly B : quarterly C : semiannually D : annually

Correct Answer : B 49 : In stock quotations, the last column, showing the net change, indicates the net change in . A : a shares price during the day B : the dividend yield C : the closing price from the previous days close D : a shares high price during the day Browsegrades.net

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Correct Answer : C 50 : What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOVs current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent. A : $24.00 B : $18.34 C : $25.68 D : $19.62 Correct Answer : C 51 : The current price of Zebar is $32.00 and the current dividend is $0.60. What is an investors required rate of return on Zebar if dividends are expected to grow perpetually at a compound annual rate of 8 percent? A : 9.88% B : 11.38% C : 18.75% D : 10.03% Correct Answer : D 52 : Fast Wheels Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return? A : $9.00 B : $5.14 C : $9.54 D : $8.16 Correct Answer : A 53 : What is the current value of the common stock of Clump Dump Kitty Litter, Ltd., if you know the current dividend yield is 6.14%, the PE is 16, and the annual dividend is $1.35? A : $21.60 B : $21.99 C : $8.29 D : $98.24 Correct Answer : B 54 : Bellbottom Gongs, Inc. pays a quarterly dividend of $0.70, has a PE ratio of 14, and closed yesterday at $48.25. What is the dividend yield? A : 5.45% B : 1.45% C : 5.8% D : 7.25% Correct Answer : C 55 : If the common stock of Comdisco pays an annual dividend of $0.28, has a PE ratio of 11, Browsegrades.net

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and closed at 25, what are the current earnings per share? A : $3.08 B : $2.27 C : $7.00 D : $1.12 Correct Answer : B 56 : If Night Owl Lamps pays an annual dividend of $1.54, has a PE of 13, and its last closing price was 40, then its dividend yield must be . A : 11.85% B : 3.85% C : 15.40% D : 3.25% Correct Answer : B 57 : Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is an investors required rate of return on Zero-Sum if the current price is $12? A : 12.3% B : 12.0% C : 10.0% D : 10.3% Correct Answer : B 58 : Assume Zero-Sum Enterprise pays an annual dividend of $1.40 per share and that neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sums stock to an investor who requires a 14 percent rate of return? A : $14 B : $10 C : $20 D : $0 Correct Answer : B 59 : Over the past 7 years the dividends of Sunshine Mining have grown from $0.24 to the current level of $0.53. What is the approximate annual compound growth rate of Sunshines dividends? A : 20.8% B : 12.0% C : 9.5% D : 10.0% Correct Answer : B 60 : Assume that the dividend ($3.25) on Central Power Companys common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return. A : $3.25 B : $39 Browsegrades.net

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C : $12 D : $27.08 Correct Answer : D 61 : During the past 8 years, Beef Wellington Cattle Companys common stock dividends have grown from $2.00 to $3.19. Estimate the compound annual dividend growth rate over the 8-year period. A : 59.5% B : 6% C : 12% D : 19% Correct Answer : B 62 : Moonshine Company, a producer of fine liqueurs, has earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Moonshines common stock dividends continue growing at the past rate for the foreseeable future, determine the value of the companys common stock to an investor who requires a 13 percent rate of return on these securities. A : $44.44 B : $36.81 C : $46.22 D : $48.62 Correct Answer : C 63 : What is the rate of return to an investor in the stock of Bajo Inc. if the current dividend of $0.80 is not expected to change in the foreseeable future? The current price of Bajo is $13.25. A : 6.04% B : 8.0% C : 24.15% D : 11.06% Correct Answer : A 64 : The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investors required rate of return is 14 percent? A : 11.07% B : 14.0% C : 11.4% D : 10.75% Correct Answer : D 65 : Many regulated companies are required by their regulatory commissions to sell new security issues via . A : negotiated underwriting B : competitive bidding C : purchasing syndicates D : private placement Browsegrades.net

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Correct Answer : B 66 : Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investors required rate of return on this stock is 14%. A : 6% B : 8% C : 14% D : 20% Correct Answer : B 67 : CPU Company currently (t = 0) pays a dividend of $2.50 per share on its common stock. Dividends are expected to increase at the rate of $0.25 per share for the next several years. Determine the current value of CPUs common stock to an investor who expects to be able to sell the stock for $35 per share after 3 years, given that the investor requires a 14 percent rate of return on this security. A : $24.00 B : $30.54 C : $19.64 D : $68.75 Correct Answer : B 68 : What is the current value of Frocks & Socks Clothiers, Inc., to an investor who has a required rate of return of 12 percent? The current dividend is $1.00, and the dividends are expected to grow 8 percent per year for 3 years. At the end of 3 years the investor expects to sell the security for $76. A : $79.51 B : $56.90 C : $51.13 D : $76.00 Correct Answer : B 69 : What is the current value of a share of MoreGro common stock that does not pay a current dividend? Earnings are growing at a 20 percent per year rate for the next 10 years. Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years. Current earnings are $1.50 per share. A : $56.87 B : $62.21 C : $25.00 D : There is insufficient information to solve this problem. Correct Answer : D 70 : What is the current value of a share of ABC common stock if its current dividend is $1.50 and dividends are expected to grow at the annual compound growth rate of 20 percent into the foreseeable future? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years. A : $56.87 B : $30.00 Browsegrades.net

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C : $25.00 D : The constant growth rate model cannot be used because the growth rate is greater than the required rate of return. Correct Answer : D 71 : What is the current value of a share of McDonalds if its current dividend is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72. A : $44.31 B : $35.78 C : $39.63 D : $72.00 Correct Answer : A 72 : The earnings and dividends of Nebula Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Nebula currently pays a dividend of $0.50 per share. What is the value of Nebula stock to an investor who requires a 14 percent rate of return? A : $9.31 B : $15.73 C : $11.35 D : $2.04 Correct Answer : C 73 : During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years. A : $62.50 B : $31.25 C : $67.50 D : $46.96 Correct Answer : C 74 : Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investors required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model. A : 6.74% B : 17.26% C : 6.40% D : 3.80% Correct Answer : C 75 : Helix common stock currently sells for $30, and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends? A : 13.5% Browsegrades.net

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B : 9.5% C : 10.0% D : 30.0% Correct Answer : B 76 : Over the past 5 years, Dippity Doo-Dah Party Dips common stock earnings per share have grown from $0.62 to $0.91. If an investor in Dippitys stock is assumed to have a required rate of return of 14%, what is the current value of Dippity if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate. A : $2.16 B : $1.62 C : $4.94 D : $2.00 Correct Answer : A 77 : High Brow Cow Farms, producers of the finest dairy products, has common stock that sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in High Brow require a 13% rate of return, what is the current dividend? A : $2.70 B : $2.50 C : $4.00 D : $3.25 Correct Answer : B 78 : Keeping Pace Enterprises, makers of track and field equipment, has common stock that sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year? A : $1.33 B : $2.40 C : $1.45 D : $1.60 Correct Answer : C 79 : The common stock of Kute & Kuddly Kids Clothes, Inc., currently sells for $88.50, and its current (D0) dividend is $1.10. Determine the implied growth rate for Kute assuming that an investors required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate. A : 13.9% B : 12.3% C : 13.8% D : 12.6% Correct Answer : D 80 : Helluva stock currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of Helluva common stock to an investor who expects to be able to sell the stock for $28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security. A : $66.00 Browsegrades.net

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B : $28.00 C : $21.20 D : $15.88 Correct Answer : C 81 : Over the past 10 years the dividends of Allegro have grown from $0.45 to $1.82 per share. Determine the value of Allegros common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years. A : $36.40 B : $41.86 C : $43.68 D : $20.93 Correct Answer : B 82 : Zimmers common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) given that an investor requires a return of 16 percent? A : $2.74 B : $3.20 C : $5.92 D : $2.96 Correct Answer : D 83 : The earnings of Foggy Futures Weather Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Foggy currently pays a dividend of $0.36 per share. What is the value of Foggys stock to an investor who requires a 16% rate of return? A : $7.97 B : $7.76 C : $14.42 D : $11.11 Correct Answer : B 84 : During the past 10 years, Saturns common stock dividends have grown from $0.24 to $0.62. If the past growth of dividends is expected to continue at the same rate in the future, what is the current value of Saturns common stock to an investor who requires an 18% rate of return? A : $7.75 B : $3.79 C : $8.53 D : $10.42 Correct Answer : C 85 : HiGlos common stock sells for $23.50, and its earnings are expected to grow at a rate of 12% annually. What is the current dividend (Do) for an investor who requires a 15% return? A : $0.71 B : $0.63 C : $0.34 Browsegrades.net

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D : $0.31 Correct Answer : B 86 : During the past 7 years, Burger Flippin Corp.s earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Flippins common stock to an investor who requires a 16% rate of return? A : $97.50 B : $13.93 C : $111.15 D : $48.50 Correct Answer : C 87 : Quantum Inc. has 5.4 million shares outstanding, and the firms charter provides for cumulative voting. The company has a twelve-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to ensure the election of one director? A : 450,001 B : 415,386 C : 431,251 D : 425,421 Correct Answer : B 88 : AVIX has 6.8 million shares outstanding, and the firms charter provides for cumulative voting. The company has a seven-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to ensure the election of two directors? A : 850,001 B : 5,950,001 C : 3,400,001 D : 1,700,001 Correct Answer : D 89 : AVIX has 6.8 million shares outstanding, and the firms charter provides for cumulative voting. The company has a seven-member board of directors, all of whom are up for reelection. What is the minimum number of shares needed to ensure the election of two directors? A : $17 B : $13 C : $22 D : $50 Correct Answer : A 90 : Listed below are some of the responsibilities of investment bankers. Which of the following is NOT one of them? A : They can purchase securities. B : They market securities. C : They directly influence the objectives and direction of the company. D : They arrange private loans and leases. Correct Answer : C Browsegrades.net

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91 : The zero growth method is used to value A : common stock B : required rate of return C : bonds D : preferred stock

Correct Answer : D 92 : All of the following are ways that securities are offered to the public in a public offering EXCEPT . A : securities are sold through competitive bidding B : securities are sold through negotiated underwriting to a purchasing syndicate C : securities are sold through excess-market pricing D : securities are sold on a best-efforts basis Correct Answer : C 93 : In a liquidation of a firm due to bankruptcy, whose claims are considered last? A : the government B : preferred stockholders C : common stockholders D : debt holders Correct Answer : C 94 : Standby underwriting is a procedure whereby an investment banker agrees to during a rights offer. A : purchase any shares not sold to rights holders B : set the subscription price C : underwrite a new security issue and sell it to the public D : underwrite all of the firms future security issues in exchange for a large underwriters fee Correct Answer : A 95 : Standby underwriting is a procedure whereby an investment banker agrees to a rights offer. A : 10.11% B : 12.02% C : 8.15% D : 9.74%

during

Correct Answer : A 96 : Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if investors require 12% return? A : $18.14 B : $22.75 C : $19.47 D : $20.16 Correct Answer : C Browsegrades.net

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97 : During negotiated underwriting, in whose interest is it that the issued security be fairly priced? A : the issuing firm but not the underwriter B : the underwriter but not the issuing firm C : both the underwriter and the issuing firm D : neither the underwriter nor the issuing firm Correct Answer : C 98 : If Crafty Creatures Cage Maker stock sells for $18 per share and the firm nets $12 per share, the difference is called the . A : underwriting spread B : profit C : SEC charge D : refund Correct Answer : A 99 : An option for selling securities reserved for larger firms (MVE > $150,000,000) whereby the firm files a master registration statement and then can sell small increments of the stock over the next two years by filing a short-form statement is called . A : SEC registration B : red herring C : shelf registration D : commission registration Correct Answer : C 100 : An option for selling securities reserved for larger firms (MVE > $150,000,000) whereby the firm files a master registration statement and then can sell small increments of the stock over the next two years by filing a short-form statement is called . A : 15% B : 25% C : 12% D : 21% Correct Answer : B 101 : A rights offering (also called a privileged subscription) allows existing stockholders to . A : purchase one new share of stock for every ten shares of stock they currently possess B : purchase any shares of stock not sold to rights holders C : sell existing shares of stock above market price D : purchase new shares of stock below market price Correct Answer : D 102 : Haulin It Towing Company is selling a stock for $16. The stock just paid a dividend of $0.60, and this dividend is expected to grow by 15% per year for three years. After that, it will grow at a constant rate of 4%. The stocks beta is 1.7, the risk-free rate of interest is 1.75%, and the market risk premium is 5.25%. Should you buy the stock? (Round to dollars and cents or two decimal points.) Browsegrades.net

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A : No, the stock is not a good value since it is only worth about $8. B : No, the stock is not a good value since it is only worth about $12. C : Yes, the stock is a good value since it should sell for about $25. D : Yes, the stock is a good value since it should sell for about $18. Correct Answer : B 103 : All of the following statements about common stock are correct EXCEPT A : common stock is a variable income security B : common stock prices fluctuate more than bonds C : common stock is callable D : common stockholders have preemptive rights

Correct Answer : C 104 : Of the following common stock rights, which allows common stockholders to buy more shares of common stock in order to retain their pro-rata share of ownership in the company? A : asset rights B : preemptive rights C : dividend rights D : voting rights Correct Answer : B 105 : Stock splits are a sign that the company . A : is in need of more financial capital B : has set its stock price too low C : wants to get its stock price to a more desirable trading level D : cannot pay its stock dividend Correct Answer : C 106 : If a company offers more than one class of stock, corporate governance experts feel that . A : this is more democratic since some shares are more expensive than others B : this is preferable in order to provide a special class of nonvoting stock to executives C : super-voting power allows for the election of directors that benefit a specific class of stock D : decisions made by the dual class system are more advantageous for the average investor Correct Answer : C 107 : Which of the following statements about common stock voting is (are) correct? I. Majority voting typically prohibits a group of stockholders with a minority viewpoint from having any representation on the board.II. Cumulative voting allows each share of stock to represent as many votes as there are directors to be elected. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 108 : All of the following are reasons that companies hold treasury stock EXCEPT Browsegrades.net

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A : compliance with SEC regulations that a certain amount of company shares must be kept by the company B : disposition of excess cash C : financial restructuring D : future corporate needs Correct Answer : A

ESSAY 109 : List the various rights of common stockholders. Correct Answer : 1. Dividend rights - they share equally on a per-share basis in any distribution of corporate earnings.?2. Asset rights - in liquidation, they have the right to assets that remain after senior obligations have been satisfied.3. Preemptive rights - they have the right to share proportionately in any new stock sold.4. Voting rights - they have the right to vote on stockholder matters such as the selection of the board of directors. 110 : What are the advantages and disadvantages of common stock financing? Correct Answer : Advantages:1.There is no fixed-dividend obligation.2.Common stock is less risky to the firm than fixed-income securities.3.It is not restricted by restrictive covenants.4.Common stock can lower the firm’s weighted cost of capital. Disadvantages:1.From the investor’s perspective, common stock is riskier than preferred stock or debt securities and may have a higher required rate of return.2.It frequently results in an initial dilution of per-share earnings.3.It involves relatively high issuance costs (flotation costs) when sold to the public. 111 : List the responsibilities of investment bankers. Correct Answer : Investment bankers are an important source of financial market expertise and an important part of the security offering process.They are involved in:1. Long-range financial planning2. The timing of security issues3. The purchase of securities4. The marketing of securities5. The arrangement of private loans and leases6. The negotiation of mergers 112 : What are some of the costs associated with new security offerings? Correct Answer : 1.Direct costs called an underwriting spread or underwriting discount.2.A cost of management time in preparing the offering.3.The cost of underpricing, which occurs because the new security is priced below the current or correct market price. This is due to the riskiness of the new security.4.The cost of stock price declines for stock offerings by firms whose shares are already outstanding.5.The cost of other incentives provided to the investment banker. This includes the overallotment or “Green Shoe” option. The option gives the investment banker the right to buy up to 15% of the new offering at a price equal to the offering price. This option normally lasts for 30 days. 113 : Why do closely held firms need to have an outside appraiser to determine their value? What are the reasons for valuation? Correct Answer : In general a corporation’s value is determined by the marketability of its stock and its price as listed on an exchange. An active market for closely held firms normally does not Browsegrades.net

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exist. This necessitates using an independent appraiser to determine its value. A firm needs to know its current value for:1. mergers and acquisitions, divestitures and liquidation2. initial public offerings3. estate and gift tax returns4. leveraged buyouts5. recapitalizations6. employee stock ownership plans7. divorce settlements8. estate valuation9. litigation 114 : What are the disadvantages of owning minority interest in a closely held corporation, and how can this be overcome? Correct Answer : A minority interest investment in a closely held corporation has an investment that:1. lacks control2. may lack marketability3. generally receives little, if any, dividend?Minority interest shares should be discounted. A discount is applied to the per-share value which ranges from 6% to more than 50%. 115 : Explain the difference between majority voting and cumulative voting and why one is preferred over the other. Correct Answer : Majority voting is similar to the voting that takes place in political elections: if two slates of people are running for the board, the one that receives more than 50 percent of the votes wins. In cumulative voting, each share of stock represents as many votes as there are directors to be elected. For example, if a firm is electing seven directors, then a holder of 100 shares would have 700 votes. That holder could then cast all 700 votes for one particular candidate, dramatically increasing that candidate’s chances of being elected to the board. Cumulative voting thereby makes it much easier for stockholders with minority opinions to elect at least one board member who shares their views, so management is typically against this system. In contrast, majority voting usually results in the election of a board that has no representation for minority opinions — the preferred outcome for management.

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Chapter 9. Capital Budgeting and Cash Flow Analysis 1 : The is a statistical measure of the mean or average value of the possible outcomes. A : probability distribution B : standard deviation C : expected value D : coefficient of variation Correct Answer : C 2 : The the standard deviation, the A : smaller; larger the expected return on B : larger; riskier C : smaller; riskier D : larger; smaller the expected return on

the investment.

Correct Answer : B 3 : The is an absolute measure of risk, and the A : systematic risk;, unsystematic risk B : standard deviation; coefficient of variation C : correlation; covariance D : security market line; characteristic line

is a relative measure of risk.

Correct Answer : B 4 : When comparing two equal-sized investments, the risk. A : standard deviation B : coefficient of variation C : correlation D : covariance

is an appropriate measure of total

Correct Answer : A 5 : The slope of the characteristic line for a specific security is an estimate of security. A : alpha B : beta C : total risk D : relative risk

for that

Correct Answer : B 6 : The is the ratio of to the . A : standard deviation; covariance; expected value B : covariance; expected value; standard deviation C : coefficient of variation; standard deviation; expected value D : coefficient of variation; systematic risk; expected value Correct Answer : C Browsegrades.net

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7 : The possibility that actual returns will deviate from expected returns is known as A : risk B : interest C : beta D : standard deviation

Correct Answer : A 8 : Values of the can range from +1.0 to 1.0. A : coefficient of variation B : correlation coefficient C : standard deviation D : covariance Correct Answer : B 9 : The of a portfolio of two or more securities is equal to the weighted average of the of each of the individual securities in the portfolio. A : standard deviation; standard deviation B : risk; risk C : expected return; expected return D : standard deviation; risk Correct Answer : C 10 : The expected value of one roll of a standard six-sided die is A:6 B:3 C : 3.5 D:4

Correct Answer : C 11 : Security As expected return is 10%, while the expected return of B is 14%. The standard deviation of As returns is 5%, and it is 9% for B. An investor plans to invest equal amounts in A and B. Which of the following statements is true about this portfolio consisting of stock A and stock B? A : The risk of the portfolio is equal to 7%. B : The lower the correlation of returns between the two stocks, the higher the portfolios risk. C : The risk of the portfolio is primarily dependent on the utility function of the investor. D : The higher the correlation of returns between the two stocks, the higher the portfolios risk. Correct Answer : D 12 : Which of the following is NOT an example of a source of systematic risk? A : interest rate changes B : foreign competition with an industrys products C : changes in the overall economic outlook D : changes in the inflation rate Correct Answer : B 13 : The security market line

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A : is defined as the slope of a line relating an individual securitys return to the returns of other securities in that firms primary industry B : provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets C : has as its slope the beta of the security D : is determined by the prevailing level of risk-free interest rates minus a risk premium Correct Answer : B 14 : All other things being equal, what is the major impact that an increase in the expected inflation rate would be anticipated to have on the security market line? A : reduce its slope B : shift it down and to the right C : shift it up and to the left D : reduce required returns for investors in any individual asset Correct Answer : C 15 : Beta is defined as . A : a measure of volatility of a securitys returns relative to the returns of a broad-based market portfolio of securities B : the ratio of the variance of market returns to the covariance of returns on a security with the market C : the inverse of the slope of the security regression line D : All of these are correct Correct Answer : A 16 : A beta value of 0.5 for a security indicates that the security has A : average systematic risk B : above-average systematic risk C : no unsystematic risk D : below-average systematic risk

Correct Answer : D 17 : The security market line can be thought of as expressing relationships between required rates of return and . A : the time value of money B : beta C : total risk D : portfolio diversification Correct Answer : B 18 : Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following? A : estimating expected future market returns B : determining the most appropriate measure of the risk- free rate C : determining the best estimate of an assets future beta D : All of these are correct Correct Answer : D Browsegrades.net

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19 : A security that is completely uncorrelated (j,m = 0) with the market portfolio would have a beta of . A:1 B:0 C : +1 D : 100 Correct Answer : B 20 : Systematic risk . A : cannot be mitigated via diversification B : can be mitigated via diversification C : is unique to each firm D : is affected by factors such as strikes Correct Answer : A 21 : The correlated the returns from two securities are, the effects of risk reduction. A : more positively; greater B : greater; greater C : less positively; greater D : lower; lower

will be the portfolio

Correct Answer : C 22 : All of the following factors have their primary impact on unsystematic risk EXCEPT A : availability of raw materials B : effects of foreign competition C : changes in inflation D : strikes

Correct Answer : C 23 : The risk remaining after extensive diversification is primarily A : unsystematic risk B : systematic risk C : coefficient of variation risk D : standard deviation risk

Correct Answer : B 24 : The most relevant risk that must be considered for any widely traded individual security is its . A : unsystematic risk B : standard deviation C : covariance risk D : systematic risk Correct Answer : D 25 : Texas Computers (TC) stock has a beta of 1.5, and American Water (AW) stock has a beta Browsegrades.net

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of 0.5. Which of the following statements will be true about these securities? A : The addition of TC would reduce portfolio risk more than the addition of AW. B : The addition of AW would reduce total portfolio risk more than the addition of TC. C : The required return for TC is greater than the required return for AW. D : The required return for AW is greater than the required return of TC. Correct Answer : C 26 : The risk premium for an individual security is equal to the . A : beta times the market return B : difference between the required return and the risk-free rate C : weighted average of the individual security betas in a portfolio D : securitys covariance divided by the variance of the market Correct Answer : B 27 : The risk-free rate of return can be thought of as consisting of A : a real rate of return; a default premium B : unanticipated inflation; bond default premium C : a real rate of return; an inflation premium D : a zero beta component; an expectation premium

and

Correct Answer : C 28 : What will happen to the Security Market Line if (1) inflation expectations increase and (2) investors become more risk averse? A : It will shift up and have a steeper slope. B : It will shift down and have the same slope. C : It will shift down and have a steeper slope. D : It will shift up but have less slope. Correct Answer : A 29 : Unsystematic risk . A : is caused by factors affecting the market as a whole B : is the predominant determinant of individual security risk premium C : cannot be mitigated via diversification D : can be mitigated via diversification Correct Answer : D 30 : What is the standard deviation of {5, 5, 5, 5, 5}? A : 2.5 B:5 C:1 D:0 Correct Answer : D 31 : A set of numbers that is will have a A : perfectly consistent; nonzero B : inconsistent; low C : consistent; high

standard deviation.

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D : consistent; low Correct Answer : D 32 : In order to completely eliminate the risk (i.e., a portfolio standard deviation of zero) in a twoasset portfolio, the correlation coefficient between the securities must be . A : less than +1.0 B : equal to 0.0 C : less than 0.0 D : equal to 1.0 Correct Answer : D 33 : A portfolio is efficient if which of the following is true? A : For a given standard deviation, there is no other portfolio with a higher expected return. B : For a given expected return, there is no other portfolio with a lower standard deviation. C : For a given expected return, the correlation coefficient is equal to +1.0. D : All of these are correct. Correct Answer : D 34 : In general, when the correlation coefficient between the returns on two securities is the risk of a portfolio is the weighted average of the total risk of the two individual securities. A : equal to +1.0; equal to B : less than +1.0; greater than C : greater than 1.0; less than D : None of these are correct

Correct Answer : A 35 : An increase in the expected future inflation rate has the effect of . A : increasing the slope of the security market line B : shifting the security market line upward by the amount of the expected increase in inflation C : increasing systematic risk D : None of these are correct Correct Answer : B 36 : An increase in uncertainty regarding the future economic outlook has the effect of A : increasing the slope of the security market line B : shifting the security market line upward C : reducing risk D : None of these are correct

Correct Answer : A 37 : Empirical studies of the Capital Asset Pricing Model have produced A : universally adoring B : mixed C : mostly negative D : mostly positive Browsegrades.net

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Correct Answer : B 38 : A probability distribution assigns probabilities to a limited number of outcomes. A : discrete B : continuous C : lazy D : systematic Correct Answer : A 39 : The security returns from multinational companies tend to have those of domestic companies. A : more B : less options with C : less D : neither more nor less

systematic risk than

Correct Answer : C 40 : An important risk dimension other than variability of returns that motivates investors is . A : standard deviation B : beta C : risk of failure D : coefficient of variation Correct Answer : C 41 : Investors can obtain high returns in their investments if they A : use hedging techniques B : assume high risks C : invest only international securities D : invest in legal Ponzi type securities

Correct Answer : B 42 : The term structure of interest rates is the pattern of interest rate yields for securities that differ only in . A : default risk B : liquidity premiums C : the yield to maturity D : the length of time to maturity Correct Answer : D 43 : The theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity. A : MacGuffin B : market segmentation C : expectations D : liquidity premium Correct Answer : D Browsegrades.net

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44 : The maturity premium reflects a preference by many lenders for A : shorter maturities B : reducing yields C : high yield securities D : longer maturities

Correct Answer : A 45 : The default risk premium reflects the fact that . A : the premium remains constant over time B : there is a positive relationship between risk and maturity C : there is a positive relationship between default risk and required returns D : the premium varies depending on the time to maturity Correct Answer : C 46 : The business risk of a firm refers to the . A : results from using fixed-cost sources of funds B : variability in the price of a firms securities C : variability in the firms operating earnings over time D : influence of government regulations on business earnings Correct Answer : C 47 : The business risk of a firm refers to the A : maturity B : default C : seniority D : financial

Correct Answer : B 48 : The ability of an investor to buy and sell a companys securities quickly and without a significant loss of value is known as the risk. A : financial B : marketability C : business D : security Correct Answer : B 49 : According to the , long-term interest rates are a function of expected short-term interest rates. A : maturity theory B : expectations theory C : market segmentation theory D : preferred habitat theory Correct Answer : B 50 : The term structure of interest rates is related to the A : default Browsegrades.net

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B : seniority C : marketability D : maturity Correct Answer : D 51 : The theory holds that the securities markets are demarcated by maturity. A : boondoggle B : liquidity premium C : expectations D : market segmentation Correct Answer : D 52 : The expectations, liquidity premium, and market segmentation theories all attempt to A : account for the differences between systematic and unsystematic risks in the securities market B : define investors required rates of return C : predict the values of effective interest rates D : explain the shape of the yield curve Correct Answer : D 53 : Common stockholders require a higher rate of return than do holders of Aaa-rated bonds. This reflects which type of risk premium? A : maturity B : default C : seniority D : marketability Correct Answer : C 54 : The theory of the yield curve takes into account the supply and demand interactions between buyers and lenders of securities. A : expectations B : market segmentation C : preferred habitat D : liquidity premium Correct Answer : B 55 : Business risk is influenced by all the following factors EXCEPT A : variability in interest expenses B : variability in sales C : diversity of its product line D : choice of production technology

Correct Answer : A 56 : can be achieved by investing in a set of securities that have different risk-return characteristics. A : Indexing B : Capital Asset pricing Browsegrades.net

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C : Diversification D : Asset allocation Correct Answer : C 57 : On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by . A : lending money B : borrowing money C : reducing risk D : investing in index funds Correct Answer : B 58 : On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by . A : 8% B : 0% C : 10% D : 40% Correct Answer : A 59 : On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by . A : 45.6% B : 20.9% C : 2.2% D : 21.4% Correct Answer : D 60 : On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by . A : 0.0 B : 2.68 C : 2.61 D : 0.275 Correct Answer : B 61 : The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning more than 21% on FTC common stock. (Note: Table V is required to work this problem.) A : 1.00 B : 0.8413 C : 0.0013 D : 0.1587 Correct Answer : D 62 : The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of Browsegrades.net

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earning a negative rate of return (i.e. less than 0%) on FTC common stock. (Note: Table V is required to work this problem.) A : 0.0228 B : 2.00 C : 0.5000 D : 0.9772 Correct Answer : A 63 : Elephant Company common stock has a beta of 1.2. The risk-free rate is 6%, and the expected market rate of return is 12%. Determine the required rate of return on the security. A : 7.2% B : 14.4% C : 19.2% D : 13.2% Correct Answer : D 64 : An investor plans to invest 75% of her funds in the common stock of Gamma Industries and 25% in Epsilon Company. The expected return on Gamma is 12%, and the expected return on Epsilon is 16%. The standard deviation of returns for Gamma is 8% and for Epsilon is 12%. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the expected return on the investors portfolio. A : 14% B : 12% C : 13% D : 9% Correct Answer : C 65 : An investor plans to invest 75% of her funds in the common stock of Gamma Industries and 25% in Epsilon Company. The expected return on Gamma is 12%, and the expected return on Epsilon is 16%. The standard deviation of returns for Gamma is 8% and for Epsilon is 12%. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the standard deviation of returns for this investors portfolio. A : 73.8% B : 6.71% C : 3.00% D : 8.59% Correct Answer : D 66 : Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omegas stock has a beta of 0.8. A : 10.8% B : 4.8% C : 48.0% D : 16.8% Correct Answer : B 67 : The return expected from a risky investment is 24%, and the standard deviation of this return is 17%. If returns from this investment are normally distributed, what is the probability that Browsegrades.net

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the investment may earn a negative rate of return? (Note: Table V is required to work this problem.) A : 8.33% B : 7.93% C : 6.88% D : 5.44% Correct Answer : B 68 : The expected rate of return for 3COM is 18%, with a standard deviation of 10.98%. The expected rate of return for Just the Fax is 26%, with a standard deviation of 15.86%. Which firm would be considered the riskier from a total risk perspective? A : 3COM B : Just the Fax C : Neither, as both have the same risk D : Cannot be determined Correct Answer : C 69 : Don has $3,000 invested in AT&T with an expected return of 11.6%; $10,000 in IBM with an expected return of 12.8%; and $6,000 in GM with an expected return of 12.2%. What is Dons expected return on his portfolio? A : 12.42% B : 12.20% C : 11.81% D : Cannot be determined Correct Answer : A 70 : Sallys broker told her that the expected return from her portfolio was 14.2%. If 40% of her securities have an expected return of 10.3% and 20% have an expected return of 12.8%, what is the expected return of the remaining portion of her portfolio? A : 20.9% B : 18.8% C : 12.5% D : Cannot be determined Correct Answer : B 71 : Dana has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28, and the beta of the riskiest security is 1.75. Dana wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security? A : 1.21 B : 0.91 C : 0.73 D : 1.62 Correct Answer : C 72 : A college student owns two securities: Apple and Coca- Cola. Apple has an expected return of 15%, with a standard deviation of those returns being 11%. Coca-Cola has an expected return of 12% and a standard deviation of 7%. The correlation of returns between Browsegrades.net

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Apple and Coca-Cola is 0.81. If the portfolio consist of $6,000 in Coca-Cola and $4,000 in Apple, what is the expected standard deviation of portfolio returns? A : 8.18% B : 13.20% C : 8.60% D : 9.71% Correct Answer : A 73 : A college student owns two securities: Apple and Coca- Cola. Apple has an expected return of 15%, with a standard deviation of those returns being 11%. Coca-Cola has an expected return of 12% and a standard deviation of 7%. The correlation of returns between Apple and Coca-Cola is 0.81. If the portfolio consist of $6,000 in Coca-Cola and $4,000 in Apple, what is the expected standard deviation of portfolio returns? A : 57% B : 47% C : 43% D : 53% Correct Answer : C 74 : Over the 10-year period from 1978 through 1987, the compound annual rate of return on U.S. Treasury bills was 9.17%. Over the same time period, the average annual inflation rate was 6.39%. Therefore, the . A : inflation premium was 2.78 percentage points B : real expected rate of return was 9.17 percentage points C : realized real rate of return was 2.78 percentage points D : required rate of return was 6.39 percentage points Correct Answer : C 75 : The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security? A : 9.6% B : 10.0% C : 8.5% D : 8.9% Correct Answer : C 76 : If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is . A : 2.86% B : 7.02% C : 4.70% D : 6.48% Correct Answer : A 77 : The yield to maturity on ACL bonds maturing in 2025 is 8.75%. The yield to maturity on a similar maturity U.S. Government Treasury bond is 7.06%, and the yield on Treasury bills is Browsegrades.net

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6.51%. What is the default risk premium on the ACL bond? A : 2.24% B : 1.69% C : 0.55% D : 8.75% Correct Answer : B 78 : The risk-free rate of return is 5.51%, based on an expected inflation premium of 2.54%. The expected return on the market is 12.8%. What is the required rate of return for Envoy common stock which has a beta of 1.35? A : 6.98% B : 16.24% C : 15.35% D : 12.80% Correct Answer : C 79 : The risk-free rate of return is 5.51%, based on an expected inflation premium of 2.54%. The expected return on the market is 12.8%. What is the required rate of return for Envoy common stock which has a beta of 1.35? A : 1.05 B : 1.00 C : 1.10 D : 0.95 Correct Answer : A 80 : Twin City Knitting (TCK) pays a current dividend of $2.20, and dividends are expected to grow at a rate of 7% annually in the foreseeable future. The beta of TCK is 1.2. If the risk-free rate is 9.2% and the market risk premium is 6%, at what price would you expect TCKs common stock to sell? A : $14.35 B : $33.63 C : $23.40 D : $25.04 Correct Answer : D 81 : Micromatic is considering expanding into a new product area. Micromatics current beta is 1.2 and its beta is expected to increase to 1.45 after the expansion. The long-term growth rate of the firms earnings is expected to increase from 6.5% to 10%. Micromatics current dividend is $1.70 per share, the current risk-free rate is 9.1%, and the expected market return is 12.9%. Should Micromatic undertake the planned expansion? A : No, stock price decreases $10.15. B : Yes, stock price increases $15.27. C : Yes, stock price increases $0.45. D : No, stock price decreases $15.27. Correct Answer : B 82 : Quick Start Inc. is expected to pay a dividend of $1.05 next year and dividends are expected to continue their 7% annual growth rate. The SML has been estimated as follows:kj = Browsegrades.net

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0.08 + 0.064jAssuming Quick Start has a beta of 1.1, what would happen to its stock price if inflation expectations went from the current 5% to 8%? A : It would decrease $8.14. B : It would decrease $3.55. C : It would decrease $3.18. D : The stock price will not change. Correct Answer : B 83 : Richtex Brick has a current dividend of $1.70, and the market value of its common stock is $28. The expected market return is 13%, and the risk-free rate is 9%. If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtexs dividends assuming a constant growth valuation model is appropriate for Richtex? A : 4.93% B : 4.65% C : 5.37% D : 5.41% Correct Answer : B 84 : AKAs stock is currently selling for $11.44. This year the firm had earnings per share of $2.80, and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10%, and the expected market return is 14.2%. What will be the effect on the price of AKAs stock if systematic risk increases by 40%, all other factors remaining constant? A : an increase of $1.14 B : a decrease of $0.40 C : a decrease of $1.99 D : Cannot determine from the given data Correct Answer : C 85 : AKAs stock is currently selling for $11.44. This year the firm had earnings per share of $2.80, and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10%, and the expected market return is 14.2%. What will be the effect on the price of AKAs stock if systematic risk increases by 40%, all other factors remaining constant? A : 13.5%; 15% B : 13.8%; 14.4% C : 13.8%; 10.6% D : 13.5%; 8.7% Correct Answer : C 86 : Gates Industries current common stock dividend (year 0) is $2.50 per share and is expected to continue growing at a rate of 5% per year for the foreseeable future. Currently the risk-free rate is 7.5% and the estimated market risk premium (i.e., km - rf) is 8.3%. Value Line has estimated Gates Industries beta to be 1.10. Determine the expected price for Gates Industries, common stock. A : $21.50 B : $15.03 C : $15.78 D : $22.57 Browsegrades.net

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Correct Answer : D 87 : An investor who believes the economy is slowing down wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21, and the beta of the riskiest security is 1.62. What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80? A : 1.14 B : 1.18 C : 1.05 D : 1.10 Correct Answer : A 88 : Assume that the rate of return on Calengry common stock over the coming year is normally distributed with an expected value of 16% and a standard deviation of 20%. What is the probability of earning a negative rate of return? (Note: Table V is required to work this problem.) A : 10.56% B : 40.13% C : 21.19% D : 3.59% Correct Answer : C 89 : Assume that the rate of return on Calengry common stock over the coming year is normally distributed with an expected value of 16% and a standard deviation of 20%. What is the probability of earning a negative rate of return? (Note: Table V is required to work this problem.) A : 0.93 B : 0.85 C : 1.00 D : 1.14 Correct Answer : C 90 : HDTV has planned on diversifying into the VR field. As a result, HDTVs beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firms earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk-free rate, rf, is 7%; and the current dividend, Do, is $0.50. Should HDTV go into the VR field? A : No, stock price decreases $7.82. B : Yes, stock price increases $9.89. C : Yes, stock price increases $3.81. D : No, stock price decreases $3.78. Correct Answer : B 91 : HDTV has planned on diversifying into the VR field. As a result, HDTVs beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firms earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk-free rate, rf, is 7%; and the current dividend, Do, is $0.50. Should HDTV go into the VR field? A : 14% and 15.67% B : 14.8% and 9.44% C : 13.2% and 10.54% D : 13.1% and 9.67% Browsegrades.net

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Correct Answer : C 92 : Jim Bowles is an investor who believes the economy is gaining strength and therefore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000, and the current beta of the portfolio is 1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then? A : 1.03 B : 1.07 C : 1.08 D : 1.04 Correct Answer : B 93 : Kermit Industries current common stock dividend is $1.35 per share, and the dividend is expected to grow at 6% per year into the foreseeable future. Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated KIs beta to be 1.10. Compute the expected price for KIs common stock. A : $17.20 B : $10.33 C : $18.23 D : $49.35 Correct Answer : C 94 : Kermit Industries current common stock dividend is $1.35 per share, and the dividend is expected to grow at 6% per year into the foreseeable future. Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated KIs beta to be 1.10. Compute the expected price for KIs common stock. A : 1.00 B : 1.12 C : 1.09 D : 1.11 Correct Answer : D 95 : The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafils stock sells for $40 per share, and there are 10 million shares outstanding. Matras stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firms beta?MVS = $40(10,000,000) = $400,000,000MVM = $60(2,000,000) = $120,000,000 A : 1.00 B : 1.14 C : 1.05 D : 1.16 Correct Answer : B 96 : Lotte Group is planning on diversifying into the transportation industry. As a result, Lottes beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firms earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lottes current dividend is $1.30, should Lotte diversify into the Browsegrades.net

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transportation industry? A : No, stock price does not increase. B : No, stock price declines about $10.11. C : Yes, stock price increases about $19.42. D : Yes, stock price increases by about $26.27. Correct Answer : D 97 : Security A offers an expected return of 14%, with a standard deviation of 8%. Security B offers an expected return of 11%, with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A? A : 55% B : 60% C : 65% D : 45% Correct Answer : B 98 : Which of the following statements is (are) correct? I. Unsystematic risk can be eliminated through diversification.II. Unsystematic risk is the relevant portion of an assets risk attributable to market factors that affect all firms, like inflation, political events, etc. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 99 : Correlation is a statistical measure of the relationship between a series of numbers representing data. Which of the following statements about correlation is (are) correct? I. Perfectly negatively correlated describes two negatively correlated stocks that have a correlation coefficient of 1.II. Perfectly positively correlated describes two positively correlated stocks that have a correlation coefficient of 0. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 100 : Total risk of a security can be viewed as consisting of two parts. Which of the following apply? I. verifiable riskII. non-verifiable risk A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 101 : All of the following statements about risk are correct EXCEPT A : risk can be defined as the chance for financial loss B : the term risk is used interchangeably with uncertainty Browsegrades.net

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C : risk refers to the certainty of returns associated with a given asset D : the more certain the return from an asset, the less variability and therefore less risk Correct Answer : C 102 : Which of the following statements regarding risk is (are) correct? I. A portfolio of two negatively correlated assets has less risk than either of the individual assets, and risk could be further reduced to 0 or below.II. There is no case where creating a portfolio of assets will result in greater risk than that of the riskiest asset included in the portfolio. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 103 : What kind of probability distribution shows all possible outcomes for a given event? A : categorical B : expected value C : bar chart D : continuous Correct Answer : D 104 : The portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the risk. A : maturity B : default C : seniority D : marketability Correct Answer : B 105 : An investor, by investing in combinations of stocks, develops a A : simple B : structured C : diversified D : energetic

portfolio.

Correct Answer : C 106 : An investor, by investing in combinations of stocks, develops a A : 1.11 B : 0.95 C : 2.15 D : 1.43

portfolio.

Correct Answer : D 107 : An investor, by investing in combinations of stocks, develops a A : 12.61% B : 8.27% C : 10.11% Browsegrades.net

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D : 14.84% Correct Answer : D 108 : An investor, by investing in combinations of stocks, develops a A : 16.82% B : 20.76% C : 10.15% D : 18.11%

portfolio.

Correct Answer : B 109 : A diversified portfolio has many stocks, as opposed to a single stock. Diversification can occur with as few as stocks. A:5 B : 10 C : 20 D : 100 Correct Answer : C 110 : Which of the following would be considered a risk-free investment? A : U.S. Treasury securities B : blue chip stocks C : AAA rated corporate bonds D : real estate Correct Answer : A 111 : The normal probability distribution is characterized by a A : bell curve B : bar chart C : logarithmic curve D : step graph

Correct Answer : A 112 : When looking at measures of risk and return, the notation represents A : risk B : return C : standard deviation D : probability

Correct Answer : C

ESSAY 113 : What is an efficient portfolio? Correct Answer : A portfolio is efficient if, for a given standard deviation, there is no other portfolio with a higher expected return, or for a given expected return, there is no other portfolio Browsegrades.net

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with a lower standard deviation. An efficient portfolio maximizes return for a given level of risk, or minimizes risk for a given rate of return. 114 : List types of events that influence systematic (nondiversifiable) risk. Correct Answer : Events that are broad in scope and affect the market as a whole will impact systematic risk. These events include:warinflationpolitical eventsinterest rate changesinternational incidentschanges in investor expectations about the overall economy 115 : List the various risk elements that are considered when determining the risk premium. Correct Answer : The risk elements include:1. maturity risk premium2. default risk premium3. seniority risk premium4. marketability risk premium 116 : How can standard deviation, a statistical measure of dispersion, be used in investment analysis? Correct Answer : The standard deviation can be used to measure the variability of a return from an investment. It gives an indication of the risk involved in the asset or security. The larger the standard deviation, the more variable an investment’s return and thus the riskier the investment. 117 : Explain marketability risk and marketability premium. Correct Answer : Marketability risk refers to the ability of an investor to buy and sell a company’s securities quickly and without a significant loss of value. Usually the stock of companies listed on the NYSE is considered easy to sell and has a ready buyer. The marketability risk premium is that extra interest rate charged on loans to companies whose stock may not be easy to sell. The lender, in order to be adequately compensated for the risk taken in making the loan, receives a higher return. 118 : Why is risk an increasing function of time? Correct Answer : Investment decisions require that returns be forecasted several years into the future. The riskiness of these forecasted returns may be thought of as an increasing function of time. Returns that are generated early can generally be predicted with more certainty than those that are anticipated farther out into the future. The farther into the future that performance is forecasted, the greater the chance that the forecast will be incorrect. Even though cash flows from an investment or project may be equal each year, it is reasonable to assume that the riskiness of these flows increases over time as more and more presently unknown variables have a chance to affect the investment’s or project’s cash flows.

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Chapter 10. Capital Budgeting: Decision Criteria and Real Option Considerations 1 : Sale of an asset for less than book value creates an operating loss that effectively reduces the companys taxes by an amount equal to times . A : one-half the loss; the companys marginal tax rate B : the loss; one minus the companys marginal tax rate C : one-half the loss; one minus the companys marginal tax rate D : the loss; the companys marginal tax rate Correct Answer : D 2 : The value of resources used in an investment project should be measured in terms of their cost. A : acquisition B : historical C : opportunity D : depreciated Correct Answer : C 3 : There is neither a gain nor a loss on the sale of a depreciable asset for an amount exactly equal to its . A : acquisition cost B : tax book value C : opportunity cost D : historical cost Correct Answer : B 4 : The curve is a schedule of projects arranged in rates of return. A : investment opportunity; ascending B : marginal cost of capital; ascending C : investment opportunity; descending D : marginal cost of capital; descending

order according to their expected

Correct Answer : C 5 : Which of the following would not be classified as a capital expenditure for decision-making purposes? A : purchase of a building B : investment in a management training program C : purchase of 90-day Treasury bills D : development of a major advertising campaign Correct Answer : C 6 : A firms cost of capital is A : an important financial ratio B : equal to 10 percent

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C : rarely used in practice D : an important input in the capital budgeting process

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Correct Answer : D 7 : The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of . A : independent projects B : mutually exclusive projects C : contingent projects D : separable projects Correct Answer : B 8 : Which of the following is NOT a major difficulty in implementing the basic capital budgeting model? A : determining the schedule of available projects before a decision on any one project can be made B : accounting for the risk of individual projects C : projecting the cost of funds over the investment decision horizon D : choosing an appropriate criterion for selecting among various investment alternatives Correct Answer : D 9 : Which of the following is NOT a major step in the capital budgeting process? A : generating investment project proposals B : estimating cash flows C : analyzing the effect of a project on the firms financial ratios D : performing a project post-audit and review Correct Answer : C 10 : Which of the following is a basic principle when estimating a projects cash flows? A : Cash flows should be measured on a pretax basis B : Cash flows should ignore depreciation because it is a noncash charge C : Only direct effects of a project should be included in cash flow calculations D : Cash flows should be measured on an incremental basis Correct Answer : D 11 : Which of the following items is NOT considered as a part of the net investment calculation? A : the first years net cash flow B : increase in net working capital C : salvage of an old piece of equipment that is being replaced D : installation and shipping charges Correct Answer : A 12 : The effect of a one-dollar increase in depreciation expenses is to cash flows by one dollar. A : increase; less than B : increase; exactly C : decrease; more than D : increase; more than Browsegrades.net

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Correct Answer : A 13 : The dollar amount of interest charges is . A : always considered in the net cash flow calculation B : normally not considered in the net cash flow calculation C : always considered as a part of the net investment D : never a consideration Correct Answer : B 14 : Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of . A : independent projects B : mutually exclusive projects C : contingent projects D : marginal projects Correct Answer : B 15 : The determination of net cash flows (NCF) should NEVER include A : changes in depreciation B : changes in operating costs C : interest charges D : indirect effects Correct Answer : C 16 : Which of the following is generally considered a problem associated with cash flow estimation? A : Uncertainty about the value of future cash flows B : Bias in the estimation of cash flows C : Different levels of uncertainty among different types of projects D : All of these are correct Correct Answer : D 17 : Most firms choose accelerated depreciation methods because . A : reported net income is higher B : tax payments are made sooner, resulting in a lower deferred tax liability C : operating expenses are correspondingly reduced D : income taxes are deferred Correct Answer : D 18 : Cash flows for all investment projects should be projected over the A : MACRS recovery period B : depreciable life C : economic life D : smaller of depreciable or economic lives

of the project.

Correct Answer : C 19 : When a firm sells an asset for

, it realizes a capital gain and must pay income taxes on Browsegrades.net

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it. A : book value B : less than book value C : more than book value but less than original cost D : more than its original cost Correct Answer : D 20 : is the term used when the initial cost of all acceptable capital budgeting projects is greater than the total funds the firm has available. A : Profit maximization B : Funds constraint C : Mutually exclusive D : Contingent Correct Answer : B 21 : In estimating the net investment, an outlay that has already been made is known as a(n) . A : sunk cost B : cash outflow C : opportunity cost D : expansion cost Correct Answer : A 22 : Depreciation is based on the asset cost plus all of the following EXCEPT A : shipping costs B : increase in inventory C : installation D : cost of attached equipment acquired at the same time

Correct Answer : B 23 : Depreciation reported profits and it A : increases; reduces B : reduces; reduces C : reduces; increases D : increases; increases

taxes paid by a firm.

Correct Answer : B 24 : If a firm sells an asset for less than its book value, A : there are no tax consequences B : the loss is treated as lost depreciation C : the loss reduces depreciation expenses D : the loss may be used to offset operating income

Correct Answer : D 25 : The the amount of depreciation charged in a period, the income. A : greater; lower Browsegrades.net

will be the firms taxable

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B : lower; lower C : lower; greater D : greater; higher Correct Answer : A 26 : In terms of the capital budgeting process, net cash flows are the A : net cash outlays required to place a project in service B : funds invested in additional assets C : incremental changes in a firms cash flow D : outlays that have already been made

Correct Answer : C 27 : A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that . A : few firms prepared formal cash flow estimates B : the majority produced detailed cash flow projections C : a majority estimated cash flows for a range of estimates D : about 50 percent made comparisons between actual and projected cash flows Correct Answer : B 28 : Depreciation . A : does not affect cash flows B : does not affect profits C : is not a cash outflow D : is a cash inflow Correct Answer : C 29 : The capital budgeting process is very important to the firm because it A : highlights the impacts of a project on net income B : essentially plots the companys future direction C : is used in working capital analysis D : indicates the net cash flows available for employee education

Correct Answer : B 30 : A(n) is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year. A : depreciation charge B : operating expenditure C : capital expenditure D : capital gain Correct Answer : C 31 : The set of investment projects arranged in descending order according to their expected rates of return is known as the . A : marginal cost of capital schedule B : schedule of mutually exclusive projects C : schedule of contingent projects Browsegrades.net

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D : simplified capital budgeting model Correct Answer : D 32 : A(n) project is one whose acceptance is dependent on the adoption of one or more other projects. A : contingent B : mutually exclusive C : independent D : perfectly correlated Correct Answer : A 33 : The net cash flows for any year during the life of a capital expenditure project are equal to the change in plus the change in . A : earnings before interest and taxes; depreciation B : earnings before taxes; depreciation C : earnings after taxes; depreciation D : revenues; costs Correct Answer : C 34 : The net investment calculation for an project normally includes A : asset expansion; pretax proceeds from the sale of the old asset B : asset replacement; pretax proceeds from the sale of the old asset C : asset expansion; after-tax proceeds from the sale of the old asset D : asset replacement; after-tax proceeds from the sale of the old asset

Correct Answer : D 35 : The total accumulated net working capital of a project is normally recovered in the projects year. A : last B : first C : second D : second to last Correct Answer : A 36 : The net investment calculation for an asset replacement decision normally includes any . A : after-tax salvage value of the old asset B : increase in net working capital C : installed asset costs D : All of these are correct Correct Answer : D 37 : When calculating the net cash flow in a projects expected final year, the A : recovery of any working capital invested is disregarded B : after-tax salvage value of any project equipment is considered C : remaining principal on any borrowed funds is considered D : sales proceeds from any land associated with the project is disregarded Browsegrades.net

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Correct Answer : B 38 : When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are . A : performing management by exception B : increasing their total compensation C : departing from the shareholder wealth maximization goal D : increasing their confidence level Correct Answer : C 39 : Capital expenditure projects may be classified in all the following types EXCEPT A : growth opportunities B : obligations to meet legal requirements C : cost reduction opportunities D : capital rationing

Correct Answer : D 40 : have cash flow patterns with more than one sign change. A : Conventional projects B : Nonnormal projects C : Normal projects D : Contingent projects Correct Answer : B 41 : A drill press costs $30,000 and is expected to have a 10-year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firms cash operating costs by $4,500 per year. Assuming the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press. A : $4,500 B : $900 C : $5,700 D : $3,900 Correct Answer : D 42 : An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000, and the firms tax rate is 40 percent. Determine the projects annual net cash flows. A : $48,000 B : $66,000 C : $36,000 D : $52,000 Correct Answer : B 43 : Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost Browsegrades.net

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$500,000. The firms marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000. A : $380,000 B : $397,500 C : $400,000 D : $418,000 Correct Answer : C 44 : Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,000 for new equipment in the second year. If the firms cost of capital is 12 percent, what is the present value of the net investment at time 0? A : $1,460,000 B : $1,132,070 C : $1,267,720 D : $300,000 Correct Answer : C 45 : In-Step Video is considering expanding its video rental library to 8,000 DVDs. The purchase price of the additional DVDs will be $80,000, and the shipping cost is another $4,000. To house the media, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In-Step Video for this project? A : $95,000 B : $99,000 C : $84,000 D : $107,000 Correct Answer : B 46 : What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year. A : $48,300 B : $54,900 C : $43,500 D : $51,000 Correct Answer : A 47 : Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment? A : $1,030,000 B : $1,163,000 C : $1,033,000 D : $996,000 Browsegrades.net

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Correct Answer : D 48 : Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight-line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent. A : $900 B : $2,000 C : $127,000 D : $25,000 Correct Answer : B 49 : The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent. A : $15,000 B : $18,000 C : $27,000 D : $21,000 Correct Answer : B 50 : Jim Bos currently has annual cash revenues of $240,000 and annual operating expenses of $185,000, including $35,000 in depreciation. The firms marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000, which will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bos annual incremental after-tax net cash flows. A : $25,000 B : $20,800 C : $93,000 D : $19,000 Correct Answer : A 51 : Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present handmade production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent. A : $296,800 B : $136,200 C : $192,200 D : $209,200 Correct Answer : D 52 : LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will Browsegrades.net

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replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent. A : $47,000 B : $45,000 C : $48,000 D : $55,000 Correct Answer : A 53 : LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first-year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year, with no increase in operating cost. If LISPs marginal tax rate is 40 percent, what is the net cash flow in the first year? A : $22,665 B : $19,000 C : $18,666 D : $21,500 Correct Answer : C 54 : Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year, and operating costs are expected to increase by $15,000 per year. If the firms marginal tax rate is 34 percent and the first years depreciation rate is 20 percent, what is the net cash flow in the first year. A : $264 B : $7,984 C : $19,864 D : $26,034 Correct Answer : C 55 : What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40 percent. A : $29,000 B : $31,400 C : $32,600 D : $34,505 Correct Answer : B 56 : Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allens marginal tax rate is 40%. Determine the projects annual net cash flows. A : $150,000 B : $110,000 C : $90,000 D : $60,000 Correct Answer : B Browsegrades.net

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57 : Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. Bakers marginal tax rate is 40%. Determine the annual net cash flows generated by the lathe. A : $11,400 B : $9,000 C : $600 D : $5,400 Correct Answer : A 58 : Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year. Calculate the projects net investment. A : $81,000 B : $125,000 C : $131,000 D : $135,000 Correct Answer : D 59 : Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%. Use the rounded MACRS schedule listed below.(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) A : $3,754 B : $7,498 C : $2,560 D : $16,502 Correct Answer : C 60 : Rupp Pumps is purchasing an extruder for $80,000. The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators. The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable. What is the net investment for this project? A : $108,000 B : $102,000 C : $98,000 D : $99,000 Correct Answer : B 61 : Airstat is replacing an old stamping line that cost $80,000 five years ago, with a new, more efficient machine that will cost $225,000. Shipping and installation will cost an additional $20,000. The old machine has a book value of $15,000 but will be sold as scrap for $5,000. The new machine will be depreciated with a 7-year life under MACRS guidelines. With the increased production, inventories will increase $4,000, accounts receivable will increase $16,000, and accounts payable will increase $14,000. If Airstat has a marginal tax rate of 40 percent, what is Browsegrades.net

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the net investment? A : $274,000 B : $242,000 C : $260,000 D : $274,000 Correct Answer : B 62 : Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000. The line will be depreciated as a 7-year MACRS asset. With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000. The MACRS depreciation rate during the fifth year is 8.93%, and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset. Assume the firms marginal tax rate is 40 percent and that the company does get to take the full benefit of year 5 depreciation. If Ripstart expects to sell the new machine at the end of year 5 for $40,000, what will be the net cash flow in the fifth year? A : $29,751 B : $53,736 C : $75,615 D : $69,751 Correct Answer : C 63 : Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The companys marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased. A : $19,000 B : $16,600 C : $17,400 D : cannot be computed Correct Answer : C 64 : Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipments estimated salvage value at the end of the project is $9,000. The equipments $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The companys marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project. A : $32,000 B : $27,000 C : $24,000 D : $18,000 Correct Answer : C 65 : Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipments estimated salvage Browsegrades.net

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value at the end of the project is $9,000. The equipments $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The companys marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project. A : $14,350,000 B : $12,356,650 C : $9,327,500 D : $8,035,788 Correct Answer : B 66 : Anderson Clayton will purchase a new pellet mill that will replace an older, less efficient mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines to the new mill will cost an additional $22,000. The old mill has a book value of $25,000 and can be sold for $12,000. The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill? A : $392,800 B : $412,800 C : $374,800 D : $398,000 Correct Answer : A 67 : A Lotta Bread Corp. is replacing an entire baking line that was purchased for $420,000 and currently has a book value of $60,000. The new more efficient line will cost $940,000 installed and can be depreciated as a 7-year MACRS asset. With the increased efficiency, Lotta expects annual revenues to increase by $425,000 and operating expenses to increase by $170,000. The older machine, which was being depreciated at the straight-line rate of $20,000/year, will be sold for $30,000. What are the net cash flows for year 2? Assume the firms marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%. A : $26,996 B : $332,206 C : $237,082 D : $383,206 Correct Answer : C 68 : Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The companys marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased. A : $252,000 B : $228,000 C : $260,000 D : $248,000 Correct Answer : D 69 : Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can Browsegrades.net

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be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. (The depreciation rate for year one is 10 percent for this asset.) The companys marginal tax rate is 40%. If the new extractor is purchased, annual revenues will increase by $10,000 and annual operating expenses will decrease by $10,000. What is the net cash flow in year 1? A : $7,600 B : $19,600 C : $24,200 D : $600 Correct Answer : B 70 : Com-Cat is considering expanding their current production facility. This year Com-Cat had an operating income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and capital expenditures of $160,000. Next year, after the expansion is completed, operating income is expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to $61,000. To support the expansion, cash is expected to increase by $5,000, accounts receivable by $12,000, inventories by $8,000, and accounts payable by $7,000. What is the change in Com-Cats net operating cash flows attributable to this project if the tax rate is 40%? A : $80,400 B : $88,000 C : $106,000 D : $70,000 Correct Answer : D 71 : The Weis Corp. purchased a new conveyor system to replace an older less automated system. The old system, which was 10 years old, was being depreciated on a straight-line basis over its 20-year life at $25,000 per year. The new system will be depreciated as a 7-year asset for MACRS purposes. The more efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year. Compute the net cash flows in year 3 for the new system. Assume a 40% tax rate. Use the rounded MACRS schedule listed below:(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) A : $71,840 B : $80,779 C : $68,600 D : $149,917 Correct Answer : A 72 : Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below:(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%) A : $170,000 B : $157,200 C : $202,514 D : $151,228 Correct Answer : B Browsegrades.net

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73 : Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below:(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) A : $250,000 B : $226,000 C : $221,298 D : $223,620 Correct Answer : D 74 : Pixaire purchased a new mixer to replace an older system. The older system, which cost $100,000, is 5 years old now and was being depreciated over a MACRS life at 7 years. The new mixer, which will cost $270,000, will also be depreciated as a 7-year asset for MACRS purposes. The new mixer is expected to increase revenues by $64,000 with no additional operating expenses. Determine the net operating cash flows in year 2 for the new mixer. Assume a 40% tax rate. Use the rounded MACRS schedule listed below:(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) A : $66,974 B : $66,124 C : $61,277 D : $64,229 Correct Answer : C 75 : Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less efficient one. The new machine will cost $240,000 including installation. The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property. It can be sold for $40,000. Compute the NINV for this project if KC has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below:(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%) A : $200,000 B : $197,386 C : $202,614 D : $216,000 Correct Answer : C 76 : Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below:(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%) A : $143,520 B : $135,520 C : $39,520 D : $47,520 Browsegrades.net

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Correct Answer : B 77 : The difference between a capital expenditure and an operating expenditure is that a capital expenditure . A : is expected to generate returns greater than 10% B : involves replacement of a money market account with three-month treasury bills. C : is expected to generate future cash benefits lasting longer than one year. D : involves a combined effort of the accounting department and the marketing department. Correct Answer : C 78 : Of the following, an example of a component of a firms cost of capital is A : repurchase of company stock B : investment of corporate funds into a money market account C : the purchase of another companys bonds D : the return on common stock required by investors

Correct Answer : D 79 : A contractor has a team of plumbers and assigns those plumbers to a new construction site. The fact that the plumbers are unavailable for any other job makes the construction site project a(n) project. A : independent B : qualified C : mutually exclusive D : contingent Correct Answer : C 80 : The of an asset are the cash flows that the asset could generate if it were not used in the project under consideration. A : sunk costs B : opportunity costs C : marginal costs D : net investments Correct Answer : B 81 : A term meaning that the firm has limited funds and must choose only those projects that will be profitable is . A : capital refunding B : capital debt C : capital rationing D : capital choice Correct Answer : C 82 : A poker player calls a large bet early in the hand and another large bet later in the hand. At the end of the hand, her opponent makes a small bet. The poker player is almost positive that her opponent has superior cards, but she decides to call the small bet anyway, reasoning that she cannot fold because she has already invested so much money in the hand. The poker players reasoning error is analogous to a manager violating which of the following principles of cash flow estimation? Browsegrades.net

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A : Sunk costs should not be considered when evaluating a project. B : Cash flows should be measured on an incremental basis. C : The value of resources used in a project should be measured in terms of their opportunity costs. D : All the indirect effects of a project should be included in the cash flow calculations. Correct Answer : A 83 : Projects are often classified based on the type of capital expenditure. All of the following are project classifications EXCEPT projects generated . A : by growth opportunities B : by cost reduction opportunities C : to meet legal requirements and health and safety standards D : to meet the needs of customers Correct Answer : D 84 : Most existing products become obsolete. For a firm to continue to grow, it must do all of the following EXCEPT . A : move all production to the firms existing facilities for economies of scale B : generate research and development investment proposals C : invest in marketing research D : invest in new plants Correct Answer : A 85 : Projects that begin with an initial investment and then are expected to generate a stream of cash inflows are considered projects. A : contingent B : nonconventional C : normal D : non-normal Correct Answer : C 86 : What type of tax consequence is associated with the recovery of net working capital? A : A firm must pay tax and a penalty. B : There is no tax consequence. C : The firm must pay capital gains tax. D : The firm must pay ordinary income tax. Correct Answer : B 87 : A conventional project can also be considered . A : a normal project B : a project that has both positive and negative cash flow patterns C : one that has a high required rate of return D : nonnormal project Correct Answer : A

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ESSAY 88 : List the steps that a firm uses in the capital budgeting process: Correct Answer : The steps in the process are:1. Generate capital investment project proposals.2. Estimate cash flows.3. Evaluate alternatives and select projects to be implemented.4. Review the project’s performance after it has been implemented, and post auditing the performance of the project after its termination. 89 : What are some of the different outlays that may be classified as capital expenditures? Correct Answer : 1. The purchase of new equipment, real estate, or a building for improved service or expansion purposes.2.The replacement of existing equipment.3.Expenditures for an advertising campaign.4.Expenditures for research and development.5.Investments in permanent increases of target inventory or levels of accounts receivable.6.Employee education and training7.The refunding of an old bond issue8.Lease-versus-buy analysis9.Merger and acquisition evaluation. 90 : What are the principles that should be applied when estimating cash flows for capital budgeting purposes? Correct Answer : 1. Cash flows should be measured on an incremental basis.2. Cash flows should be measured on an after-tax basis.3. All the indirect effects of a project should be included in the cash flow calculations.4. Sunk costs should not be considered when evaluating a project.5. The value of resources used in a project should be measured in terms of their opportunity costs. 91 : There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset. Describe the four ways and the tax impact. Correct Answer : 1. Sale of an asset for its book value: There is no gain or loss on the sale and thus no tax consequences.2.Sale of an asset for less than its book value: This results in a capital loss thus reducing the company’s tax liability equal to the loss times the company’s marginal tax rate.3.Sale of an asset for more than its book value but less than the original purchase price: The IRS treats this transaction as a recapture of depreciation and the firm’s taxes increase by the gain times the marginal tax rate.4.Sale of an asset for more than its original purchase price: This transaction results in recaptured depreciation for all money received up to the purchase price. The difference between the sale price and the original purchase price is treated as a capital gain, which is taxed at the capital gains rate for corporations. The end result is taxes due on the recaptured depreciation plus taxes due on the long-term capital gain. 92 : Why is depreciation beneficial to firms? Correct Answer : Depreciation benefits firms because it represents a noncash expense that is deductible for tax purposes. The more depreciation charged in a period, the lower the firm's taxable income. The lower a firm's taxable income, the lower a firm's tax obligation. Less money paid in taxes means more cash inflows. 93 : In classifying investment projects, there are several types of capital expenditures. List them. Correct Answer : Projects can be grouped as:1. Projects generated by growth opportunities.2. Browsegrades.net

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Projects generated by cost reduction opportunities.3. Projects generated to meet legal requirements and health and safety standards. 94 : Why should sunk costs not be considered when evaluating a project? Correct Answer : Sunk costs are outlays that have already been made. Because sunk costs cannot be recovered, they should not be considered in the decision to accept or reject a project. The only relevant costs associated with a project are the incremental outlays that will be made from the point of undertaking the project. 95 : What is the marginal cost of capital and why does the MCC schedule increase as more funds are sought in the capital markets? Correct Answer : The marginal cost of capital (MCC) is the cost of successive increments of capital acquired by the firm. The MCC schedule increases as more funds are sought in the capital markets. This increase is a result of:1. investors’ expectations about the firm’s ability to successfully undertake a large number of new projects.2. the business risk to which the firm is exposed because of its particular line of business.3. the firm’s financial risk, which is due to its capital structure.4. the supply and demand for investment capital in the capital market.5. the cost of selling new stock, which is greater than the cost of retained earnings. 96 : There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. List some of them. Correct Answer : The reasons that managers might produce biased cash flow estimates when preparing capital expenditure proposals are:1. The manager might be tempted to overestimate the revenues or underestimate the costs associated with the project if the manager is attempting to expand the resource base over which he or she has control.2. Because managerial compensation is sometimes tied to the span of job responsibilities, managers may be tempted to expand this span of control at the expense of other areas of the firm.3. Some firms tie employee compensation to performance relative to stated objectives. If a manager is confident that the best estimate of the cash flows from a proposed project is sufficiently large to guarantee project acceptance, the manager may be tempted to reduce these cash flow estimates to a level below the "most likely outcome" level, confident that the project will continue to be viewed as an acceptable investment and that it will be funded.

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Chapter 11. Capital Budgeting and Risk 1 : Multiple internal rates of return can occur when there is (are) . A : large abandonment costs at the end of a projects life B : a major shutdown and rebuilding of a facility sometime during its life C : more than one sign change in the pattern of cash flows over a projects life. D : All of these are correct Correct Answer : D 2 : The measures the present value return for each dollar of initial investment. A : payback period B : internal rate of return C : net present value D : profitability index Correct Answer : D 3 : The payback method is at best a crude measure of the risk of a project because it fails to consider the of a projects returns. A : liquidity B : variability C : timing D : magnitude Correct Answer : B 4 : According to the profitability index criterion, a project is acceptable if its profitability index is greater than . A : 1 plus the cost of capital B:0 C : or equal to 1 D : 1.1 Correct Answer : C 5 : The payback period of an investment is defined as . A : the number of years required for cumulative profits from a project to equal the initial outlay B : the number of years required for the cumulative cash flows from a project to equal the initial outlay C : the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered D : a period of time sufficient to earn a rate of return equal to the firms cost of capital Correct Answer : B 6 : The advantages of the payback approach include all of the following EXCEPT it A : is easy to compute B : considers a projects liquidity C : considers cash flows, not net income D : provides an objective measure of profitability Browsegrades.net

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Correct Answer : D 7 : The disadvantages of the payback approach include . A : cash flows after the payback period are ignored in the calculation B : payback ignores the time value of money C : payback fails to provide an objective decision-making criterion D : All of these are correct Correct Answer : D 8 : One weakness of the internal rate of return approach is that it . A : does not directly consider the timing of the cash flows from a project B : fails to provide a straightforward decision-making criterion C : implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firms cost of capital. D : None of these are correct Correct Answer : D 9 : The relationship between NPV and IRR is such that . A : both approaches always provide the same ranking of alternative investment projects B : the IRR of a project is equal to the firms cost of capital if the NPV of a project is $0 C : if the NPV of a project is negative, the IRR must be greater than the cost of capital D : None of these are correct Correct Answer : B 10 : When a project has multiple internal rates of return, the analyst should . A : choose the highest rate to compare with the firms cost of capital B : choose the lowest rate to compare with the firms cost of capital C : choose the rate that seems most reasonable, given the projects cash flows, to compare with the firms cost of capital D : compute the projects net present value and accept the project if its NPV is greater than $0 Correct Answer : D 11 : The profitability index (PI) approach . A : fails to directly consider the timing of a projects cash flows B : considers only a projects contributions to net income and does not consider cash flow effects C : always gives the same accept-reject decisions for independent projects as does NPV and IRR D : always gives the same accept-reject decisions for mutually exclusive projects as does NPV and IRR Correct Answer : C 12 : In the case of mutually exclusive projects, NPV and PI are likely to yield conflicting decisions when . A : the projects require the same net investment B : the projects differ significantly in size C : multiple rates of return are a possibility D : None of these are correct Browsegrades.net

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Correct Answer : B 13 : The objective in solving capital rationing problems is to A : accept all projects with a PI greater than 1.1 B : maximize the IRR of the projects that are accepted C : maximize the NPV of the projects that are accepted D : minimize the opportunity cost of the firms funds

Correct Answer : C 14 : Which of the following is NOT a technique to handle the capital rationing problem? A : linear programming B : goal programming C : ranking projects according to payback D : ranking projects according to profitability index Correct Answer : C 15 : Input flexibility, output flexibility, and expansion options are the three types of A : growth B : shutdown C : abandonment D : designed-in

options.

Correct Answer : D 16 : If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return the required rate of return for the firm. A : greater than B : less than C : equal to D : Cannot be determined from the information given Correct Answer : A 17 : When two or more normal projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals. A : coincident B : mutually exclusive C : independent D : None of these are correct Correct Answer : C 18 : The net present value method assumes that the cash flows over the life of the project are reinvested at the . A : computed internal rate of return B : risk-free rate C : market capitalization rate D : firms cost of capital Browsegrades.net

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Correct Answer : D 19 : The internal rate of return method assumes that the cash flows over the life of the project are reinvested at the . A : risk-free rate B : firms cost of capital C : computed internal rate of return D : market capitalization rate Correct Answer : C 20 : In the absence of capital rationing, the net present value method is normally superior to the method when choosing among mutually exclusive investments.I. internal rate of returnII. profitability index A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 21 : Generally, the is considered to be a more realistic reinvestment rate than the A : risk-free rate; internal rate of return B : internal rate of return; cost of capital C : cost of capital; internal rate of return D : risk-free rate; cost of capital

Correct Answer : C 22 : The profitability index is the ratio of the to the A : net present value; net investment B : net investment; net present value C : present value of future net cash flows; net investment D : net investment; present value of future net cash flows

Correct Answer : C 23 : With the net present value approach, all net cash flows are discounted at the A : required rate of return B : discount rate C : cost of capital D : All of these are correct

Correct Answer : D 24 : If the net present value of an investment project is positive, then the A : project would be unacceptable under the internal rate of return method B : project would be acceptable under the payback method C : projects rate of return is greater than the firms cost of capital D : All of these are correct

Correct Answer : C Browsegrades.net

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25 : The value additivity principle means that the . A : firm should accept all projects with a positive net present value B : firms value is the sum of the value of all the projects undertaken C : firm will grow through the addition of new projects D : positive net present value is added to the firms net worth Correct Answer : B 26 : The internal rate of return does NOT take into account the A : explicit risk of the net cash flows B : magnitude of cash flows over the projects life C : net investment D : timing of cash flows over the entire life of a project

Correct Answer : A 27 : The net present value method assumes that cash flows are reinvested at the , whereas the internal rate of return method assumes that cash flows are reinvested at the A : discount rate; required rate of return B : cost of capital; market rate of return C : firms cost of capital; computed internal rate of return D : marginal cost of capital; discount rate

Correct Answer : C 28 : options allow a firm to design into a project the capability of shifting the product mix of the project if demand or relative product prices dictate such a shift. A : Input flexibility B : Output flexibility C : Expansion D : Growth Correct Answer : B 29 : Which of the following would increase the net present value of a project? A : increase in the net investment B : use of straight-line depreciation rather than MACRS C : decrease in the expected accounts payable D : decrease in the discount rate Correct Answer : D 30 : The reason for a post-audit is to . A : help financial managers reduce errors in cash flow estimation B : reduce the number of accepted risky projects C : reduce the number of projects submitted D : determine the correct required rate of return Correct Answer : A 31 : If a capital expenditure project has an expected 20% internal rate of return, and a $10,000 net present value, and one cash flow sign change, then which one of the following statements Browsegrades.net

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about the project is true? A : The discount rate used to calculate NPV is greater than 20% B : The project has another internal rate of return in addition to the 20% rate mentioned above C : In the internal rate of return calculation, the projects cash inflows are assumed to be reinvested at the firms required rate of return D : None of these is correct Correct Answer : D 32 : The value additivity principle indicates that, when a firm undertakes an independent project, the value of the firm is increased by the from the project. A : present value of the cash inflows B : sum of the cash inflows and outflows C : net present value D : None of these are correct Correct Answer : C 33 : When dealing with cash flows, the is computed with the help of a financial calculator or by using capital budgeting spreadsheet programs. A : uniform; internal rate of return B : perpetual; internal rate of return C : uneven; internal rate of return D : uneven; net present value Correct Answer : C 34 : The is interpreted as the for each dollar of initial investment. A : net present value; present value return B : profitability index; cash flow return C : profitability index; present value return D : None of these is correct Correct Answer : C 35 : The of an investment is the period of time for the A : profitability index; present value of the cash inflows B : payback period; cumulative cash inflows C : payback period; present value of the cash inflows D : None of these are correct

to equal the initial cash outlay.

Correct Answer : B 36 : The profitability index would be if the present value of the net cash flows (NCF) over the life of a project were . A : negative; less than zero B : negative; less than the net investment C : zero; equal to the net investment D : None of these are correct Correct Answer : A 37 : Which of the following investment decision rules (if any) assumes that the cash flows Browsegrades.net

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generated are reinvested over the life of the project at the firms cost of capital? A : payback period B : internal rate of return C : accounting rate of return D : None of these are correct Correct Answer : D 38 : The approach takes into account both the magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability. A : payback period B : accounting rate of return C : average rate of return D : internal rate of return Correct Answer : D 39 : There are many reasons why a firm can earn above-normal profits. These reasons include all of the following EXCEPT . A : access to superior labor or managerial talents B : superior access to financial resources at lower costs C : patent control of superior product designs D : ability of new firms to acquire necessary factors of production Correct Answer : D 40 : Real options in capital budgeting can be classified in all of the following ways EXCEPT . A : abandonment option B : investment option C : purchasing power option D : shutdown options Correct Answer : C 41 : Generally, the existence of a(n) option reduces the downside risk of a project and should be considered in project analysis. A : designed-in B : abandonment C : investment timing D : output expansion Correct Answer : B 42 : When evaluating international capital expenditure projects, the analyst may compute the present value of the net cash flows in the local currency and then . A : discount by one plus the spot rate (1+ S0) B : multiply by the forward exchange rate C : discount by the future exchange rate D : multiply by the spot exchange rate Correct Answer : D Browsegrades.net

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43 : options give a firm the ability to temporarily stop a project in order to avoid negative cash flows.. A : Abandonment B : Shutdown C : Designed-in D : Growth Correct Answer : B 44 : The reasons that the amount and timing of the net cash flows to the foreign subsidiary and parent may differ include . A : subsidized loans B : differential tax rates C : legal and political constraints on cash remittance D : All of these are correct Correct Answer : D 45 : A negative net present value project that may ultimately lead to a highly positive net present value project is called a(n) option. A : shutdown B : expansion C : growth D : designed-in Correct Answer : C 46 : An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firms cost of capital is 12%. Determine the payback period for the project. A : 0.28 years B : 1.4 years C : 3.57 years D : 17.86 years Correct Answer : C 47 : An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firms cost of capital is 12%. Determine the net present value for the project. A : $940 B : $100,940 C : $77,884 D : $40,000 Correct Answer : A 48 : An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firms cost of capital is 12%. Determine the internal rate of return for the project (to the nearest tenth of one percent). A : 12.0% B : 12.6% C : 3.6% Browsegrades.net

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D : 12.4% Correct Answer : D 49 : The Atlantic Company plans to open a new branch office in a suburban area. The building will cost $200,000 and will be depreciated (on a straight-line basis) over a 20-year life to a $0 estimated salvage value. Equipment for the building will cost an additional $100,000. This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value. The branch office is expected to generate additional before tax net income of $30,000 per year. The tax rate is 40%, and the cost of capital is 12%. Compute the net present value for the project. A : $63,523 B : +$246,477 C : +$53,523 D : $53,523 Correct Answer : D 50 : An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years. The firms cost of capital is 12%. Determine the profitability index for this project. A : 1.50 B : 1.028 C : 0.028 D : 0.972 Correct Answer : B 51 : A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firms 12% cost of capital. Determine the net present value of the project. A : $112,500 B : $562,500 C : $1,012,500 D : $140,625 Correct Answer : A 52 : What is the net present value of a project that requires a net investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the cost of capital is 15%. A : $91,520 B : $15,520 C : $78,000 D : $167,474 Correct Answer : B 53 : Would you invest in a project that has a net investment of $14,600 and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12%? A : Yes, as the NPV is $862.90. B : No, as the NPV is -$1,975.70. C : No, as the NPV is -$481.70. D : Yes, as the NPV is $165.70. Browsegrades.net

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Correct Answer : C 54 : Sigma is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year. Should Sigma purchase this digger if its cost of capital is 12%? A : Yes, NPV = $3,176 B : Yes, NPV = $5,084 C : Yes, NPV = $16,605 D : Yes, NPV = $19,084 Correct Answer : B 55 : What is the internal rate of return for a project that has a net investment of $76,000 and net cash flows of $20,507 per year for 7 years? A : 16% B : 17% C : 18.2% D : 19% Correct Answer : D 56 : What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years? A : 10% B : 12% C : 15.3% D : 13.1% Correct Answer : B 57 : What is the internal rate of return for a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years? A : between 10% and 11% B : between 9% and 10% C : between 11% and 12% D : between 12% and 13% Correct Answer : A 58 : Using the profitability index, which of the following mutually exclusive projects should be accepted?Project A: NPV = $6,000; NINV = $50,000Project B: NPV = $10,000; NINV = $120,000Project C: NPV = $8,000; NINV = $80,000 A:A B:B C:C D : All projects should be accepted Correct Answer : A 59 : Turntec is considering replacing an automatic shuttle machine that has a book value of $2,000 and a $0 market value with a more efficient machine that will cost $24,000. The annual net cash flows from the new equipment are expected to be $6,000 for the next 6 years. What is the net present value of this project? Assume the firms cost of capital is 12% and its marginal Browsegrades.net

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tax rate is 40%. A : $666 B : $1,466 C : $1,866 D : $134 Correct Answer : B 60 : GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlos expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the trucks 5-year life. What is the payback period for this project? A : 3 years B : 4.2 years C : 3.5 years D : 3.3 years Correct Answer : C 61 : Hydroponics is considering adding another greenhouse that would cost $95,000 and generate $20,000 in annual net cash flows over its 8-year expected life. The greenhouse would be depreciated on a straight-line basis to zero, and the salvage value is also expected to be zero. If the firm has a marginal tax rate of 40%, what is this projects internal rate of return? A : between 20% and 24% B : between 13% and 14% C : between 28% and 32% D : between 7% and 8% Correct Answer : B 62 : Red Lake Mines Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the projects sixth and final year, it is expected to have a net cash outflow of $1 million. What is the projects net present value, using a discount rate of 12%? A : about $8.52 million B : about $8.00 million C : about $7.52 million D : None of these are correct Correct Answer : C 63 : Calculate the profitability index for a project that has a net present value equal to $10,000. The projects net investment is $20,000, and the firm has a 40 percent marginal tax rate. A : 0.5 B:0 C : 0.8 D : None of these are correct Correct Answer : D 64 : A project requires a net investment of $100,000. At the firms cost of capital of 10%, the projects profitability index is 1.15. Determine the net present value of the project. A : $15,000 B : $215,000 Browsegrades.net

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C : $115,000 D : Cannot be determined Correct Answer : A 65 : What is the NPV of a project that required a net investment of $500,000 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%. A : $211,080 B : $392,580 C : $588,710 D : $160,920 Correct Answer : A 66 : Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%? A : $252,760 B : $110,840 C : $88,200 D : $47,570 Correct Answer : C 67 : Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%? A : Project M B : Project N C : Project O D : All projects should be accepted Correct Answer : D 68 : ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%? A : $47,625 B : $18,503 C : $17,490 D : None of these are correct Correct Answer : B 69 : Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years. What is the IRR for this project? A : 16.76% B : 17.26% C : 18.13% D : 17.76% Correct Answer : B Browsegrades.net

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70 : What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7, and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11%. A : $34,302 B : $74,847 C : $57,738 D : $2,238 Correct Answer : A 71 : What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7? A : 12.5% B : 13% C : 12% D : 13.5% Correct Answer : C 72 : What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $30,000? A : 17.3% B : 16.7% C : 15.7% D : 16.3% Correct Answer : D 73 : Road Hawk Inc. is adding a new production line that will cost $720,000. The line will be depreciated on a straight-line basis over a 7-year period and will generate net cash flows of $160,000 in each of the 7 years. At the end of the project, it is expected the line can be sold as scrap for $10,000. If the firms marginal tax rate is 40% and its required rate of return is 14%, what is the net present value of this project? A : $70,091 B : $27,920 C : $64,091 D : $31,520 Correct Answer : D 74 : Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipments estimated salvage value at the end of the project is $9,000. The equipments $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The companys marginal tax rate is 30%. Calculate the projects net present value using a 12% discount rate. A : about $10,610 B : about $12,530 C : about $9,954 D : about +$9,462 Browsegrades.net

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Correct Answer : C 75 : Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipments estimated salvage value at the end of the project is $9,000. The equipments $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The companys marginal tax rate is 30%. Calculate the projects net present value using a 12% discount rate. A : $56,560 B : $30,000 C : $13,840 D : Cannot be determined with information given Correct Answer : C 76 : Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firms marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment? A : Yes, NPV = $2,090 B : Yes, NPV = $12,390 C : No, NPV = $63,210 D : No, NPV = $12,210 Correct Answer : A 77 : G-III Apparel is considering increasing the size of a warehouse. The cost of the expansion is $825,000, and the increase in inventories and accounts payable will be $410,000 and $360,000, respectively. G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12. G-III has a 14% cost of capital and a marginal tax rate of 35%. What is the NPV of the warehouse expansion? A : $3,450 B : $60,050 C : $10,050 D : $338,570 Correct Answer : C 78 : What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8? A : 15.5% B : 13.6% C : 17.4% D : None of these are correct Correct Answer : B 79 : Rollerblade, a manufacturer of skating gear, plans to expand its operation in Brighton, Browsegrades.net

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England. The expansion will cost $18.5 million and is expected to generate annual net cash flows of 2.2 million pounds for a period of 15 years and nothing thereafter. The cost of capital for the project is 16%. Using the spot exchange rate of $1.60 per British pound, compute the net present value of the expansion project. A : $6.235 million B : $2.458 million C : $1.124 million D : $10.83 million Correct Answer : C 80 : Zimmer, a manufacturer of modular rooms, plans to expand its operation in Landshut, Germany. The expansion will cost $14.5 million and is expected to generate annual net cash flows of DM4.5 million for a period of 12 years and then the operation will be sold for DM2 million. The cost of capital for the project is 14%. Using the spot exchange rate of $0.60 per DM, compute the NPV of this expansion project. A : $0.78 million B : $1.03 million C : $2.58 million D : $11.39 million Correct Answer : B 81 : A digital assembly system that costs $160,000 is expected to operate for 8 years. The estimated salvage value at the end of 8 years is $12,000. The system is expected to save the company $38,000 in labor costs before taxes and depreciation. The company will depreciate this system on a 5-year MACRS schedule. If the firms cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project. (Note: Requires MACRS tables.) A : $4,045 B : $7,196 C : $20,873 D : $167,196 Correct Answer : B 82 : TexMex is considering replacing its tortilla machine with a new model that sells for $46,000 including the cost of installation. The old machine has been fully depreciated and has a $0 salvage value. The new machine will be depreciated as a 3-year MACRS asset. Revenues are expected to increase $18,000 per year over the 5-year life of the new machine. At the end of 5 years the new machine is expected to have no salvage value. What is the IRR for this project if TexMex has a required rate of return of 14% and a marginal tax rate of 40%? Operating costs are not expected to increase from the current level of $8,000 per year. A : 21.0% B : 14.0% C : 19.3% D : 5.7% Correct Answer : C 83 : Colex wishes to bid on a contract that is expected to yield after-tax net cash flows of $25,000 in year 1, $30,000 in year 2, and $35,000 per year in years 3-8. To obtain the contract, Colex will need to invest $110,000 to reconfigure a packaging system, $20,000 (after-tax) to retrain current employees, and $15,000 (after-tax) on an environmental impact study that is Browsegrades.net

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required to be completed on acceptance of the contract. What is the projects internal rate of return? A : 16.7% B : 14.1% C : 16.2% D : 14.9% Correct Answer : D 84 : Which of the following statements about comparing capital budget techniques is (are) correct? I. The payback period is easy to understand and helps the firm identify how long it will be unable to use the initial investment for other projects.II. Mutually exclusive projects allow a firm to do other like projects (mutually exclusive) simultaneously as long as the budget constraints are met. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 85 : Which of the following statements about comparing the techniques of net present value (NPV) and internal rate of return (IRR) is (are) correct? I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic.II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 86 : Which of the following statements about comparing the techniques of net present value (NPV) and internal rate of return (IRR) is (are) correct? I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic.II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance. A : $203,690 B : $180,665 C : $150,000 D : $116,681 Correct Answer : D 87 : Which of the following statements about comparing the techniques of net present value (NPV) and internal rate of return (IRR) is (are) correct? I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic.II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance. A : Yes, because the internal rate of return is 10.5%, which is less than 12%. B : Yes, because the internal rate of return is 35%, which is more than 12%. C : No, because the internal rate of return is 8.7%, which is less than 12%. Browsegrades.net

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D : Yes, because the internal rate of return is 48%, which is more than 12%. Correct Answer : D 88 : In comparing the techniques of net present value and internal rate of return:I. The NPV and IRR techniques will generate the same accept-reject decision provided the projects have conventional cash flows.II. The differences between the underlying assumptions of NPV and IRR can cause them to rank projects differently. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 89 : In considering the payback period, . A : the maximum period allowed by a firm is a specific time period based on objective criteria B : it considers the time value of money in determining the maximum allowable time period C : it gives some indication of a projects desirability from a liquidity viewpoint D : it is based on cash flows both during and after the payback period Correct Answer : C 90 : In considering the payback method, . A : it is a method of determining the financial exposure of a firm for a project B : it is a complicated but accurate capital budgeting method C : it is generally superior to the net present value method D : None of these are correct Correct Answer : A 91 : The payback method has all of the following advantages EXCEPT it . A : considers the time value of money B : determines a firms financial exposure C : is easy to calculate D : determines if the project under consideration will be able to replace the start-up costs. Correct Answer : A 92 : A weakness of the payback period is that it disregards A : projects with shorter payback periods B : cash flows during the payback period C : start-up costs D : the time value of money

Correct Answer : D 93 : Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed waiting to invest is the option. A : investment timing B : abandonment C : shutdown D : growth Browsegrades.net

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Correct Answer : A 94 : Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed waiting to invest is the option. A : No, the profitability index is 2. B : No, the profitability index is 0.95. C : Yes, the profitability index is 1.18. D : Yes, the profitability index is 0.78. Correct Answer : C 95 : Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed waiting to invest is the option. A : Yes, the NPV is $288,410.60 and the IRR is 38.2%. B : Yes, the NPV is $175,478.98 and the IRR is 20.42%. C : No, the NPV is $211,589.40 and the IRR is 3.24%. D : No, the NPV is $75,375.18 and the IRR is 11.75%. Correct Answer : C 96 : Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed waiting to invest is the option. A : Yes, the rounded NPV is $228, 940.00 and the IRR is 46.62%. B : Yes, the rounded NPV is $75,428.63 and the IRR is 12.27%. C : No, the rounded NPV is $57,277.32 and the IRR is 8.75%. D : No, the rounded NPV is $221,275.39 and the IRR is 9.97%. Correct Answer : A 97 : The choice to accept or reject projects based on the payback period . A : is an objective decision B : is a subjective decision C : will always give the same results as when using the net present value method D : will always give the same results as when using the internal rate of return method Correct Answer : B 98 : The payback period can be considered justified for which of the following reasons? A : It can account for the risk of the project. B : It can account for the time value of the project. C : It can account for the return on investment. D : It can account for the objective rationale of the project. Correct Answer : A 99 : When considering projects for implementation, management generally has three options. All of the following reflect possible managerial options EXCEPT that management could . A : attempt to find another combination of projects that would allow for a more complete utilization of available funds B : accept the current project or projects and hope that the preliminary analysis is correct C : choose to reject the projects under consideration and place the available funds in a short term security until the next period Browsegrades.net

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D : sell stock to raise sufficient capital to invest in the project if it is required to make it profitable Correct Answer : D 100 : A firms capital expenditures may be limited due to externally imposed constraints. All but which of the following are external constraints? A : The firms loan agreements may contain restrictive constraints. B : The firm may decide to place an upper limit on the amount of funds allocated to capital investment. C : If the firm has a weak financial position, it may be too expensive to float a new bond issue. D : There may be market-imposed difficulties such as a tight money policy on the part of the Federal Reserve System. Correct Answer : B

ESSAY 101 : List the advantages and disadvantages of the payback method. Correct Answer : The advantages of the payback method are:1.It is easy and inexpensive to use.2.It provides a crude measure of project risk.3.It provides a measure of project liquidity. The disadvantages of the payback method are:1.There is no objective decision criterion.2.It gives equal weight to all cash flows within the payback period, regardless of when they occur during the period. It ignores the time value of money.3.It ignores cash flows occurring after the payback period. 102 : Why is the net present value method of evaluating projects better than the internal rate of return method? Correct Answer : The net present value method is better for the following reasons:1.The internal rate of return method can produce multiple internal rates of return that cannot be compared to the firm’s cost of capital in determining a project’s acceptability.2.The net present value assumes that cash flows are reinvested at the firm’s cost of capital, whereas the internal rate of return method assumes that these cash flows are reinvested at the computed internal rate of return. The cost of capital is considered a more realistic reinvestment rate than the computed internal rate of return. 103 : Explain why the internal rate of return method is more popular than the net present value method. What are some potential problems with relying on the IRR method? Correct Answer : The internal rate of return method is more popular because some people feel more comfortable dealing with the concept of a project’s percentage rate of return than with its dollar amount of net present value. The internal rate of return takes into account both the timing and magnitude of cash flows over the entire life of the project in measuring the project’s economic desirability.?In spite of this, it is possible to have multiple internal rates of return. Net present value will yield only one internal rate of return. The reinvestment rate of the internal rate of return method is less realistic. 104 : How does the profitability index differ from the net present value, and when would each method be preferred?

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Correct Answer : The profitability index is the benefit-cost ratio, the ratio of the present value of expected net cash flows over the life of a project to the net investment. When dealing with mutually exclusive investments, conflicts may arise between the net present value and the profitability index criteria. When a conflict arises, the final decision is based on other factors. If there is no capital rationing, the net present value approach is preferred because it will select the projects that are expected to generate the largest total dollar increase in the firm’s wealth and thus maximize shareholder wealth. If the firm must do capital rationing, and capital budgeting is being done for only one period, the profitability index approach may be preferred because it will indicate which projects will maximize the returns per dollar of investment. 105 : In working with capital budgeting, what does a post-audit do? Correct Answer : A post-audit consists of comparing actual cash flows from an accepted project with projected cash flows that were estimated when the project was adopted. A project review should be concerned with identifying systematic biases or errors in cash flow estimation on the part of individuals, department, plants, or divisions and attempting to determine why these biases or errors exist. A good post-audit can help a company’s decision makers better evaluate investment proposals submitted in the future. 106 : There are various reasons why companies may have difficulty in earning a positive net present value. These reasons include barriers to market entry and other factors. List these factors. Correct Answer : Reasons why companies may have difficulty in earning a positive NPV:1. Buyer preferences for established brand names.2. Ownership or control of favored distribution systems (such as exclusive dealerships).3. Patent control of superior product designs or production techniques.4. Exclusive ownership of superior natural resource deposits.5. Inability of new firms to acquire necessary factors of production (management, labor, equipment).6. Superior access to financial resources at lower costs (economies of scale in attracting capital).7. Economies of large-scale production and distribution arising from: a. capital intensive production processes. b. high initial start up costs.8. Access to superior labor or managerial talents at costs that are not fully reflective of their value.9. Operating synergies when combining two companies in a merger. 107 : Explain the three different types of designed-in options. Correct Answer : Input flexibility options allow a firm to design into a project the capability of switching between alternative inputs because of input cost differences. Output flexibility options allow a firm to design into a project the capability of shifting the product mix of the project if demand or relative product prices dictate such a shift. Expansion options give project managers the ability to add future capacity to a project at a relatively low marginal cost.

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Chapter 12. The Cost of Capital 1 : Which of the following is NOT used when evaluating mutually exclusive investments having unequal lives? A : Equivalent annual annuities B : Replacement chains C : Linear programming D : All of these are used to evaluate mutually exclusive investments having unequal lives. Correct Answer : C 2 : Each of the following is true EXCEPT . A : the equivalent annual annuity method is often computationally simpler than the replacement chain technique B : the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method C : the equivalent annual annuity method is theoretically superior D : the equivalent annual annuity and replacement chain methods usually give the same decision Correct Answer : C 3 : When two or more mutually exclusive alternative investments have unequal , neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time. A : lives B : net cash flows C : net investments D : None of these are correct Correct Answer : A 4 : When two or more mutually exclusive alternative investments have unequal , neither the net present value nor the internal rate of return method yields reliable accept-reject information unless the projects are evaluated for an equal period of time. A : NPVs = $8,860: NPVT = $109,240 B : NPVs = $14,690: NPVT = $109,240 C : NPVs = $40,020: NPVT = $109,240 D : None of these are correct Correct Answer : C 5 : Lakeland Ramblers is considering two mutually exclusive projects to boost their tourist revenue. Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years. Project B costs $100,000 and will produce annual net cash flows of $25,000 for 10 years. If Lakelands cost of capital is 12%, which project should be chosen using the equivalent annual annuity method? A : Project A, as NPV is $17,941 higher B : Project B, as NPV is $11,125 higher C : Project A, as NPV is $28,383 higher D : Project B, as NPV is $21,567 higher Browsegrades.net

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Correct Answer : A 6 : Casa Chica is considering replacing a piece of equipment. Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years. Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years. If Chicas cost of capital is 13%, which alternative should be chosen using the equivalent annual annuity method? A : Project A B : Project B C : Indifferent between the two projects D : Neither, because both projects have a negative NPV Correct Answer : B 7 : Casa Chica is considering replacing a piece of equipment. Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years. Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years. If Chicas cost of capital is 13%, which alternative should be chosen using the equivalent annual annuity method? A : Beta, because it has the higher total net cash flows. B : Beta, because it has the higher NPV. C : Axa, because it has the higher NPV using infinite replacement. D : Beta, because it has the higher NPV using infinite replacement. Correct Answer : C 8 : Quorex is evaluating two mutually exclusive projects. Project A has a net investment of $48,000 and net cash flows over a six-year period of $12,500 per year. Project B also has a net investment of $48,000, but its net cash flows of $8,640 per year will occur over a 12-year period. If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen, and what is its NPV? A : Project A, $862 B : Project A, $1,800 C : Project B, $2,475 D : Project B, $902 Correct Answer : D 9 : Marvec needs to replace an extruder and two replacements look good. Extruder A costs $102,000 and has a 10-year life. Extruder B costs only $56,000, but its expected life is 6 years. Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years. If Marvecs cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities. A : Extruder B, $564 B : Extruder B, $2,388 C : Extruder A, $1,646 D : Extruder A, $280 Correct Answer : B 10 : Kaneb is evaluating two alternative pipeline welders. Welder A costs $310,000, has a 7-year life, and is expected to generate net cash inflows of $78,000 in each of the 7 years. Welder B costs $320,000, has a 5-year life, and is expected to generate annual net cash inflows Browsegrades.net

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of $68,900 in each of the 5 years. Kanebs cost of capital is 16%. Using the equivalent annual annuity method, which alternative should be chosen and what is its NPV? A : Welder B, $4,920 B : Welder A, $7,111 C : Welder B, $10,650 D : Welder A, $7,800 Correct Answer : C 11 : Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen? A : Press A B : Press B C : Both Presses A and B D : Neither Press A nor B Correct Answer : A 12 : Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen? A : $5,527.89 B : $4,355.25 C : $7,768.67 D : $2,259.62 Correct Answer : D 13 : Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a 12% cost of capital. Which press should be chosen? A : $2,024 B : $5,033 C : $1,257 D : $8,358 Correct Answer : A 14 : Rollerblade, a maker of skating gear, is evaluating two alternative presses. Press A costs $88,000, has a 4-year life, and is expected to generate annual cash inflows of $30,100 in each of the 4 years. Press B costs $122,000, has an 8-year life, and is expected to generate annual cash inflows of $24,600 in each of 8 years. The cost of replacement for A is $96,000, and the replacement press will generate cash inflows of $30,100 for another 4 years. Rollerblade uses a Browsegrades.net

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12% cost of capital. Which press should be chosen? A : $5,304 B : $6,271 C : $2,058 D : $4,157 Correct Answer : C 15 : The best way to measure projects with unequal lives is A : the Gordon Model B : the payback period C : the net present value method D : equivalent annual annuity approach

Correct Answer : D 16 : Under most conditions the equivalent annual annuity method will give the same decision as . A : the net present value method B : linear programming C : the replacement chain method D : the internal rate of return Correct Answer : C 17 : Creative Furniture is considering two mutually exclusive projects that would automate part of their production facilities. Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years. Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years. Creatives cost of capital is 11%. Using a replacement chain, which project should be chosen? Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows. A : Project B, as NPV of A is negative. B : Project A, as NPV of B is negative. C : Project B, as NPV is $492 higher. D : Project A, as NPV is $6,468 higher. Correct Answer : C 18 : Creative Furniture is considering two mutually exclusive projects that would automate part of its production facilities. Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years. Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years. Creatives cost of capital is 11%. Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows. Using the equivalent annual annuity method, which project should be chosen? A : Project B, as NPV is approximately $823 higher. B : Project A, as NPVB is negative. C : Project B, as NPV is approximately $10,473 higher. D : Project B, NPV is approximately $90.56 higher. Correct Answer : A

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ESSAY 19 : The importance of time discrepancies depends on several items when making capital budgeting decisions. State those items. Correct Answer : 1. The number of years in the discrepancy. The fewer the years of the discrepancy, the less important it is.2. The number of years into the future where the discrepancy occurs. The further into the future, the less important the discrepancy is.3. The relationship between the rate of return on future investments and the cost of capital. When the NPV=0, the discrepancy can be ignored. 20 : What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data? Correct Answer : The firm will be ignoring any alternative investment opportunities that might have been available at the end of the shorter-lived project. It could create a “replacement chain” for the shorter-lived project. This new stream of cash flows could create a higher net present value overall for the shorter-lived project. 21 : How does the equivalent annual annuity approach solve the time discrepancy problem? Correct Answer : The EAA method assumes that each piece of equipment producing the cash flows will be replaced an infinite number of times into the future and will provide annual “annuity payments” in perpetuity. As perpetuities, these equivalent annual annuities can be valued (at present) by dividing the annuity amount by the cost of capital, thereby eliminating any differences in time.

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Chapter 13. Capital Structure Concepts 1 : The discount rate used in calculating the certainty equivalent net present value is the . A : risk-adjusted discount rate B : cost of capital C : risk-free rate D : cost of equity capital Correct Answer : C 2 : The certainty equivalent factors used to adjust the cash flows for risk can range from A : -1 to +1 B : 0 to infinity C : +0.01 to +0.99 D : 0 to +1.0

Correct Answer : D 3 : The basic capital budgeting decision models (that is NPV and IRR) handle risk by A : ignoring it B : assuming all cash flows are known with certainty C : assuming all projects are of average risk D : using risk-adjusted discount rates to evaluate projects

Correct Answer : C 4 : All of the following are advantages of the NPV/payback approach to risk analysis EXCEPT it . A : is easy and inexpensive to apply B : considers a projects liquidity C : explicitly considers the variability of a projects return D : is consistent with the notion that risk increases with futurity Correct Answer : C 5 : The subjective approach to determining risk-adjusted discount rates . A : uses the risk-free rate for average-risk projects B : explicitly considers the probability distribution of a projects cash flows C : always leads to the correct investment decisions D : groups projects into risk classes and evaluates all projects in a particular risk class at the same risk-adjusted discount rate Correct Answer : D 6 : Simulation techniques are . A : cheap to apply B : widely used C : mostly beneficial for large projects D : identical to sensitivity analysis Correct Answer : C Browsegrades.net

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7 : The use of sensitivity analysis requires that . A : all variables affecting NPV be defined B : probability distributions of the determinants of a projects cash flows be estimated C : the firms have access to a very large computer D : the firm is greatly interested in the portfolio risk reduction characteristics of a project Correct Answer : A 8 : Project C has been classified into risk class II by the analyst of a major firm. The risk premium required for projects in this risk class is 8%. The current risk-free rate measured by the analyst is 10%. If the project has an estimated return of 20%, the analyst would recommend . A : accepting project C B : rejecting project C C : re-estimating the risk premiums for class II projects D : None of these are correct Correct Answer : A 9 : Total project risk is . A : the contribution a project makes to the risk of the firm B : measured by the correlation coefficient C : the chance that a project will perform below expectations D : measured by the projects beta Correct Answer : C 10 : A firms leveraged beta will always be A : less than B : greater than C : the same as D : None of these are correct

its unleveraged beta.

Correct Answer : B 11 : The the amount of debt in a firms capital structure, the A : larger; larger B : smaller; larger C : larger; smaller D : smaller; smaller

will be the firms beta.

Correct Answer : A 12 : The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when . A : all projects have the same risk characteristics B : the risk-free rate is known with certainty C : the projects under consideration have different risk characteristics D : the firm is unlevered Correct Answer : C Browsegrades.net

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13 : A major problem with using the risk-adjusted discount rate approach is the determination of . A : the beta value for the firm B : the firms weighted cost of capital C : the firms required rate of return D : beta values for individual projects Correct Answer : D 14 : Which of the following techniques can be used to analyze total project risk? A : net present value/payback approach B : risk-adjusted discount rate approach C : simulation analysis D : All of these are correct Correct Answer : D 15 : The net present value/payback approach is a useful approach when A : screening projects characterized by rapid technological advances B : cash flow estimates are known with certainty C : the more risky cash flows occur during the startup period D : None of these are correct

Correct Answer : A 16 : In a simulation analysis, a model is simulated on a computer program and run through several iterations. The results of these iterations are used to . A : plot a required rate of return value profile B : compute a mean and a standard deviation of returns C : provide the decision maker with a measure of beta risk D : plot the coefficient of variation of the annual net cash flows Correct Answer : B 17 : Sensitivity analysis is a procedure that can be used in the capital budgeting process to indicate how sensitive the is to changes in a particular variable. A : probability B : return distribution C : net present value D : standard deviation Correct Answer : C 18 : When analyzing a sensitivity curve, the value is to a change in the computed variable. A : more negative B : steeper C : more general D : smaller

the slope, the more sensitive the net present

Correct Answer : B 19 : A major disadvantage of the risk-adjusted discount rate approach is that it Browsegrades.net

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A : can lead to selecting only above-average risk projects B : provides the decision maker with a range of numbers C : can lead to selecting only below-average risk projects D : is difficult to estimate the appropriate risk premium for a project Correct Answer : D 20 : The certainty equivalent approach adjusts the value equation. A : net cash flows; numerator B : risk-free rate; numerator C : required return; numerator D : net cash flows; denominator

for risk in the

of the net present

Correct Answer : A 21 : When evaluating a capital expenditure to be made in a foreign country, the parent firm must be concerned with the . A : exchange rate risk B : cash flows that can be expected to be received by the parent C : greater uncertainty associated with tax rates in the host country D : All of these are correct Correct Answer : D 22 : The approach is widely used by firms that attempt to consider differential project risk in their capital budgeting procedures. A : net present value B : internal rate of return C : risk-adjusted discount rate D : certainty equivalent Correct Answer : C 23 : The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the . A : sensitivity analysis method B : simulation approach C : net present value/payback method D : risk-adjusted discount rate approach Correct Answer : B 24 : The risk-adjusted discount rate approach is used in the analysis of projects for which is the applicable risk measure. A : total project risk B : beta (systematic) risk C : unsystematic risk D : both total project and beta risk Correct Answer : D 25 : The certainty equivalent factors used in capital budgeting analysis are equal to the Browsegrades.net

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divided by . A : certain return; risky return B : risky return; certain return C : certain return; beta D : beta, risky return Correct Answer : A 26 : With the approach, the decision maker adjusts separately each periods cash flows to account for the specific risk of those cash flows. A : risk-adjusted discount rate B : NPV/payback C : certainty equivalent D : economic life Correct Answer : C 27 : With the risk-adjusted discount rate approach, in the context of total risk, the discount rates used in evaluating cash flows are determined . A : objectively B : subjectively C : using regression analysis D : objectively and by using regression analysis Correct Answer : B 28 : The risk of a firm is a weighted average of the firm. A : systematic; systematic B : unsystematic; unsystematic C : total; total D : systematic, total

risk of the individual assets in the

Correct Answer : A 29 : The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is . A : sensitivity analysis B : simultaneous equations C : scenario analysis D : RADR analysis Correct Answer : C 30 : A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV? A : 99.38% B : 0.62% C : 34.5% D : 49.38% Correct Answer : B Browsegrades.net

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31 : A project has an expected NPV of $50,000 with a standard deviation of the NPV of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a net present value greater than $60,000? A : 1915% B : 69.15% C : 0.13% D : 30.85% Correct Answer : D 32 : A simulation analysis for a new acquisition has indicated that the expected NPV is $50 million with a standard deviation of $40 million. Assume that NPV is normally distributed. What is the probability that the project will be unacceptable? A : 89.44% B : 10.56% C : 39.44% D : 21.19% Correct Answer : B 33 : The DMT Company is financed entirely with equity. DMT has a beta of 1.20 and the current risk-free rate is 9.5 percent. If the expected market return is 14 percent, what rate of return should DMT require on a project of average risk? A : 14.9% B : 15.4% C : 14.0% D : 12.0% Correct Answer : A 34 : Faris currently has a capital structure of 40 percent debt and 60 percent equity, but is considering a new product that will be produced and marketed by a separate division. The new division will have a capital structure of 70 percent debt and 30 percent equity. Faris has a current beta of 1.1 but is not sure what the beta for the new division will be. AMX is a firm that produces a product similar to the product under consideration by Faris. AMX has a beta of 1.6, a capital structure of 40 percent debt and 60 percent equity, and a marginal tax rate of 40 percent. Assuming Fariss tax rate is 40 percent, estimate the levered beta for the new product division. A : 2.44 B : 1.14 C : 2.74 D : 3.88 Correct Answer : C 35 : Technico plans to start a new product division that will have a capital structure of 70 percent debt and 30 percent equity. The leveraged beta for this division has been estimated to be 2.02. What will be Technicos weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent? A : 14.77% B : 10.33% C : 18.1% Browsegrades.net

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D : 1.03% Correct Answer : B 36 : Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a riskadjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion? A : Yes, since NPV = $10,096 B : Yes, since NPV = $9,896 C : No, since NPV = -$5,276 D : No, since NPV = -$9,896 Correct Answer : C 37 : Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a riskadjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion? A : 1.01 B : 1.53 C : 0.93 D : 1.13 Correct Answer : A 38 : Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a riskadjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion? A : 13.05% B : 16.20% C : 12.25% D : 15.00% Correct Answer : D 39 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.6. The current risk-free rate is 9.5 percent, and the expected market return is 16 percent. What rate of return should Chris-Kraft require on a project of average risk? A : 25.6% B : 14.9% C : 10.4% D : 19.9% Correct Answer : D 40 : The net present value of a project is normally distributed with an expected value of $52,000 and a standard deviation of $31,515. Determine the probability that the project will have a net present value of less than zero. A : 1.65% B : 95.1% C : 4.95% Browsegrades.net

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D : Cannot be determined Correct Answer : C 41 : IKON is financed entirely with equity, and its beta is 1.31. If the current risk-free rate is 6.25% and the expected market return is 12.8%, what is IKONs required rate of return on a project of average risk? A : 8.58% B : 14.83% C : 17.65% D : 12.81% Correct Answer : B 42 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : Yes, since NPV = $5,726 B : Yes, since NPV = $75,726 C : No, since NPV = -$10,934 D : No, since NPV = -$5,726 Correct Answer : A 43 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : only Project X B : only Project Y C : both projects X and Y D : reject both projects Correct Answer : C 44 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : $12,805 B : $5,746 C : $3,703 D : $11,025 Correct Answer : B 45 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net Browsegrades.net

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investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : $20,083,000 B : $6,628,400 C : $13,905,000 D : $3,019,400 Correct Answer : B 46 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : $3,233 B : $17,743 C : -$15,243 D : $13,233 Correct Answer : A 47 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : $624.50 B : 125.8 C : 0.201 D : Cannot be determined Correct Answer : C 48 : The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.25. The current risk-free rate is 7 percent, and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firms average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should ChrisKraft invest in the project? A : $32,000 B : $18,692 C : $4,238 D : Cannot be determined Correct Answer : B 49 : M-tel is financed entirely with equity, and the firms stock has a beta of 0.85. M-tel is considering investing in a project that is expected to have a beta of 1.3. The project requires an initial outlay of $6 million and is expected to generate after-tax net cash flows of $1.3 million each year for 8 years. Calculate the NPV of the project. Assume the risk-free rate is 7% and the expected market return is 14%. (Note: Problem requires either calculator use or interpolation from the tables. The suggested solutions use calculator accuracy.) A : $249,685 B : -$371,484 Browsegrades.net

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C : $238,700 D : -$352,800 Correct Answer : B 50 : MedChem has a capital structure of 60% equity and 40% debt and a current beta of 1.2. MedChem is considering an investment project in a new line of business that has an expected internal rate of return of 16%. The typical firm already in the line of business that MedChem is considering expanding into has a beta of 1.5 and a capital structure that has 55% debt and 45% equity. The marginal tax rate for all these firms, including MedChem, is 40%. If the current riskfree rate is 7% and the expected market risk premium is 8%, should MedChem expand into the new line? Assume that MedChem will retain its current capital structure. A : expand if after-tax cost of debt is 11.5% or less B : expand if after-tax cost of debt is 15% or less C : expand if after-tax cost of debt is 10.4% or less D : do not expand Correct Answer : B 51 : American Biodyne (AB) is considering expanding into a new line of business. The expansion will require an investment of $500,000 in new equipment. This equipment, which will cost another $300,000 to install, will be depreciated on a straight-line basis over an 8-year period to an estimated salvage value of zero. If the expansion project is accepted, working capital will increase by $100,000 immediately. Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8. Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years. AB has a marginal tax rate of 40%, and its required rate of return for the project under consideration is 16%. If AB assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year, should the expansion be undertaken? A : Yes, as NPV = $275,114 B : Yes, as NPV = $265,964 C : Yes, as NPV = $302,934 D : Yes, as NPV = $272,434 Correct Answer : A 52 : All of the following are correct statements about a projects total risk EXCEPT . A : undiversified investors are concerned about the companys future outlook B : it becomes the relevant risk when the projects returns are correlated to the returns from the firm as a whole C : total project risk can be measured by calculating standard deviation D : total project risk is irrelevant when forecasting a companys chance of bankruptcy Correct Answer : D 53 : Many firms combine net present value and payback when analyzing project risk. Which of the following statements is (are) correct? I. Both payback and net present value consider the frequency of cash flows.II. Both payback and net present value can be adjusted for risk. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Browsegrades.net

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Correct Answer : A 54 : The certainty equivalent approach is a risk evaluation technique. Which of the following statements is (are) correct? I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation.II. Using the RADR involves adjustments to the denominator of the NPV equation. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 55 : The certainty equivalent approach is a risk evaluation technique. Which of the following statements is (are) correct? I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation.II. Using the RADR involves adjustments to the denominator of the NPV equation. A : $2,575.25 B : $6,655.10 C : $5,261.38 D : $4,215.15 Correct Answer : B 56 : Which of the following statements is correct about adjusting for beta risk in capital budgeting? A : It measures unsystematic risk. B : It is a guaranteed measure of the success of the project. C : The beta concept can be used to determine RADR. D : It evaluates the efficiency of the management team. Correct Answer : C 57 : Portfolio risk is also known as A : total project risk B : beta risk C : market risk D : scenario risk

Correct Answer : B 58 : All of the following techniques are used to measure total project risk EXCEPT A : simulation analysis B : the profitability index C : the certainty equivalent approach D : the risk-adjusted discount rate

Correct Answer : B 59 : A weakness of the net present value/payback method is that A : it is a complicated calculation B : it is subjective C : it is directly related to the variability of returns from a project Browsegrades.net

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D : because it recognizes the riskiness of various projects, it can develop multiple outcomes Correct Answer : B 60 : The type of analysis that models some event and requires that estimates be made of the probability distribution of each cash flow element is . A : scenario B : sensitivity C : simulation D : net present value/payback approach Correct Answer : C 61 : What item has made sensitivity analysis simple and inexpensive? A : computer accounting software B : computer spreadsheet software C : computer webinars D : computer video and presentation software Correct Answer : B 62 : All of the following are methods of adjusting a project for total risk EXCEPT A : sensitivity analysis B : the carpe diem approach C : the certainty equivalent approach D : simulation analysis

Correct Answer : B 63 : The risk of an investment project is defined in terms of the potential A : certainty B : size C : variability D : timing

of its returns.

Correct Answer : C 64 : are needed for sensitivity analysis and have made the application simple and inexpensive. A : Risk tolerance tables B : Financial statements C : Financial calculators D : Computer spreadsheets Correct Answer : D 65 : Determine the pure project beta of a project that has 45% debt and 55% equity. The beta for the company is 1.6, and it has a tax rate of 40%. A : 1.82 B : 1.82 C : 1.07 D : 2.07 Browsegrades.net

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Correct Answer : C 66 : Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%. A : 1.11 B : 1.56 C : 1.83 D : 1.05 Correct Answer : A 67 : Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%. A : Yes, the CNPV is $195,196.06. B : Yes, the CNPV is $83,775.16. C : No, the CNPV is -$75,522.84. D : No, the CNPV is -$42,175.93. Correct Answer : B 68 : Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%. A : No, the NPV of the project is -$15,175.19. B : Yes, the NPV of the project is $75,275.16. C : No, the NPV of the project is -$9,765.12. D : Yes, the NPV of the project is $55,050.92. Correct Answer : D 69 : The hurdle rate is best described as the A : required rate of return B : risk adjusted discount rate C : net present value D : risk free rate

Correct Answer : B 70 : The hurdle rate approach in determining the acceptability of projects is . A : an improvement over the risk-adjusted discount rate approach because it provides for an objective basis to determine risk premiums for individual projects B : a modification of the internal rate of return approach C : inconsistent with the principle of project risk balancing D : a method used with the certainty equivalent approach Correct Answer : B 71 : The risk-adjusted discount rate approach is considered preferable to the weighted cost of capital approach in determining the net present value of a project when the projects under consideration differ significantly in . A : the number of cash flows generated by the projects B : their total return C : their cash inflows D : their risk characteristics Browsegrades.net

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Correct Answer : D 72 : Which of the following is (are) a risk associated with projects that must be considered when determining the net present value? I. Financial riskII. Pure project risk A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C

ESSAY 73 : What is the reason companies use the certainty equivalent approach in evaluating projects? Correct Answer : 1. It can adjust the cash flows to account for risk.2. Each cash flow can be adjusted separately.3. It provides an unambiguous basis for making a decision. It utilizes net present value, which is a clear method of determining a project’s acceptability. 74 : What are the weaknesses of the net present value/payback approach? Correct Answer : 1. The choice of which payback criterion should be applied is purely subjective and not directly related to the variability of returns from the project.?2. A single payback cutoff does not allow for the fact that some investments have fairly certain cash flows far into the future, whereas others do not.?3. Some projects are more risky at start-up and the payback criterion fails to recognize this.?4. The method may cause the firm to reject some actually acceptable projects. 75 : How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm? Correct Answer : Just as beta of a portfolio of securities can be computed as the weighted average of the individual security betas, a firm may be considered as a portfolio of assets, each having its own beta. From this perspective, the systematic risk of the firm is simply the weighted average of the systematic risk of the individual assets. 76 : How and when should firms consider employing additional risk analysis techniques in judging the suitability of large projects prior to implementation? Correct Answer : The decision to employ some risk analysis techniques to evaluate an investment project depends on the project’s size and the additional cost of applying such techniques as compared with the perceived benefits. For small projects, only the simpler risk adjustment techniques should be used; for major projects that have above or below-normal risk, it is worthwhile to analyze the project’s risk as precisely as possible. Failure to fully analyze the risk of a large project could result in bad investment decisions and even substantial losses. 77 : What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?

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Correct Answer : The simulation approach explicitly recognizes all of the interactions among the variables that influence a project’s net present value. It provides both a mean net present value and a standard deviation that can help the decision maker analyze trade-offs between risk and expected return. Unfortunately, it can take considerable time and effort to gather the information necessary for each of the input variables and to correctly formulate the model. This limits the feasibility of simulation to very large projects. In addition, the simulation assumes that the values of the input variables are independent of one another. If not, then the interaction must be incorporated into the model, introducing even more complexity. 78 : List the ways that a companys decision maker can adjust for total project risk in capital budgeting. Correct Answer : 1. net present value/payback approach2. simulation analysis3. sensitivity analysis4. scenario analysis5. the risk-adjusted discount rate approach6. the certainty equivalent approach

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Chapter 14. Capital Structure Management in Practice 1 : The cost of internal common equity is represented in financial formulas as A : ki B : kd C : ke D : ke

Correct Answer : D 2 : Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over very long time periods have averaged approximately percentage points than holding period returns on corporate debt issues. A : 7.5; higher B : 7.5; lower C : 5.7; lower D : 5.7; higher Correct Answer : D 3 : The cost of equity capital for non-dividend paying stocks can be determined by .I. using the Capital Asset Pricing ModelII. estimating ke for comparable dividend-paying stocks in their industry A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 4 : For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current value weights of the individual components. A : book B : market C : replacement D : accounting Correct Answer : B 5 : The cost of capital is . A : the rate of return required by investors in the firms securities B : the minimum rate of return required on new investments of high risk undertaken by the firm C : approximately 10 percent for most firms D : concerned with plant and equipment only Correct Answer : A 6 : A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up Browsegrades.net

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to $700 million will be the marginal cost of capital for amounts over $700 million. A : less than B : equal to C : greater than D : Cannot be determined from the information given Correct Answer : A 7 : The CAPM assumes that the only risk of concern to the investor is by . A : unsystematic risk; beta B : systematic risk; the return to the market portfolio C : systematic risk; beta D : unsystematic risk; the return to the market portfolio

, which is measured

Correct Answer : C 8 : If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects, . A : its cost of capital will rise B : the average risk premium for the firm will decline C : the risk-free rate will increase as more risk is added D : its cost of capital will fall Correct Answer : A 9 : The most appropriate weights to use in calculating a firms cost of capital are the proportions of the components in the firms capital structure. A : historical average B : long-range target C : current D : industry average Correct Answer : B 10 : For firms subject to the 40% marginal tax rate, the after-tax cost of fifths the cost of preferred stock. A : retained earnings B : new common stock C : long-term debt D : None of these are correct

is roughly three-

Correct Answer : C 11 : There are four major components that determine the risk premium. They include all of the following EXCEPT risk. A : marketability B : business C : reinvestment rate D : financial Correct Answer : C Browsegrades.net

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12 : The required rate of return on any security consists of a(n) A : risk premium plus an expected inflation rate B : risk free rate plus a risk premium C : inflation rate plus a marketability premium D : risk free rate plus an inflation premium

Correct Answer : B 13 : The cost of external common equity is represented in financial formulas as A : ki B : kd C : ke D : ke

Correct Answer : C 14 : Break points can be determined by dividing the amount of funds available from each financing source at a fixed cost by the capital structure proportion for that financing source. A : weighted B : target C : economic D : divisional Correct Answer : B 15 : If a preferred stock is callable, then the calculation of the cost of preferred stock financing is . A : similar to that for bonds B : equal to Dp/Pn C : equal to Dp less flotation costs D : less than Dp/Pn Correct Answer : A 16 : The constant growth valuation model approach to calculating the cost of equity assumes that . A : earnings and dividends grow at a constant rate, but stock price growth is indeterminate B : the growth rate is greater than or equal to ke C : dividends are constant D : earnings, dividends, and stock price will grow at a constant rate Correct Answer : D 17 : The total return to stockholders, ke, is composed of the A : opportunity cost plus a risk premium B : dividend yield plus the price appreciation of the security C : opportunity cost plus an inflation premium D : dividend yield minus the risk premium

Correct Answer : B 18 : If a firm is losing money then the after-tax cost of debt is Browsegrades.net

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A : equal to kd(1 T) B : found by trial and error C : equal to the pretax cost of debt D : equal to the yield to first call date Correct Answer : C 19 : The historic beta of a firm is of little use as a forecast of the firms future systematic risk characteristics when the firm is . A : growing at a rate of 7-10 percent a year B : expanding an existing product line C : expanding into a new product line D : All of these are correct Correct Answer : C 20 : All of the following methods may be used to determine the cost of equity capital (ke) for a non-dividend-paying stock EXCEPT . A : the risk premium on debt approach B : the Capital Asset Pricing Model approach C : comparing with similar dividend-paying stocks in the industry D : the simulation with growth expectations approach Correct Answer : D 21 : The cost of external equity is greater than the cost of internal equity because A : it decreases the earnings per share B : it increases the market price of the stock C : of the flotation costs D : dividends are increased

Correct Answer : C 22 : Retained earnings are a cheaper source of funds than the sale of new equity because . A : retention defers the payment of taxable dividends to shareholders B : there are no flotation costs C : new shares are usually priced below current market price D : All of these are correct Correct Answer : D 23 : Historic average capital costs are decisions. A : not relevant for B : very useful when C : necessary for D : the relevant costs for

making new (marginal) resource allocation

Correct Answer : A 24 : Which of the following is NOT a typical source of debt funds for a small firm? A : investment banking firms Browsegrades.net

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B : commercial finance companies C : Small Business Administration D : leasing companies Correct Answer : A 25 : The after-tax cost of debt is represented in financial formulas as A : ki B : kd C : ke D : ke

Correct Answer : A 26 : The optimal capital budget is determined by comparing the expected project returns to the companys . A : computed break points B : cost of equity schedule C : marginal cost of capital schedule D : optimal opportunity curve Correct Answer : C 27 : The cost of depreciation-generated funds is equal to A : the cost of equity capital B : zero, because depreciation is a non-cash expense C : the investment opportunity cost D : the weighted cost of capital

Correct Answer : D 28 : The pretax cost of debt is represented in financial formulas as A : ki B : kd C : ke D : ke

Correct Answer : B 29 : It is difficult for small firms to apply for the dividend valuation model because . A : the dividend valuation model depends on the Capital Asset Pricing Model, which small firms cannot use B : of limited access to the capital markets for new equity C : of prohibitively high common stock issuance costs D : small firms often pay little or no dividends Correct Answer : D 30 : Rank in ascending order (lowest to highest) the relative riskiness of the various types of corporate and government securities. A : common stock, preferred stock, corporate debt, long-term government debt B : corporate debt, long-term government debt, preferred stock, common stock C : long-term government debt, corporate debt, preferred stock, common stock Browsegrades.net

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D : corporate debt, preferred stock, long-term government debt, common stock Correct Answer : C 31 : Rank in ascending order (lowest to highest) investors required rates of return on the various types of corporate securities. A : preferred stock, corporate debt, common stock B : common stock, preferred stock, corporate debt C : preferred stock, common stock, corporate debt D : corporate debt, preferred stock, common stock Correct Answer : D 32 : Which of the following statements is true concerning companies that do not pay dividends? A : The cost of equity capital can be estimated using the Capital Asset Pricing Model. B : The cost of equity capital is equal to the growth short-term rate of earnings per share. C : The dividend capitalization model can be used to determine an accurate cost of equity capital. D : None of these are correct Correct Answer : A 33 : The optimal capital budget is indicated by the point at which the intersect. A : depreciation schedule; investment opportunity schedule B : investment opportunity curve; marginal cost of capital curve C : investment opportunity curve; average cost of capital curve D : efficient portfolio curve; marginal cost of capital curve

and the

Correct Answer : B 34 : During the 1980s, the cost of capital for U.S. firms averaged about 3.3 percentage points higher than Japanese firms. During 1990 this disadvantage may have disappeared due to . A : higher exports to the United States B : higher real interest rates in Japan C : larger shareholder interest D : higher Japanese stock market Correct Answer : B 35 : If a firm sells assets, generating cash flows, the cost of these funds is A : the firms cost of equity B : the firms cost of cash flows C : the firms weighted cost of capital D : zero

Correct Answer : C 36 : Small firms are reluctant to obtain capital through the sale of common stock because of . A : potential loss of voting control B : high issuance costs C : high cost of debt Browsegrades.net

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D : All of these are correct Correct Answer : D 37 : Determine the (after-tax) percentage cost of a $50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company. Assume that the company has a 40% marginal tax rate. This long-term debt issue will yield 12% to the insurance company. A : 4.8% B : 7.2% C : 12.0% D : 10.6% Correct Answer : B 38 : Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%. A : 13.0% B : 7.8% C : 8.12% D : 13.54% Correct Answer : D 39 : The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). A : 14.1% B : 7.6% C : 6.5% D : 13.0% Correct Answer : A 40 : The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). A : 12.3% B : 13.4% C : 13.0% D : 12.7% Correct Answer : D 41 : The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). A : 12.9% B : 12.6% C : 13.0% D : 11.8% Browsegrades.net

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Correct Answer : B 42 : The Allegheny Valley Power Company common stock has a beta of 0.80. Assume the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). A : 12.7% B : 14.4% C : 12.6% D : 13.4% Correct Answer : D 43 : Determine the weighted cost of capital for the Mills Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and $180 million in retained earnings (ke = 16.0%). Mills present capital structure is considered optimal. The companys marginal tax rate is 40%. (Compute answer to nearest 0.1%.) A : 14.3% B : 12.6% C : 14.6% D : 11.9% Correct Answer : B 44 : What is the cost of a preferred stock with a $100 par value that pays a $9.60 dividend per year? The security has a flotation cost of $3.37 and will be retired at its par value in 20 years. A : 9.6% B : 9.9% C : 10.0% D : 10.6% Correct Answer : C 45 : What is the cost of equity for East Roon if the firm is expected to always pay a constant dividend of $2.22? The firms common stock is presently selling for $18.50. A : 8.3% B : 12.0% C : 10.2% D : Cannot be determined from the information given Correct Answer : B 46 : According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9% and the market risk premium is estimated to be 8.3%, what is Bestways cost of equity capital? A : 17.45% B : 8.36% C : 9.55% D : 16.2% Correct Answer : A 47 : Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at Browsegrades.net

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a rate of 7% a year into the foreseeable future. What is NAs cost of external equity if its stock can be sold to net $46 a share? A : 10.9% B : 11.2% C : 7.2% D : 21.0% Correct Answer : B 48 : A firm with a 40% marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firms weighted cost of capital if the marginal pretax cost of debt is 12%, the firms average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5%? A : 13.75% B : 11.59% C : 12.31% D : 10.45% Correct Answer : C 49 : Crickentree has a target capital structure of 30% debt and 70% equity. If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40%, what will be its equity break point? A : $2,428,571 B : $1,457,143 C : $3,400,000 D : $971,429 Correct Answer : B 50 : Easy Slider Inc. sold a 15-year $1,000 face value bond with a 10% coupon rate. Interest is paid annually. After flotation costs, Easy Slider received $928 per bond. Compute the after-tax cost of debt for these bonds if the firms marginal tax rate is 40%. A : 6.0% B : 7.2% C : 7.8% D : 6.6% Correct Answer : D 51 : Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its capital budget for next year, the firm will sell $50 million of 11% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7% to $140 million, and dividends also are expected to increase 7% to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alphas stock is $30. If the firm has a marginal tax rate of 40%, what is its weighted cost of capital for the coming year? A : 9.64% B : 8.63% C : 9.84% D : 11.67% Correct Answer : A Browsegrades.net

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52 : Wellington Gas has a target capital structure of 50% common equity, 40% debt, and 10% preferred stock. The cost of retained earnings is 16%, and the cost of new equity (external) is 16.7%. Wellington can sell debentures that will have an after-tax cost of 8.3% and the after-tax cost of preferred stock will be 11.9%. What is the marginal cost of capital before and after the break point? A : 12.51% and 12.86% B : 11.18% and 11.53% C : 14.23% and 14.68% D : 12.51% and 11.53% Correct Answer : A 53 : GQ earned $740,000 before taxes this year. The firm has a debt ratio of 30%, a marginal tax rate of 35%, and a dividend payout ratio of 40%. GQ has no preferred stock. What is GQs break point for equity? A : $634,286 B : $962,000 C : $412,286 D : $288,600 Correct Answer : C 54 : Groves Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5% each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5%, and the risk-free rate is 9.3%. What is the cost of equity for Groves? A : 19.6% B : 13.5% C : 15.4% D : 6.1% Correct Answer : C 55 : Groves Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5% each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5%, and the risk-free rate is 9.3%. What is the cost of equity for Groves? A : 1 and 2 only B : 2 and 3 only C : 1 and 3 only D : Cannot be determined from the information provided Correct Answer : C 56 : Mid-South Utilities will sell $10 million of $100 par value preferred stock that will pay an annual dividend of $9.75. Mid-South will receive $93.98 per share after flotation costs. If the issue must be retired in 20 years, what is the cost of the preferred issue? A : 10.37% B : 10.50% C : 10.23% D : 9.75% Browsegrades.net

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Correct Answer : B 57 : Witins stock price is currently $34.25, and the current quarterly dividend is $0.25. Consensus estimates for Witin indicate a growth rate in earnings of 10% into the foreseeable future. If Witin plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%? A : 13.49% B : 10.87% C : 13.21% D : 13.17% Correct Answer : A 58 : Weltron has a target capital structure of 35% debt and 65% equity. If the firm expects net income of $12.3 million and an annual dividend of $0.12 per share, what is the expected equity break point? There are 12 million shares outstanding. A : $18,923,076 B : $16,707,692 C : $10,061,538 D : $2,215,385 Correct Answer : B 59 : Pluega Inc. issued a $100 million 8.27% coupon debenture bond due in the next 20 years. The bonds each sold for $996. If the bonds pay interest semi-annually, what is Pluegas after cash cost of debt? Assume 40% tax rate. A : 4.96% B : 8.30% C : 4.99% D : 3.32% Correct Answer : C 60 : Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsees cost of equity if the firms tax rate is 40%. A : 9.48% B : 17.1% C : 14.9% D : Cannot determined from the information provided Correct Answer : B 61 : Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsees cost of equity if the firms tax rate is 40%. A : 1 and 2 only B : 1 and 3 only C : 1, 2, and 3 D : Cannot be determined from the information provided Browsegrades.net

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Correct Answer : A 62 : Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsees cost of equity if the firms tax rate is 40%. A : 1, 2, 3, and 4 B : 2 only C : 1, 2, and 4 only D : 2 and 4 only Correct Answer : C 63 : Temple Companys common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temples dividends are expected to grow at this rate for the foreseeable future. Temples stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internal and external equity to Temple. A : 18.1%; 18.9% B : 15.9%; 16.6% C : 16.2%; 16.9% D : 15.9%; 18.9% Correct Answer : C 64 : Temple Companys common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temples dividends are expected to grow at this rate for the foreseeable future. Temples stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internal and external equity to Temple. A : $11 million B : $10 million C : $5 million D : $14 million Correct Answer : A 65 : American Dental Laser is selling a 10-year $1,000 face value bond with an 8% coupon rate. Interest is paid annually. The price to the public is $820, and the issue costs per bond are $10 each. Compute the pretax cost of debt for these bonds. A : 11.1% B : 11.3% C : 11.5% D : 11.8% Correct Answer : B 66 : Mid-States Utility Company just issued a $3.20 cumulative preferred stock at a price to the public of $30 a share. The flotation costs were $1.50 a share, and the issue will be retired in 20 years at its $30 par value. What is the cost of this preferred issue? A : 11.3% B : 10.3% C : 10.7% Browsegrades.net

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D : 11.6% Correct Answer : A 67 : Wright Express (WE) has a capital structure of 30% debt and 70% equity. WE is considering a project that requires an investment of $2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%. A : 14.9% B : 12.4% C : 13.4% D : 16.0% Correct Answer : C 68 : California Best (CB), a sports shoes store, expects an operating income of $2.3 million this year. CB has no long-term debt. The firm is considering as expansion project. The current riskfree rate of return is 7%, and the current market risk premium is 8.3%. If CBs beta is 20% greater than the overall market, what is the firms cost of capital? Assume that CB has a marginal tax rate of 40%. A : 8.3% B : 16.96% C : 9.96% D : 15.3% Correct Answer : B 69 : Columbia Gas Companys (CG) current capital structure is 35% debt and 65% equity. This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding, and its current market price is $31. If CGs long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%. A : 10.9% B : 13.6% C : 19.6% D : 16.9% Correct Answer : A 70 : Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5%, and the risk-free rate is 4.2%. If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change? A : Yes, cost of capital decreases by 2.52% B : Yes, cost of capital decreases 1.67% C : No, stock price would decrease due to increased risk D : No, cost of capital increases by 0.85% Correct Answer : B Browsegrades.net

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71 : Sadaplast has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock. The cost of retained earnings is 14%, and the cost of new equity is 15.5%. Sadaplast expects to have a net income of $85 million in the coming year. If the firm sells bonds, up to $25 million can be sold at par value to yield an after-tax cost of 5.4%. An additional $20 million of debentures could be sold to yield an after-tax cost of 7.0%. The after-tax cost of preferred stock financing is estimated to be 11%. Sadaplast has a dividend payout ratio of 25%. What is Sadaplasts cost of capital between the first and second break points? A : 12.25% B : 11.27% C : 11.75% D : 12.73% Correct Answer : C 72 : Sadaplast has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock. The cost of retained earnings is 14%, and the cost of new equity is 15.5%. Sadaplast expects to have a net income of $85 million in the coming year. If the firm sells bonds, up to $25 million can be sold at par value to yield an after-tax cost of 5.4%. An additional $20 million of debentures could be sold to yield an after-tax cost of 7.0%. The after-tax cost of preferred stock financing is estimated to be 11%. Sadaplast has a dividend payout ratio of 25%. What is Sadaplasts cost of capital between the first and second break points? A : 13.4% B : 13.1% C : 11.6% D : 12.7% Correct Answer : D 73 : Mahlo is planning to diversify into the bakery industry. As a result, its beta should drop from 1.4 to 1.2 and the expected long-term growth rate of dividends will drop from 12% to 9%. The risk-free rate is 4%, the expected market risk premium is 9%, and the current dividend per share paid by Mahlo is $2.10. Should Mahlo complete the diversification into the bakery industry? A : No, stock price drops about $11.70 B : Yes, stock price increases about $9.40 C : Yes, stock price increases about $1.80 D : No, stock price drops about $9.40 Correct Answer : A 74 : Which of the following statements regarding the cost of capital is (are) correct? I. The weighted cost of capital is the discount rate used when computing the net present value.II. The after-tax cost of capital is weighted by the proportions of the capital components in the firms long-range target capital structure. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 75 : The cost of debt must account for all of the following inputs EXCEPT A : bond ratings Browsegrades.net

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B : issuance costs C : flotation costs D : the tax rate Correct Answer : A 76 : There are two primary ways that capital is raised. Which of the following statements is (are) correct? I. Capital is raised internally by using retained earnings.II. Capital is raised externally by selling fixed assets. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 77 : Investors can form earnings growth expectations from various sources, including A : potential sales growth B : current earnings and retention rates C : assumed product development D : investors required rate of return

Correct Answer : B 78 : Investors can form earnings growth expectations from various sources, including A : 6.9% B : 8.5% C : 10.2% D : 9.8%

Correct Answer : D 79 : Investors can form earnings growth expectations from various sources, including A : 15.71% B : 9.11% C : 12.56% D : 10.72%

Correct Answer : C 80 : The cost of internal equity is cheaper than the cost of external equity. Which of the following statements is (are) correct? I. External equity may incur expenses that are deducted from the capital received for the sale of the security.II. Corporations generally discount the price of the securities that are sold to the public in order to raise capital. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 81 : What is the cost of preferred stock if the stock is selling for $208, the dividend is $35, and flotation costs are 5% of the selling price? Browsegrades.net

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A : 17.7% B : 25.2% C : 12.5% D : 10.8% Correct Answer : A 82 : Calculate the weighted average cost of capital for Limp Linguini Noodle Makers Inc. under the following conditions:*The capital structure is 40% debt and 60% equity.*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket.*The firms beta is 1.7.*The risk-free rate is 7% and the market risk premium is 6%. A : 15.12% B : 18.7% C : 17.2% D : 12% Correct Answer : A 83 : A firm has a beta of 1.2. The return in the market is 14%, and the risk-free rate is 6%. The estimated cost of common stock equity is . A : 6% B : 7.2% C : 15.6% D : 14% Correct Answer : C 84 : The optimal capital budget occurs at the point where two curves intersect. Which of the following is (are) one of those curves? I. Weighted marginal cost of capital curveII. Investment opportunity curve A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 85 : The cost of common stock equity may be estimated by using which of the following? A : Earnings curve B : Dupont analysis C : Capital asset pricing model D : Price/Earnings ratio Correct Answer : C 86 : A firm is determining its cost of common stock equity. It last paid a dividend of $0.52, the dividends are growing at 5%, flotation costs are $2 per share, and the firm will net $72 per share upon the sale of the stock. What is the firms cost of common equity? A : 3.49% B : 8.22% C : 6.11% D : 5.76% Browsegrades.net

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Correct Answer : D 87 : Surfin Bubba Surfboard Shop is currently selling for $34.25 a share with a current dividend of $1.00. It is estimated that Surfin Bubba will have a growth rate in earnings of 10% into the foreseeable future. If Surfin Bubba plans to raise new capital for expansion, what is the cost of new equity if flotation costs are 8% of the price? A : 13.49% B : 11.57% C : 12.21% D : 10.87% Correct Answer : A 88 : Calculate Bodacious Bodywears weighted average cost of capital under the following conditions:*The firm has 30% debt, 10% preferred stock, and 60% equity.*The cost of common equity is 14% and the cost of preferred stock is 9%.*The firms debt has a before-tax cost of debt of 10% (including flotation costs).*The firm is in the 40% tax bracket. A : 11.1% B : 8.5% C : 12.3% D : 10.5% Correct Answer : A 89 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : the firms before-tax cost of debt B : the firms tax rate C : flotation costs D : the firms growth rate of dividends Correct Answer : D 90 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : 14.00% B : 13.57% C : 12.26% D : 10.00% Correct Answer : A 91 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : 5.18% B : 3.6% C : 7.5% D : 12.2% Correct Answer : A 92 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . Browsegrades.net

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A : 4.9% B : 11.55% C : 7.88% D : 8.44% Correct Answer : D 93 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : 12.25% B : 19.75% C : 14.97% D : 13.22% Correct Answer : C 94 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : 10.12% B : 19.63% C : 13.78% D : 12.11% Correct Answer : C 95 : In determining the cost of debt, several factors must be considered. All of the following are those factors EXCEPT . A : 12% B : 8% C : 15% D : 18% Correct Answer : A 96 : In many instances, book value, rather than market value, may be used to determine the weighted average cost of capital. This is because of all of the following EXCEPT , A : market values change daily B : the market prices of the various sources of capital are not easily estimated C : many firms have several different issues of debt which may not be publicly held D : book value is a more accurate value in determining the actual cost of capital Correct Answer : D

ESSAY 97 : In considering the SML concept, the required returns for any individual security are dependent on certain values. List and discuss those values. Correct Answer : 1. The risk-free rate: The 3-month or 6-month Treasury Bill rate is generally used for this value.2.The expected market return: This is the return that investors expect to earn on stocks with a beta of 1.0.3.The beta of the corporation: Beta is normally estimated by using Browsegrades.net

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historic values reflecting the relationship between and the market returns.

a security’s returns

98 : What are the reasons that the cost of external equity is greater than the cost of internal equity? Correct Answer : 1. External equity has issuance costs associated with new shares. These costs are generally significant enough that they cannot be ignored.2.The price of the new shares being sold to the public is normally set to an amount less than the market price of the stock before the announcement of the new issue. 99 : Firms can raise capital in two ways. Why does internal funding not have a zero cost? Correct Answer : Firms using internal funding, or retained earnings, incur an opportunity cost. When funds are generated through the earnings of the firm, either managers can pay out funds as dividends to common stockholders, or the funds can be retained and reinvested in the firm. If the funds are paid out to stockholders, they could reinvest the funds elsewhere to earn an appropriate return, given the risk of the investment. If managers decide to retain earnings and reinvest them in the firm, there must be investment opportunities in a firm offering a return equivalent to the returns available to stockholders in alternative investments on a risk-adjusted basis. 100 : How is the marginal cost of the various component capital sources determined? Correct Answer : The marginal cost of funds is the cost of the next increments of capital raised by the firm. When computing the marginal cost of the various component capital sources, companies typically estimate the component costs they anticipate encountering, or paying, during the coming year. If capital costs change significantly during the year, it may be necessary to recompute the new capital costs and use the new estimates when evaluating projects from that time forward. 101 : What is the investment opportunity curve, and how is it accomplished? Correct Answer : The investment opportunity curve is the graph that illustrates the comparison between the expected project return to the company’s marginal cost of capital schedule. It is accomplished by first plotting the returns expected from the proposed capital expenditure projects against the cumulative funds required. The optimal capital budget is indicated by the point at which the investment opportunity curve and the marginal cost of capital curve intersect. 102 : Sources of debt capital to small firms are limited. Generally, what are the sources of funds for the small firm? Correct Answer : Until a small firm has grown to a relatively large size, it must rely on the following sources for debt funds:1.The owners’ own funds and loans from friends2.Loans from commercial banks and savings and loan associations3.Small Business Administration loans4.Commercial finance company loans5.Leasing companies6.Venture capital firms that normally demand some equity interest in the firm through conversion features or warrants7.Private placements of debt issues with insurance companies and large corporations, often with a conversion feature or warrants 103 : What does the optimal capital budget maximize? How is it determined? Correct Answer : The optimal capital budget maximizes the value of the firm and occurs at the Browsegrades.net

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point where the firm’s investment opportunity curve and weighted marginal cost of capital curve intersect. 104 : Depreciation does not generate cash. In what way, then, is depreciation a source of funds? Correct Answer : Depreciation is a noncash expense charged against income. Therefore, a firm's reported net income will normally understate the amount of cash flow generated by the firm during a given time period. To adjust net income for the cash flow effect of depreciation, the amount of depreciation must be added to net income after taxes. It is in this sense that depreciation represents a source of funds.

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Chapter 15. Dividend Policy 1 : In analyzing the value of a firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected , resulting in an interior optimal capital structure. A : financial distress costs B : agency costs C : holding costs D : financial distress costs and agency costs Correct Answer : D 2 : The Modigliani-Miller theory that the value of the firm is independent of its capital structure is based on a(n) process. A : reinvestment B : capital asset pricing model C : arbitraging D : compound interest Correct Answer : C 3 : Two prominent finance researchers (Modigliani and Miller) showed that the firms . A : optimal capital structure consists of approximately equal proportions of debt and equity B : value is independent of its capital structure in perfect capital markets with no income taxes C : cost of capital is minimized when its capital structure consists of approximately equal proportions of debt and equity D : cost of capital is maximized when its capital structure consists of approximately equal proportions of debt and equity Correct Answer : B 4 : Which of the following is implied by perfect capital markets? A : There are no transactions costs for buying and selling securities. B : Relevant information is unavailable for individuals. C : All investors can borrow and lend at the same rate. D : A single investor can influence security prices. Correct Answer : C 5 : With an optimal capital structure, . A : overall capital costs are minimized B : the net present value of new projects is minimized C : financial leverage is minimized D : the weighted cost of capital is maximized Correct Answer : A 6 : Holding all other things equal, as the relative amount of debt in the capital structure of the firm increases, the cost of equity capital will . A : increase B : decrease C : remain unchanged; there is no relationship between the two Browsegrades.net

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D : initially rise rapidly, then increase slowly beyond some point Correct Answer : A 7 : As more debt is added to the capital structure of a firm, the cost of debt capital A : initially rises slowly, then falls beyond some point B : increases at a steady rate throughout the entire range C : becomes greater than the cost of equity beyond a certain point D : initially rises slowly, then increases rapidly beyond some point

Correct Answer : D 8 : Which of the following statements is true regarding the relationship between the firms cost of debt and its capital structure (as measured by the debt ratio)? A : The range of debt ratios where the cost of debt begins to increase rapidly varies by firm and industry, depending on the level of business risk. B : The precise relationship between the cost of debt and the debt ratio is simple to determine. C : The relationship is a saucer-shaped curve. D : The relationship is determined by the static tradeoff theory. Correct Answer : A 9 : Which of the following statements is true concerning the relationship between the firms cost of equity and its capital structure (as measured by the debt ratio)? A : The exact relationship between the cost of equity and the debt ratio is difficult to determine. B : The range of debt ratios where the cost of equity begins to increase rapidly varies by firm and industry depending on the firms age. C : The relationship is a saucer-shaped curve. D : The relationship is determined by the static tradeoff theory. Correct Answer : A 10 : The amount of permanent short-term debt, long-term debt, preferred stock, and common stock used to finance a firm defines the firms . A : financial structure B : capital structure C : target capital structure D : optimal financial structure Correct Answer : B 11 : The mix of debt, preferred stock, and common equity that minimizes the weighted cost of capital to the firm is known as the . A : optimal corporate structure B : target financial structure C : optimal capital structure D : optimal degree of combined leverage Correct Answer : C 12 : The optimal capital structure is determined by several factors, including all except which of the following? A : Corporate capital gains Browsegrades.net

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B : Business risk C : Potential bankruptcy risk D : Agency costs Correct Answer : A 13 : One of the primary assumptions of capital structure analysis is that the level and variability of is not expected to change as changes in capital structure are contemplated. A : net income B : earnings before taxes C : operating income D : debt Correct Answer : C 14 : Generally the a firms business risk, the be used in the optimal capital structure. A : greater; greater B : smaller; less C : greater; less D : smaller; greater

the amount of financial leverage that will

Correct Answer : C 15 : All except which of the following factors influence a firms business risk? A : Degree of operating leverage B : Variability of interest rates C : Variability of operating costs D : Variability of selling prices Correct Answer : B 16 : Operating leverage involves the use of A : equity and debt in equal proportions B : market power C : debt D : assets having fixed costs

Correct Answer : D 17 : The use of fixed cost sources of funds, such as debt and preferred stock, affect a firms . A : financial risk B : degree of operating leverage C : market power D : business risk Correct Answer : A 18 : The use of fixed-cost financing sources is referred to as the use of A : operating leverage B : a leveraged buyout C : financial leverage Browsegrades.net

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D : combined leverage Correct Answer : C 19 : The objective of capital structure management is to find the capital mix that leads to A : maximization of earnings per share B : shareholder wealth maximization C : maximization of net income D : maximization of the current periods dividends

Correct Answer : B 20 : Financial leverage benefits shareholders when the return on A : assets is greater than the cost of debt B : equity is greater than the cost of debt C : investments is less than the weighted cost of capital D : equity is less than the cost of debt

Correct Answer : A 21 : Modigliani and Miller show that the value of a firm is capital markets and no corporate income taxes. A : maximized by having no debt in the B : independent of C : maximized by having an optimal D : dependent on the

capital structure given perfect

Correct Answer : B 22 : Due to both financial distress and agency costs, a firm should have a capital structure that contains . A : all debt B : all equity C : both debt and equity D : only long-term debt Correct Answer : C 23 : Agency costs . A : increase as the debt/total assets ratio decreases B : affect the present value of the tax shield C : decrease as financial distress increases D : reduce the market value of the levered firm Correct Answer : D 24 : Protection for debt holders takes the form of protective covenants in the bond indenture. These covenants place restrictions on which of the following activities? A : The sale of assets B : Payment of dividends C : The issuance of additional debt D : All other choices are typical protective covenants. Browsegrades.net

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Correct Answer : D 25 : As the proportion of debt in the capital structure increases, investors require a and the value of existing debt will . A : higher; increase B : higher; decrease C : lower; increase D : lower; decrease

return

Correct Answer : B 26 : Investors required returns and the cost of equity capital used to finance the firm . A : increase; increases B : increase; decreases C : remain constant; increases D : remain constant; decreases

as the relative amount of debt

Correct Answer : A 27 : Studies of capital structure changes have found that actions that increase leverage have generally been associated with stock returns and actions that decrease leverage are associated with stock returns. A : negative; positive B : negative; no change in C : positive; negative D : no change in; negative Correct Answer : C 28 : The managerial implications of capital structure theory include all except which of the following? A : Capital structure changes transmit important information to investors. B : Changes in capital structure result in changes in the market value of the firms equity. C : Optimal capital structure is influenced heavily by the business risk facing the firm. D : Tax shield benefits from equity lead to increased firm value. Correct Answer : D 29 : The increased variability in earnings per share due to the firms use of debt is a definition of . A : combined leverage B : agency risk C : financial risk D : operating risk Correct Answer : C 30 : In determining the capital structure for an international firm, the managerial objective is to minimize . A : exchange rate risk B : the risk of expropriation C : the overall cost of capital Browsegrades.net

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D : available local low-cost financing Correct Answer : C 31 : structure represents the permanent sources of the firms financing. A : Financial B : Capital C : Equity D : Cost Correct Answer : B 32 : The optimal capital structure of a firm is a function of the A : business risk of the firm B : tax structure C : business risk of the firm and the tax structure D : the variability of sales volumes

Correct Answer : C 33 : The less a firms business risk, the the amount of capital structure, holding constant all other relevant factors. A : less; financial leverage B : more; financial leverage C : less; equity capital D : more; debt capital

that will be used in the optimal

Correct Answer : B 34 : The market value of a levered firm can be represented by the following equation:Market value of levered firm = Market value of unlevered firm Present value of tax shield Present value of financial distress costs Present value of agency costs A : minus; plus; plus B : plus; plus; plus C : plus; minus; minus D : minus, plus, minus Correct Answer : C 35 : The optimal capital structure is a function of . A : corporate income taxes B : financial distress costs C : agency costs D : corporate income taxes, financial distress costs, and agency costs Correct Answer : D 36 : Per the pecking order theory, firms prefer to issue securities as a last resort. A : equity; debt B : debt; convertible debt C : debt; equity D : equity; convertible debt Browsegrades.net

securities first and then issue

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Correct Answer : C 37 : refers to the argument that officers and managers have access to information about the expected future earnings of the firm that is not available to outside investors. A : Insider trading B : Asymmetric information C : Signaling effect D : Pecking order theory Correct Answer : B 38 : A survey of Fortune 500 firms indicates that they prefer internal financing (retained earnings) to external financing. This preference is known as . A : financial slack B : the pecking order theory C : capital structure theory D : asymmetric capital Correct Answer : B 39 : A firm with highly liquid assets plus unused debt capacity is said to have A : arbitrage structural capacity B : the optimal capital structure C : financial slack D : optimal financial structure

Correct Answer : C 40 : The management of Graphicopy is trying to determine how much debt they should have in their capital structure. If they sell $500,000 in perpetual bonds with a 9% coupon, what would be the present value of the tax shield? Assume the marginal tax rate is 35%. A : $18,750 B : $29,250 C : $175,000 D : $45,000 Correct Answer : C 41 : What is the annual tax shield to a firm that has a capital structure consisting of $100 million of debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%? A : $9.0 million B : $5.4 million C : $9.36 million D : $3.6 million Correct Answer : D 42 : What is the present value of the tax shield to a firm that has a capital structure consisting of $100 million of perpetual debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%? A : $72 million Browsegrades.net

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B : $40 million C : $60 million D : $3.6 million Correct Answer : B 43 : Calculate the market value of Lotle Group, a firm with total assets of $80 million and $30 million of perpetual debt in its capital structure. The firms cost of equity is 14%, and the cost of debt is 9%. Lotle expects annual, perpetual net operating income (EBIT) of $9 million and a marginal tax rate of 40%. A : $30 million B : $61.3 million C : $57 million D : $64.3 million Correct Answer : C 44 : What is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%? A : $2.125 million B : $1.87 million C : $0.85 million D : $0.744 million Correct Answer : D 45 : What is the present value of the tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on perpetual debt is 8.5%, the average return on equity is 14%, and the marginal tax rate is 35%? A : $8.75 million B : $12.25 million C : $0.85 million D : $0.744 million Correct Answer : A 46 : Calculate the market value of a firm with total assets of $60 million and a net worth of $35 million. The firms cost of equity is 15%, and the cost of perpetual debt is 8%. The firm has a perpetual net operating income (EBIT) of $4.5 million and a marginal tax rate of 35%. A : $41.67 million B : $30.00 million C : $35.83 million D : $30.83 million Correct Answer : C 47 : What is the market value of Barings, a firm with total assets of $100 million and $30 million in perpetual debt in its capital structure? Barings cost of equity is 15%, and its cost of debt is 10%. Expected perpetual net operating income (EBIT) will be $17 million, and the marginal tax rate is 40%. A : $86.0 million B : $104.0 million Browsegrades.net

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C : $98.0 million D : $92.7 million Correct Answer : A 48 : Calculate the market value of a firm with total assets of $105 million and $50 million of 10% perpetual debt in the capital structure. The firms cost of equity is 14% on the $55 million in equity in the capital structure. The perpetual EBIT is expected to be $9 million, and the marginal tax rate is 40%. A : $88.6 million B : $67.1 million C : $114.3 million D : $78.6 million Correct Answer : B 49 : RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firms cost of equity is 14% and its cost of debt is 9%. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40%, what is the market value of RoTek? Assume all net income is paid out as dividends. A : $698,571 B : $814,286 C : $818,571 D : $55,800 Correct Answer : A 50 : RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firms cost of equity is 14% and its cost of debt is 9%. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40%, what is the market value of RoTek? Assume all net income is paid out as dividends. A : 40% has lowest cost of capital B : 50% has lowest cost of capital C : 60% has lowest cost of capital D : 70% has lowest cost of capital Correct Answer : C 51 : RoTek has a capital structure of $300,000 in equity and $300,000 in perpetual debt. The firms cost of equity is 14% and its cost of debt is 9%. If the firm has an expected, perpetual net operating income of $120,000 and a marginal tax rate of 40%, what is the market value of RoTek? Assume all net income is paid out as dividends. A : 30% debt B : 40% debt C : 50% debt D : 60% debt Correct Answer : C 52 : Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, ka, is 13.7%. Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%. What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term Browsegrades.net

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growth rate of dividends is expected to be 8.5%. A : Decrease $3.65 B : Decrease $3.96 C : Increase $3.65 D : Increase $3.96 Correct Answer : B 53 : Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, ka, is 13.7%. Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%. What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%. A : 35% debt B : 40% debt C : 45% debt D : 50% debt Correct Answer : C 54 : Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, ka, is 13.7%. Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%. What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%. A : $14.66 B : $30.40 C : $30.14 D : $29.40 Correct Answer : A 55 : Triad Labs has total assets of $120 million and $40 million of debt in its capital structure. Its current cost of equity is 13%, and its cost of debt is 8.5%. Triad is considering increasing its debt to $70 million and purchasing its own stock with proceeds from the sale of $30 million in debt with a cost of 9.5%, reducing equity to $50 million. The cost of equity will increase to 14.5%. Net operating income (EBIT) will remain at $12 million. If Triad has a marginal tax rate of 40%, should the firm increase its debt? Assume that both debt and EBIT are perpetual. A : No, the value of the firm decreases $15.9 million B : No, the value of the firm decreases $30.0 million C : Yes, the value of the firm increases $14.1 million D : Yes, the value of the firm increases $30.0 million Correct Answer : C 56 : The airline industry is extremely price competitive, as well as having huge fixed costs and very low variable costs. This is an example of . A : low asset performance B : high profitability C : high operating leverage D : low fixed threshold Correct Answer : C Browsegrades.net

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57 : The capital structure decision attempts to minimize firm. A : leverage costs B : the cost of capital C : labor costs D : compensation packages

, which maximizes the value of the

Correct Answer : B 58 : The greater the variability of costs, the greater the business risk of the firm. This is determined by the . A : selling price B : cost of inputs used to produce a firms output C : sales volume D : existence of market power Correct Answer : B 59 : The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of price differences and make a profit is called . A : option pricing B : diversification C : arbitrage D : margining Correct Answer : C 60 : Arbitrage transactions are A : risky B : illegal C : speculative D : risk-free

Correct Answer : D 61 : The tax deductibility of interest payments provides the firm with a A : market advantage B : learning curve C : tax shield D : safeguard against auditing

Correct Answer : C 62 : In considering a firms capital structure, the firm should increase its maximize its value. A : stock outstanding B : earnings C : cash flow from investing D : debt

, which will

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63 : With financial leverage, a change in EBIT results in a change in A : fixed costs B : EPS C : financial risk D : EBT

Correct Answer : B 64 : A firm accepts the risk of fixed-cost financing to A : increase stock sales B : decrease overhead costs C : increase possible returns to stockholders D : develop synergy

Correct Answer : C 65 : In considering the arbitrage process in perfect capital markets with no income taxes, the market value of a firm is . A : dependent on its capital structure B : independent of its capital structure C : reliant on stock equity prices D : reliant on management expertise Correct Answer : B 66 : The tax deductibility of the interest payments on corporate debt is known as A : the tax structure B : the tax shield C : the optimal capital structure D : Section 402a of the IRS tax code

Correct Answer : B 67 : What is optimal capital structure? A : It is the mix of debt, preferred stock, and common equity that maximizes profits. B : It is the mix of debt, preferred stock, and common equity that minimizes risk. C : It is the mix of debt, preferred stock, and common equity that minimizes the weighted cost to the firm of its employed capital. D : It is the mix of common and preferred stock that maximizes dividends to the stockholders. Correct Answer : C 68 : The amount of debt in a firms optimal capital structure is often referred to as the firms A : debt capacity B : lending ability C : line of credit D : loan limit Correct Answer : A

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69 : How do signaling effects impact the firms capital structure decision? Correct Answer : When a firm issues new securities, the event can be viewed as providing a signal to the marketplace regarding the future prospects of the firm. New common equity offerings generally have a negative impact on the stock’s market price, whereas new debt offerings generally have no impact on the stock price. Repurchases of common stock have led to positive stock returns. 70 : What is the pecking order theory regarding managerial preferences for financing alternatives? Correct Answer : The pecking order theory indicates that firms prefer internal financing (namely, retained earnings) to external financing (new security issues). This preference is based on two considerations. First, because of flotation costs of new security issues, internal financing is less costly than external financing. Second, internal financing avoids the discipline and monitoring that occurs when new securities are sold publicly. Companies are reluctant to make major changes in dividend payments and only gradually adjust dividend payout ratios to reflect their investment opportunities and thereby avoid the issuance of new securities. 71 : List some of the many factors that influence a firms business risk. Correct Answer : The factors that influence a firm’s business risk are:1. The variability of sales volumes over the business cycle2. The variability of selling prices3. The variability of costs4. The existence of market power5. The extent of product diversification6. The level and rate of growth7. The degree of operating leverage 72 : Explain how industry effects need to be considered in the capital structure decision. Correct Answer : Given the corporate income tax, financial distress costs, and agency costs, an optimal capital structure consisting of both debt and equity is shown to exist. Determination of the optimal capital structure involves balancing the present value of the tax shield accruing from debt financing against the present value of the expected financial distress costs and the agency costs associated with debt financing. In general, the studies of industry effects in capital structure tend to conclude that there is an optimal capital structure for individual firms. Firms may deviate from their optimal leverage targets but, over time, they appear to take actions that close the gap between actual and target capital structure ratios. The market rewards firms that achieve their optimal capital structure. 73 : List the factors that determine the specific capital structure for a multinational firm. Correct Answer : The factors that determine the specific capital structure that will prevail for each subsidiary of a multinational firm are:1. Exchange rate risk in the host country2. Local industry standards3. Host country requirements4. Risk of expropriation5. Availability of special, low-cost financing in a host country6. Increased capital market access for firms operating in several different countries7. The extent to which the firm diversifies political and economic country risk, which is largely a function of the number and location of foreign subsidiaries of the multinational firm 74 : When a corporation must get external financing, the first place to look for funds is with debt. There are various reasons for this preference. List the reasons why debt is generally issued first. Correct Answer : 1. Flotation costs for debt are generally lower than the costs for equities.2. The Browsegrades.net

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stock market tends to react negatively to announcements of new common stock offerings.3. Debt is considered the “safest” of the external securities that could be issued.4. Debt may offer more financial flexibility. 75 : There are many benefits to a leveraged buy-out. However, the benefits from LBOs come with significant costs. Explain the down-side of LBOs. Correct Answer : LBOs offer increased operating efficiency but this is achieved by eliminating jobs, reducing payroll expenses, and closing inefficient plants. Even when laid-off employees are rehired, they are often rehired at lower wages. Communities and civic organizations lose the support of a “corporate benefactor” if the acquiring company has other commitments and chooses not to continue the previous support level. Bondholders of the acquired firm often experience a loss in value of their bonds.

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Chapter 16. Working Capital Policy and Short-Term Financing 1 : Raw material and direct labor costs are examples of A : fixed costs B : overhead costs C : variable costs D : capital costs

Correct Answer : C 2 : When fixed operating costs are incurred by the firm, a change in relatively larger change in earnings before interest and taxes. A : overhead expenses B : interest charges C : labor costs D : sales revenue

is magnified into a

Correct Answer : D 3 : When fixed capital costs are incurred by the firm, a change in change in earnings per share. A : earnings before interest and taxes B : overhead expenses C : interest charges D : preferred dividends

is magnified into a larger

Correct Answer : A 4 : The percentage change in a firms EBIT that results in a 1% change in sales or output is known as the degree of . A : combined leverage B : financial leverage C : operating leverage D : business risk Correct Answer : C 5 : The total variability of the firms EPS associated with a change in sales is an indication of combined leverage and is best measured by . A : DOL B : DFL C : DOL plus DFL D : DOL times DFL Correct Answer : D 6 : In the analysis of financial leverage, all of the following are referred to as fixed charges EXCEPT . A : bond interest B : common stock dividends C : bank interest D : preferred stock dividends Browsegrades.net

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Correct Answer : B 7 : The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in . A : operating costs B : interest charges C : common stock dividends D : sales (or output) Correct Answer : D 8 : The degree of combined leverage is equal to the degree of operating leverage degree of financial leverage. A : added to B : divided by C : multiplied by D : subtracted from

the

Correct Answer : C 9 : Rent, insurance, and the salaries of top management are examples of A : fixed costs B : capital costs C : variable costs D : fluctuating costs

Correct Answer : A 10 : A firm that employs relatively large amounts of laborsaving equipment in its operations will have a relatively degree of operating leverage. A : low B : constant C : insignificant D : high Correct Answer : D 11 : A firm that employs a relatively large proportion of debt and preferred stock in its capital structure will have a relatively degree of financial leverage. A : low B : high C : insignificant D : constant Correct Answer : B 12 : The degree of combined leverage is equal to the multiplied by the A : degree of operating leverage; variable cost ratio B : degree of financial leverage; variable cost ratio C : degree of operating leverage; degree of financial leverage D : degree of operating leverage; fixed cost ratio Browsegrades.net

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Correct Answer : C 13 : A firm is considering the purchase of assets that will increase its fixed operating costs. The firm should decrease the proportion of it employs in its capital structure if it wants to maintain its existing degree of combined leverage. A : debt B : warrants C : common stock D : common stock and warrants Correct Answer : A 14 : To balance the operating and financial risks that are so variable for a multinational company, Nestlé allows its foreign operating subsidiaries operational flexibility and follows a financing strategy. A : decentralized; centralized B : centralized; centralized C : centralized; decentralized D : decentralized; decentralized Correct Answer : A 15 : The degree of financial leverage is defined as the percentage change in A : EBIT resulting from a given percentage change in sales B : EPS resulting from a given percentage changes in sales C : EBIT resulting from a given percentage change in EPS D : EPS resulting from a given percentage change in EBIT

Correct Answer : D 16 : An analytical technique called analysis can be used to help determine when debt financing is advantageous and when equity financing is advantageous. A : DFL-EPS B : EBIT-EPS C : DCL-EPS D : DOL-EBIT Correct Answer : B 17 : Cash insolvency analysis evaluates the adequacy of a firms cash position in a A : bankruptcy proceeding B : non-normal environment C : highly competitive environment D : recessionary environment

Correct Answer : D 18 : Financial leverage causes a firms . A : EBIT; EPS B : EPS; EBIT C : EBIT; sales D : sales; EBIT

to change at a rate greater than the change in

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Correct Answer : B 19 : In EBIT-EPS analysis, the indifference point is found at the point where alternative financing plans is (are) equal. A : EBIT B : EPS C : stock prices D : DOL

for the two

Correct Answer : B 20 : A firm that has a 2.5 DOL (degree of operating leverage) would find that an 8% increase in EBIT would result from a increase in sales. A : 3.2% B : 5.4% C : 20.0% D : 2.0% Correct Answer : A 21 : A negative DOL indicates the percentage of a 1% increase in output. A : increase B : reduction C : change D : None of these are correct

in operating losses that occurs as the result

Correct Answer : B 22 : A DFL (degree of financial leverage) of 3.0 indicates a 27% increase in EPS is the result of a(n) increase in EBIT. A : 81% B : 3% C : 9% D : 6% Correct Answer : C 23 : The use of increasing amounts of combined leverage A : decreases B : increases C : has no effect on D : creates diversity in

the risk of financial distress.

Correct Answer : B 24 : A firm is said to be A : cash insolvent B : bankrupt C : free cash challenged D : technically insolvent

if it is unable to meet its current obligations.

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Correct Answer : D 25 : Illinois Tool Companys (ITC) fixed operating costs are $1,260,000, and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITCs degree of operating leverage at a sales level of $9 million? A : 1.60 B : 1.875 C : 3.0 D : 1.26 Correct Answer : B 26 : Illinois Tool Companys (ITC) fixed operating costs are $1,260,000, and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITCs degree of financial leverage at an EBIT level of $1,440,000? A : 1.20 B : 1.875 C : 3.0 D : 1.60 Correct Answer : D 27 : Illinois Tool Companys (ITC) fixed operating costs are $1,260,000, and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8%. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50% corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITCs degree of combined leverage at a sales level of $10 million? A : 2.00 B : 1.72 C : 2.50 D : 1.25 Correct Answer : C 28 : Suppose ITCs degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITCs percentage change in earnings per share (EPS) if forecasted sales increase by 20% to $10,800,000. A : 60% B : 50% C : 32% D : 30% Correct Answer : A 29 : Suppose ITCs degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITCs percentage change in earnings per share (EPS) if forecasted sales increase by Browsegrades.net

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20% to $10,800,000. A : 0.0 B : 1.0 C : 3.0 D : cannot be determined from the information provided Correct Answer : C 30 : Last year Avators operating income (EBIT) increased by 22% while its dollar sales increased by 15%. What is Avators degree of operating leverage (DOL)? A : 0.68 B : 2.0 C : 1.47 D : 0.32 Correct Answer : C 31 : Kermits Hardwares (KH) fixed operating costs are $20.8 million, and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its marginal tax rate is 40%. Compute KHs degree of operating leverage. A : 14.81 B : 5.19 C : 12.95 D : 4.54 Correct Answer : C 32 : Kermits Hardwares (KH) fixed operating costs are $20.8 million, and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its marginal tax rate is 40%. Compute KHs degree of financial leverage. A : 1.22 B : 2.07 C : 1.09 D : 1.04 Correct Answer : B 33 : Kermits Hardwares (KH) fixed operating costs are $20.8 million, and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million, and its marginal tax rate is 40%. Compute KHs degree of combined leverage. A : 26.8 B : 5.5 C : 29.1 D : 4.7 Correct Answer : A 34 : Weis Products has fixed operating costs of $20 million and a variable cost ratio of 0.55. Weis has 4 million common shares outstanding and a marginal tax rate of 45%. What is Weiss degree of operating leverage at an expected sales level of $150 million? Browsegrades.net

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A : 1.00 B : 1.74 C : 1.42 D : 1.32 Correct Answer : C 35 : Kenzel has an EPS of $4.20, and sales are $9 million. Assuming the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline. A : $0.71 B : $3.49 C : $4.03 D : $3.33 Correct Answer : A 36 : Leigh Fibers expects its operating income over the coming year to equal $2.5 million with a standard deviation of $800,000. Leigh must pay interest charges of $1.2 million next year and preferred dividends of $300,000. Leighs marginal tax rate is 35%. What is the probability that Leigh will have negative EPS next year if its operating income is expected to be normally distributed? (Problem requires a normal distribution table.) A : 14.7% B : 5.2% C : 10.6% D : 15.7% Correct Answer : A 37 : Chemex has a cash and marketable securities balance of $200 million. Management expects free cash flows of $320 million during the coming year. If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year? A : $30 million B : $170 million C : $230 million D : $470 million Correct Answer : B 38 : Chemex has a cash and marketable securities balance of $200 million. Management expects free cash flows of $320 million during the coming year. If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year? A : $33.9 million B : $30.75 million C : $37.0 million D : $12.9 million Correct Answer : B 39 : Chemex has a cash and marketable securities balance of $200 million. Management expects free cash flows of $320 million during the coming year. If management is considering a Browsegrades.net

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restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year? A : The indifference point increases. B : The indifference point decreases. C : The indifference point does not change. D : Cannot be determined from the information provided Correct Answer : B 40 : Chemex has a cash and marketable securities balance of $200 million. Management expects free cash flows of $320 million during the coming year. If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year? A : $1.20 B : $1.20 C : $2.20 D : $3.33 Correct Answer : B 41 : Chemex has a cash and marketable securities balance of $200 million. Management expects free cash flows of $320 million during the coming year. If management is considering a restructuring of its capital structure that would add an additional $350 million of annual fixed financial charges, what is the expected cash balance at the end of the year? A : $1.50 B : $1.20 C : $2.00 D : $2.50 Correct Answer : B 42 : Onex expects to have an EBIT of $240,000 with a standard deviation of $90,000. The distribution of operating income is approximately normal. What is the probability that Onex will have an EBIT below $0? (Problem requires a normal distribution table.) A : 0.47% B : 2.67% C : 0.38% D : 2.25% Correct Answer : C 43 : Alace is an all-equity firm with 10 million shares outstanding and is evaluating two alternative financing plans. With the first plan, Alace will sell 1 million shares of common stock at $15 each. Under the second plan, the firm would sell $15 million of 12% long-term debt. If Alace has a marginal tax rate of 35%, what is the EBIT-EPS indifference point? A : $12.9 million B : $19.8 million C : $11.7 million D : $18.0 million Correct Answer : B 44 : Knight Moves is considering two alternative financing plans. The firm is expected to operate Browsegrades.net

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at the $75 million EBIT level. Under Plan D (debt financing) EPS is expected to be $2.25, and under Plan E (equity financing) EPS is expected to be $1.82. If the market is expected to assign a P/E ratio of 12 to the debt plan and 15 to the equity plan, which plan should Knight pursue? A : debt B : equity C : indifferent between the two alternatives D : neither is satisfactory Correct Answer : B 45 : Dagger Company has a current capital structure consisting of $60 million in long-term debt with an interest rate of 9% and $60 million in common equity (12 million shares). The firm is considering an expansion plan costing $23 million. The expansion plan can be financed with additional long-term debt at a 12% interest rate or the sale of new common stock at $8 per share. The firms marginal tax rate is 40%. Determine the indifference level of EBIT for the two financing plans. A : -$30.24 million B : $18.36 million C : $30.24 million D : $19.68 million Correct Answer : D 46 : The Ames Company has an expected EBIT of $16 million with a standard deviation of $8 million. The indifference point between a debt financing alternative and a common stock financing alternative was computed to be $12 million. Determine the probability that the equity financing alternative will be superior to the debt financing alternative (i.e., have a higher EPS). (Problem requires normal distribution table.) A : 50.0% B : 30.85% C : 69.15% D : cannot be computed Correct Answer : B 47 : Centex, a producer of telephone systems for small businesses, has current sales of $43 million and variable operating costs of $27.95 million. Centex expects to increase sales in the coming year by 15% while keeping fixed operating costs constant at $9.1 million. What is the DOL for Centex? A : 3.3 B : 2.5 C : 7.2 D : 1.0 Correct Answer : B 48 : TCA Cable has fixed operating costs of $2.6 million, and its variable cost ratio is 0.30. TCA has $4.0 million in bonds outstanding with a coupon interest rate of 12%. TCA has 1.0 million common shares and 1,000,000 shares of $1.75 preferred stock outstanding. Total revenues for TCA Cable are $14.2 million. If TCA has a marginal tax rate of 40%, what is its degree of combined leverage? A : 2.1 B : 1.0 Browsegrades.net

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C : 1.9 D : 2.5 Correct Answer : D 49 : Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a degree of combined leverage of 3.4. What is Borkstrans degree of financial leverage? A : 1.20 B : 0.73 C : 2.29 D : 0.84 Correct Answer : A 50 : Archive Storage earned $3.20 a share on sales of $13.6 million. Archive has determined that its degree of operating leverage is 1.87 and its degree of financial leverage is 2.91. If sales are expected to increase 15%, what will be the EPS forecast? A : $2.61 B : $4.60 C : $5.81 D : $3.68 Correct Answer : C 51 : Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Alpines DOL is 1.5, what is its DFL? A : 3.09 B : 2.06 C : 3.55 D : 1.67 Correct Answer : B 52 : If a firm sees its EPS increase 27% on a 12% increase in sales. During the same period the firm saw its EBIT increase only 8%. What is the firms DOL? A : 1.50 B : 3.38 C : 1.34 D : 0.67 Correct Answer : D 53 : If a firm sees its EPS increase 27% on a 12% increase in sales. During the same period the firm saw its EBIT increase only 8%. What is the firms DOL? A : 0.29 B : 0.38 C : 0.15 D : 0.38 Correct Answer : B 54 : ASG expects next years operating income (EBIT) to equal $22 million, with a standard deviation of $16 million. The coefficient of variation of operating income is equal to 0.73. Interest Browsegrades.net

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expenses will be $9 million next year and debt retirement will require a principal payment of $2.5 million. ASGs marginal tax rate is 40%. If EBIT is normally distributed, what is the probability that ASG will have a negative EPS next year? (Problem requires a normal distribution table.) A : 20.9% B : 25.5% C : 23.3% D : 25.8% Correct Answer : A 55 : Sulzars capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion, which will require $100 million of new capital. Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. Assuming Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point. A : $45 million B : $36 million C : $5 million D : $9 million Correct Answer : A 56 : Sulzars capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion, which will require $100 million of new capital. Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. Assuming Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point. A : $0.42 B : 8.37 C : 2.15 D : 1.78 Correct Answer : D 57 : Sulzars capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion, which will require $100 million of new capital. Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. Assuming Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point. A : 23.81 B : 4.24 C : 0.42 D : 2.18 Correct Answer : B 58 : Higgins currently has 2 million shares of common stock outstanding that are selling for $32 per share. Higgins also has a $20 million mortgage bond outstanding that has an 11% coupon rate. Higgins is considering two alternatives to financing a major expansion. Plan A is to sell $10 million of additional long-term debt with a 12.5% coupon. Plan B is to sell 200,000 shares of common stock at $30 per share and $4 million in long-term debt with an 11.25% coupon. What is the EBIT indifference level between these two alternatives? Assume the marginal tax rate is 40%. Browsegrades.net

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A : $1,374,000 B : $11,450,000 C : $4,554,000 D : $2,650,000 Correct Answer : B 59 : Onyx expects to have an EBIT of $240,000 with a standard deviation of $110,000. The distribution of operating income is approximately normal. If Onyx has interest expenses of $50,000, what is the probability that it will have an operating income that is below $0? (Problem requires a normal distribution table.) A : 4.27% B : 1.46% C : 0.02% D : 2.4% Correct Answer : B 60 : Midwest Can Company is considering opening a new plant in St. Louis that is expected to produce an average EBIT of $3 million per year. To finance this new plant, Midwest is considering two financing plans. The first plan is to sell 600,000 shares of common stock at $15 each. The second plan is to sell 200,000 shares of common stock at $15 each and $6 million of 13% long-term debt. Assuming Midwest has a marginal tax rate of 40%, what is the EBIT-EPS indifference point for this plant? A : $702,000 B : $234,000 C : $2,234,000 D : $1,170,000 Correct Answer : D 61 : Ipsy Dipsy Preschools Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans:1) Equity financing: Sale of 400,000 shares of common at $10 each2) Debt financing: Sale of $4 million of 12.5 percent long-term bondsCalculate the EBIT-EPS indifference point, assuming the marginal tax rate is 40%. A : $4.253 million B : $3.051 million C : $3.654 million D : $4.728 million Correct Answer : D 62 : River Rafts has determined that its expected EBIT for the coming year is $8.3 million. The EBIT is approximately normally distributed with a standard deviation of $5.1 million. If River Rafts has $1.9 million in annual interest payments, what is the probability that the firm will have negative earnings? A : 4.65% B : 10.47% C : 5.16% D : 35.20% Browsegrades.net

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Correct Answer : B 63 : Twin City Printing is considering two financial alternatives for financing a major expansion program. Under either alternative EBIT is expected to be $15.6 million. Currently the firms capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds. Under the debt financing alternative $10 million in 12% long-term bonds will be sold, and under the equity financing alternative the firm would sell 500,000 shares of common stock. The P/E under the debt alternative would be 15, and the P/E under the equity alternative would be 16. The firms marginal tax rate is 40%. Which alternative would produce the higher stock price? A : debtstock price of $23.70 B : debtstock price of $32.29 C : equitystock price of $25.12 D : equitystock price of $33.28 Correct Answer : C 64 : Sitco has a total of $12 million in cash and marketable securities. Free cash flows during the coming year are expected to be $47 million with a standard deviation of $31 million. Assume that Sitcos free cash flows are approximately normally distributed. What is the probability that Sitco will run out of cash during the coming year? A : 29.98% B : 34.83% C : 97.13% D : 2.87% Correct Answer : D 65 : Crown Data(CD) has a current capital structure that consists of $120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11%. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing long-term debt at a cost of 12.5%, or the sale of new common stock at $35 per share. The firms marginal tax rate is 40%. What is the EBIT indifference point between the two financing options? A : $71.5 million B : $77.2 million C : $68.3 million D : $1.0 million Correct Answer : B 66 : In considering EBIT-EPS analysis, which of the following statements is (are) correct? A : If the expected earnings are above the indifference point, the debt option is preferred. B : If the expected earnings are below the indifference point, the equity option is preferred. C : Both statements are correct. D : Neither statement is correct. Correct Answer : C 67 : What type of security is used to purchase a target company in a leveraged buy-out? A : common stock B : dividends C : debt D : retained earnings Browsegrades.net

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Correct Answer : C 68 : A change in EBIT is magnified into a larger change in EPS. This means that financial leverage is using as its fulcrum. A : short-term costs B : fixed costs C : variable costs D : retained earnings Correct Answer : B 69 : In using Nestlé Corporation as a model, when a subsidiary is first formed, about one-half of the financing needed to acquire fixed assets comes from . A : debt B : federal funds C : tax breaks D : equity from the parent company Correct Answer : D 70 : Some companies use debt or preferred stock financing instead of common stock financing. The purpose is to . A : retain control B : facilitate record-keeping C : maintain privacy D : prevent audit problems Correct Answer : A 71 : There are three categories of costs: fixed costs, variable costs and semi-variable costs. Which of the following is a semi-variable cost? A : depreciation B : labor costs C : raw materials D : management salaries Correct Answer : D 72 : Fanny Nanny Weight Monitors Inc. is considering two financial alternatives for financing a major expansion program. Under either alternative, EBIT is expected to be $12.5million. Currently the firms capital structure consists of 2 million shares of common stock and $15 million in 6% long-term bonds. Under the debt financing alternative $8 million in 4% long-term bonds will be sold and under the equity financing alternative the firm would sell 150,000 shares of common stock. The P/E under the debt alternative would be 21 and the P/E under the equity alternative would be 22. The firms marginal tax rate is 40%. Which alternative would produce the higher stock price? A : debtstock price of $57.36 B : debtstock price of $70.98 C : equitystock price of $71.28 D : equitystock price of $85.32 Correct Answer : C Browsegrades.net

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73 : Dippity Doodle Noodle Makers has a capital structure that consists of 2.0 million shares outstanding and $2.0 million of debt at 8% interest. The company is planning a major plant expansion and must decide between the following two financing plans. Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share. Option 2 is to sell 30,000 new shares of stock at $50 per share. What would be the indifference point and, considering that EBIT is expected to be $10,000,000, which option would be best? A : Indifference of $10,750,000; use stock option. B : Indifference of $1,600,000; use stock option. C : Indifference of $16,270,000; use the debt option. D : Indifference of $9,250,000; use the debt option. Correct Answer : D 74 : What is the degree of operating leverage for Flippin Out Company, a maker of scuba flippers, if the firm sells its finished product for $50 per unit with variable costs per unit of $15? The company has fixed operating costs of $2,000,000 and sells 200,000 units. (The answer is rounded.) A : 2.0 B : 3.7 C : 6.5 D : 1.4 Correct Answer : D 75 : Magnificent Manes Hair Salons is forecasting a 17% increase in sales. What would be its degree of operating leverage if it anticipates that its EBIT will go from $150,000 to $175,000 during the same time frame? A : 1.76 B : 2.5 C : .98 D : 1.11 Correct Answer : C 76 : What would be the degree of financial leverage for Foggy Futures Weather Forecasters if the company has earnings before interest and taxes of $750,000, has a 4.5% loan on $1,000,000, and is in the 38% tax bracket? The firm does not have any preferred stock outstanding. A : 1.22 B : 1.78 C : 1.06 D : 0.97 Correct Answer : C 77 : What would be the degree of financial leverage for Under A Cloud Skydiving School if the company will have earnings before interest and taxes of $750,000, which would be a 15% increase? The firm had EPS of $1.25 but, with the increased earnings, anticipates paying $1.37. A : 0.80 B : 1.08 C : 2.01 D : 1.25 Browsegrades.net

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Correct Answer : A 78 : In evaluating degree of operating leverage , it is best that the firms DOL is A : higher than 1 B : higher than 2 C : lower than 1 D : equal to 1

Correct Answer : C 79 : In evaluating a firms degree of financial leverage, financial risk is DFL. A : increased B : decreased C : not impacted D : reflective of excess inventory

with an increase in

Correct Answer : A

ESSAY 80 : What are the effects of leverage on shareholder wealth and the cost of capital? Correct Answer : Firms are limited in the amount of combined leverage that can be used by the firm to increase EPS and shareholder wealth. Excessive amounts of financial leverage can cause the market value of the firm to decline and the cost of capital to increase. As the risk of financial distress increases, investors will require a higher rate of return on funds supplied to the firm. This increase will result in the firm having to pay a higher cost for funds, which will offset the returns gained from the combined leverage. The result is a decline in the market value of the firm and a rise in its cost of capital. 81 : Explain the difference between short-run costs and long-run costs. Correct Answer : Short-run costs vary directly with the level of sales, whereas other costs remain constant regardless of sales. Costs that are closely tied to sales are called variable costs and those costs that are independent of sales are fixed costs. It is with these short-run costs that a firm can determine its breakeven point.?Long-run costs are always variable costs because a firm can change the size of its physical facilities and the number of management personnel in response to changes in the level of sales. 82 : Why does a firm use operating and financial leverage? In what ways does it help the firm and in what ways does it hurt the firm? Correct Answer : A firm uses operating and financial leverage in the hope of earning returns in excess of the fixed costs of its assets and liabilities. This will increase the returns to common stockholders. However, it also increases the variability or risk of these returns. Leverage magnifies shareholders’ potential losses as well as potential gains. Leverage concepts highlight the risk-return trade-off of various types of financial decisions. 83 : List the five steps developed to assist financial managers in making capital structure Browsegrades.net

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decisions. Correct Answer : The steps are:1. Compute the expected level of EBIT after the expansion2. Estimate the variability of this level of operating earnings.3. Compute the indifference point between the two financing alternatives4. Analyze these estimates in the context of the risk the firm is willing to assume.5. Examine the market evidence to determine whether the proposed capital structure is too risky. 84 : Some firms prefer to use debt or preferred stock for financing to retain control. Explain the rationale behind this method. Correct Answer : Some firms choose debt or preferred stock financing to avoid selling new shares of common stock. When new voting common stock is sold, the relative control position of existing stockholders is diluted. Diluted control is especially important to smaller firms with significant family ownership. 85 : In what way does managements willingness to assume risk impact the firm? Correct Answer : Its willingness to assume risk often has a major impact on the capital structure chosen by the firm, although the relative risk aversion of management does not influence the firm’s optimal capital structure. Some managers adopt unusually risky or unusually low-risk capital structures. When a suboptimal capital structure is chosen, the financial marketplace will normally penalize a firm for this action by downgrading its credit rating level.

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Chapter 17. The Management of Cash and Marketable Securities 1 : The breakeven point occurs where total revenues intersect with A : market returns B : the risk-free rate C : total costs D : total interest and taxes

Correct Answer : C 2 : Breakeven analysis is normally performed for a planning period of A : one month B : one year or less C : five years D : ten years

Correct Answer : B 3 : An example of a noncash outlay is A : property B : marketing costs C : advertising D : depreciation

Correct Answer : D 4 : Breakeven analysis can be used to assess A : financial B : operating C : sales D : volume

risk.

Correct Answer : B 5 : Breakeven analysis can be used when planning A : renovations B : expansions C : financial resources D : new product development

Correct Answer : C 6 : The uses of breakeven analysis includes all except which of the following? A : Forecasting the profitability of the firm B : Forecasting the impact of certain economic conditions on the firms profitability C : Analyzing the impact of substituting fixed costs for variable costs in production D : Analyzing the profit impact of a firms restructuring efforts Correct Answer : B 7 : The difference between the selling price per unit and the variable cost per unit is the contribution . Browsegrades.net

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A : to the bottom line B : to revenue C : margin D : to EBIT Correct Answer : C 8 : Another name for breakeven analysis is A : cost-volume-profit analysis B : graphic analysis C : EBIT-EPS analysis D : degree of operating leverage

Correct Answer : A 9 : In a graphic breakeven analysis, the point where total revenue is less than total cost indicates the firm has . A : net operating capital B : cash flow from investing C : a negative EBIT D : a positive return on capital Correct Answer : C 10 : The contribution margin per unit is the difference between the A : selling price per unit and fixed costs B : fixed costs and the variable costs C : selling price per unit and the variable cost per unit D : variable costs and the number of units sold

Correct Answer : C 11 : The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips, and a tracking chart. The finished product sells for $35, with a variable cost per unit of $21. The company has operating costs of $1,050,000. What is the firms breakeven point in units? A : 75,000 B : 50,000 C : 80,000 D : 65,000 Correct Answer : A 12 : The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips, and a tracking chart. The finished product sells for $35, with a variable cost per unit of $21. The company has operating costs of $1,050,000. The company has operating costs of $1,050,000. What is the firms breakeven point in dollars? A : $1,750,000 B : $4,670,000 C : $2,625,000 D : $3,875,566 Browsegrades.net

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Correct Answer : C 13 : The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips, and a tracking chart. The finished product sells for $35, with a variable cost per unit of $21. The company has operating costs of $1,050,000. Using 100,000 units as a base, what is the degree of operating leverage? A : 6.2 B : 5.7 C : 7.9 D : 4.0 Correct Answer : D 14 : The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart. The finished product sells for $35, with a variable cost per unit of $21. The company has operating costs of $1,050,000. What is the probability of the firm having operating losses if the firm expects to sell 80,000 almanacs, with a standard deviation of 4,000 units? (A normal distribution table, for example, Table V from the text, must accompany this problem.) A : 10.56% B : 11.12% C : 14.92% D : 13.57% Correct Answer : A 15 : Bouncy Bungee Rubber Band Company has fixed costs of $2,760,000 per year, it sells its rubber bands for $3.75 per pack, and the variable cost of these packs is $0.75. They estimate they will sell 1,000,000 packs this year, with a standard deviation of 40,000 units. Find the probability of the company incurring a loss. (A normal distribution table, for example, Table V from the text, must accompany this problem.) A : 3.22% B : 6.71% C : 5.48% D : 2.87% Correct Answer : C 16 : Kettle of Fish Hatcheries provides a stocked pond for fishing enthusiasts. They have fixed costs of $525,000, they charge $50 per person for pond access, and the variable costs of stocking the pond average about $15 per person. How many people need to fish the pond annually to break even? A : 45,000 B : 15,000 C : 32,000 D : 10,000 Correct Answer : B 17 : Kettle of Fish Hatcheries provides a stocked pond for fishing enthusiasts. They have fixed costs of $525,000, they charge $50 per person for pond access, and the variable costs of stocking the pond average about $15 per person. How many people need to fish the pond Browsegrades.net

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annually to break even? A : 13,040 B : 10,867 C : 25,000 D : 17,650 Correct Answer : B 18 : The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips, and food substitutes. The finished product sells for $60, with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point? A : 22,187 B : 37,879 C : 56,124 D : 48,961 Correct Answer : B 19 : The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips, and food substitutes. The finished product sells for $60, with a variable cost per unit of $27. The company has fixed operating costs of $1,250,000. What is its breakeven point? A : $3,172,023 B : $4,947,196 C : $7,887,259 D : $6,425,583 Correct Answer : A

ESSAY 20 : What are the possible uses for breakeven analysis? Correct Answer : Breakeven analysis can be used for:1.Forecasting the profitability for a firm, division, or product line, given a cost structure and expected sales level.2.Analyzing the impact of changes in fixed costs, variable costs and selling price on operating profits.3.Analyzing the impact of substituting fixed costs for variable costs in a production process.4.Analyzing the profit impact of a firm’s restructuring efforts designed to cut fixed costs. 21 : List the limitations of breakeven analysis: Correct Answer : Breakeven analysis makes certain assumptions:1.That the selling price and variable costs stay constant2.That all costs are classified as either fixed or variable3.That the firm is producing and selling a single product or a constant mix of different products4.That all costs—fixed costs, variable costs and selling price—are known at each level of output5.That the analysis is done for a time frame of one year or less 22 : How can a firm have more than one breakeven output point? Correct Answer : When considering the breakeven analysis model, it is assumed that the selling Browsegrades.net

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price and the variable cost per unit are constant, when, in reality, they are not. Often, the firm can sell additional units of output by lowering the price per unit, which results in a curvilinear model, rather than a straight line. In addition, variable costs can increase and decrease. Nonlinear total cost and total revenue curves can result in a firm having more than one breakeven point. This interprets to having operating losses below a specific level (Q1) and above a specific output level (Q2). 23 : Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis. Correct Answer : Breakeven analysis assumes that costs can be either fixed or variable. In fact, both costs are dependent on the time period involved and the output range under consideration. All costs are variable in the long run. In addition, some costs are partly fixed and partly variable. In fact, some costs increase as output is increased and are constant only over narrow ranges of output.

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Chapter 18. The Management of Accounts Receivable and Inventories 1 : The dividend clientele effect concept was originally developed by A : Myron Gordon B : Merton Miller and Franco Modigliani C : Milton Friedman D : Paul Samuelson

Correct Answer : B 2 : Dividend reinvestment plans involve the purchase of A : newly issued stock B : existing stock C : letter stock D : both newly issued and existing stock

Correct Answer : D 3 : Most states limit dividend policy by requiring that dividends . A : not be paid unless the firm generates net earnings during the most recent year B : be paid only out of retained earnings C : not be paid when the firm is insolvent D : be paid out of the firms capital Correct Answer : C 4 : Which of the following factors influence a firms ability and/or willingness to pay dividends? A : liquidity B : borrowing capacity and access to capital markets C : earnings stability D : All of these are correct Correct Answer : D 5 : In the theoretical world of Miller and Modigliani, . A : a firm should pay out 100% of earnings as dividends to maximize shareholder wealth B : the marginal tax rates facing investors are the most important single determinant of dividend policy C : dividends are important only for their informational content D : dividends reduce investors uncertainty Correct Answer : C 6 : Finance researcher Myron Gordon argues that . A : risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline B : dividends reduce uncertainty, and thus the payment of dividends will increase the firms value C : the clientele effect has no influence on share value D : the existence of transaction costs has no impact on the dividend decision Correct Answer : B Browsegrades.net

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7 : The passive residual dividend policy asserts that . A : dividends should be paid out only if the firm does not have enough acceptable investment projects to utilize all earnings internally B : dividends should be paid only when the firm has ready access to new equity markets C : retained earnings, being the residual earnings of the firm, should always be paid out to existing stockholders D : investment policy and dividend policy decisions should always be made independently Correct Answer : A 8 : The passive residual dividend policy seems to be inconsistent with a . A : world having significant transactions costs associated with new stock issues B : stable dividend policy C : policy of paying only stock dividends D : share-repurchase policy Correct Answer : B 9 : Many firms try to maintain a stable dividend policy . A : because of the informational content of dividend changes B : in order to satisfy investors who rely on dividends as a primary source of income C : in order to remain as eligible investments for many financial institutions D : All of these are correct Correct Answer : D 10 : The record date in the normal dividend payment procedure is . A : the same day as the declaration date B : the same day as the ex-dividend date C : the date when the firm makes a list from its stock transfer books of shareholders eligible to receive the dividend D : one day prior to the payment date Correct Answer : C 11 : A passive residual dividend policy suggests that the firm will . A : pay the same dollar amount of dividends every year B : pay the same percentage of earnings in dividends every year C : pay a dividend only after all viable investment projects have been exhausted D : omit a dividend in the next period Correct Answer : C 12 : Which of the following terms BEST summarizes the arguments supporting a stable dollar dividend policy? A : Earnings stability B : Beta C : Capital structure D : Informational content Correct Answer : D 13 : In a large, widely held corporation, the financial manager should consider all of the Browsegrades.net

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following in establishing a dividend policy EXCEPT A : individual shareholder preferences B : cash flow needs C : informational content of dividends D : investment opportunities

Correct Answer : A 14 : Which of the following is NOT a direct result of a stock dividend? A : The number of shares outstanding is increased. B : The market price of each outstanding share is increased. C : The amounts shown in the firms capital accounts are redistributed. D : The per-share price of the stock goes up. Correct Answer : B 15 : Firms carry out share repurchase agreements in a number of ways, including all of the following EXCEPT they . A : buy from shareholders through a tender offer B : buy outstanding shares in the open market C : buy treasury shares D : negotiate a purchase privately from large holders, particularly institutions Correct Answer : C 16 : Rank in chronological sequence the payment date, ex-dividend date, declaration date, and record date. A : Record date, declaration date, ex-dividend date, payment date B : Declaration date, record date, ex-dividend date, payment date C : Declaration date, record date, payment date, ex-dividend date D : Declaration date, ex-dividend date, record date, payment date Correct Answer : D 17 : Firms with the A : highest; highest B : highest; lowest C : lowest; lowest D : lowest; highest

earnings growth tend to have the

dividend payout ratio.

Correct Answer : B 18 : The value of a firm is influenced by three types of financial decisions, including all of the following EXCEPT . A : dividend decisions B : financing decisions C : investment decisions D : par value decisions Correct Answer : D 19 : The capital impairment restriction, a legal constraint on dividend payments, states that . Browsegrades.net

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A : only the current years earnings may be used for dividend payments B : dividends may not be paid out of stockholders equity C : a firms capital cannot be used to make dividend payments D : a firms capital surplus can be used to make dividend payments Correct Answer : C 20 : A legal constraint that dividends must be paid out of a firms present and past net earnings is known as the restriction. A : net earnings B : net operating earnings C : initial investment D : earned capital Correct Answer : A 21 : Which of the following does not contain restrictive covenants? A : Preferred stock agreements B : Lease contracts C : Bond indentures D : Agency restrictions Correct Answer : D 22 : Dividend payments reduce all of the following balance sheet items EXCEPT A : cash B : fixed assets C : stockholders equity D : retained earnings

Correct Answer : B 23 : A firm with stable earnings is usually more willing to A : retain more earnings B : have a higher dividend payout ratio C : have a sinking fund agreement D : seek aggressive growth

Correct Answer : B 24 : Which of the following is not an alternative dividend policy? A : Constant payout B : Stable dollar C : Constant earnings D : Passive residual Correct Answer : C 25 : In order for a stock to qualify for inclusion on the legal lists, a firm must A : register with the Securities Exchange Commission (SEC) B : have assets in excess of $500,000 C : have 10 continuous profitable quarters D : have a record of continuous and stable dividends Browsegrades.net

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Correct Answer : D 26 : Which of the following balance sheet items will a stock dividend not affect? A : Total assets B : Retained earnings C : Contributed capital in excess of par D : Common stock at par Correct Answer : A 27 : One reason why small business concerns have very low dividend payout ratios is that the firm . A : is usually low on cash B : needs funds for taxes C : needs the funds to finance growth D : prefers stock offerings Correct Answer : C 28 : Dividend payments from foreign subsidiaries represent . A : a movement from a weak to a stronger currency B : the primary means of transferring funds to the parent company C : a way to avoid taxes D : the effects of exchange risk Correct Answer : B 29 : On the ex-dividend date, the . A : seller of the stock is entitled to the dividend B : buyer has four business days to register his/her purchase C : buyer of the stock is entitled to the dividend D : corporation records all security owners Correct Answer : A 30 : Under dividend reinvestment plans, shareholders can automatically A : reduce their taxable income B : increase their cash inflows C : use dividends to purchase additional shares D : transfer from retained earnings accounts to equity accounts.

Correct Answer : C 31 : The net effect of a stock dividend is to increase A : the firms total stockholders equity B : the number of shares outstanding C : total dividends D : stock prices

Correct Answer : B 32 : The fundamental question in dividend policy is Browsegrades.net

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A : the tax consideration B : the amount of growth the firm considers optimal C : not violating any restrictive covenants D : determining what portion of earnings will be paid out Correct Answer : D 33 : The dividend states that investors will tend to be attracted to firms that have dividend policies consistent with the investors objectives. A : clientele effect B : informational content C : signal D : passive residual theory Correct Answer : A 34 : From an accounting standpoint, stock splits are accomplished by . A : increasing the number of shares authorized B : increasing par value of existing shares C : reducing the par value of existing shares D : reducing the number of shares and increasing the price of each share Correct Answer : C 35 : According to the dividend policy, a firm that has more funds than it needs should pay a cash dividend to shareholders. A : constant payout ratio B : stable dollar C : passive residual D : reinvestment Correct Answer : C 36 : As part of a share repurchase program by a company, a tender offer involves the . A : purchase of stock on the open market B : purchase of stock directly from its stockholders C : private negotiation of purchases from large institutions, such as insurance companies D : planning for many positive-NPV investments Correct Answer : B 37 : Dividend policy can affect the value of the firm for which of the following reasons? A : Personal taxes B : Flotation costs C : Shareholder transaction costs D : All of these are correct Correct Answer : D 38 : According to Miller and Modigliani, it is A : investment policy B : dividend policy C : payout ratio

that really determines a firms value.

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D : transaction costs Correct Answer : A 39 : Which of the following is not a dividend policy? A : Stockholders want dividends and they want them to be consistent. B : Stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains. C : Stockholders of small firms favor a dividend policy of retention. D : Stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income. Correct Answer : D 40 : The theoretical post-stock dividend price is equal to the pre-stock dividend price percentage stock dividend rate. A : multiplied by 1 minus B : multiplied by 1 plus C : divided by 1 minus D : divided by 1 plus

the

Correct Answer : D 41 : Under the Revenue Reconciliation Act of 1993, the tax-paying individual investor may prefer low dividends and higher expected capital gains because . A : the top marginal rate is lower on dividend income than on capital gains B : the taxes on capital gains can be deferred C : capital gains are more certain than share repurchases D : the tax on capital gains is 28% Correct Answer : B 42 : Which of the following is not an argument for the relevance of dividends? A : Existence of issuance costs B : Reduction of agency costs C : Protection against dilution D : Risk aversion Correct Answer : C 43 : In considering the arguments for the relevance of dividends, which of the following statements is (are) correct? I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock. A : I only B : II only C : Both I and II D : Neither I nor II Correct Answer : A 44 : A firm that employs a constant payout ratio dividend policy pays A : a constant (fixed) dollar dividend Browsegrades.net

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B : out a certain percentage of each years earnings C : a constant quarterly dividend D : low payout ratios if the company has low growth rates Correct Answer : B 45 : When a firm purchases its own stock in the open market, the repurchased shares become known as . A : treasury stock B : preferred stock C : option stock D : reinvestment stock Correct Answer : A 46 : When a firm initiates the repurchase of stock through a tender offer, it is giving the shareholders . A : treasury stock notification B : a put option C : a call option D : a futures option Correct Answer : B 47 : A foreign subsidiary with good access to capital within the host country tends to pay dividends to the parent than subsidiaries with poor access to local capital. A : smaller B : larger C : no D : None of these answers is correct; dividends are not related to availability of capital. Correct Answer : B 48 : Which of the following is not one of the advantages of share repurchase as a dividend decision? A : It effectively converts dividend income into capital gains income. B : It provides firm with greater financial flexibility in timing the payment of returns to shareholders. C : All current shareholders can sell their shares at a higher price. D : It represents a signal to investors that the company expects higher earnings in the future. Correct Answer : C 49 : Which of the following is not one of the advantages of share repurchase as a dividend decision? A : $4,000,000 B : $1,375,000 C : $2,750,000 D : $1,250,000 Correct Answer : C 50 : Which of the following is not one of the advantages of share repurchase as a dividend Browsegrades.net

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decision? A : $1,250,000 B : $1,375,000 C : $125,000 D : $2,500,000 Correct Answer : B 51 : The Wagner Company tries to follow a pure residual dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% and the cost of new equity is 16%. Assuming Wagner has $70 million of investment projects having expected returns greater than 15%, determine the total amount of dividends Wagner should pay. A : None B : $10 million C : $20 million in dividends and raise needed investment funds externally D : $80 million in dividends and raise needed investment funds externally Correct Answer : B 52 : The Wagner Company tries to follow a pure residual dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% while the cost of new equity is 16%. Assuming Wagner has $90 million of investment projects having expected returns greater than 16%, determine Wagners dividend and investment policies. A : Pay out $20 million in dividends and raise $30 million externally B : Pay no dividends and invest only in the first $80 million in projects. C : Pay out $10 million in dividends and raise $20 million externally D : Pay no dividends and raise $10 million externally Correct Answer : D 53 : Last year, Qualitys earnings per share were $2.34 and it paid a dividend of $1.10. What was Qualitys dividend payout ratio? A : 21.2% B : 42.7% C : 47% D : 53% Correct Answer : C 54 : Last year, Qualitys earnings per share were $2.34 and it paid a dividend of $1.10. What was Qualitys dividend payout ratio? A : $1,000,000 B : $51,000,000 C : $14,950,000 D : $5,000,000 Correct Answer : B 55 : HiTec is growing fast and wishes to retain all its earnings to finance future growth. Instead Browsegrades.net

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of a cash dividend, HiTec declares a 10% stock dividend. If the price per share of HiTec stock is $30 before the ex-dividend date, what will be the price on the ex-dividend date? A : $27.27 B : $27.94 C : $33.00 D : $27.00 Correct Answer : A 56 : Saturn Corporation has just declared a 25% stock dividend. The stock was selling for $18 before the stock dividend. The stock will pay a quarterly cash dividend of 8 cents per share after the stock dividend. If the 8-cent dividend is maintained over the next year, what will be the poststock dividend yield? A : 2.13% B : 2.22% C : 0.56% D : 1.44% Correct Answer : B 57 : Last year, Toluca Engineering paid a $0.25 dividend per share each quarter. If Toluca announces both a 5% stock dividend and an increase in the quarterly dividend to $0.27, what is the effective rate of the dividend increase? A : 13.0% B : 8.0% C : 11.2% D : 13.4% Correct Answer : D 58 : Grabill Aerospace Company has just declared a 15% stock dividend. Immediately prior to the stock dividend, the stock was selling for $23 and had a P/E ratio of 14. Calculate the poststock dividend price of Grabills stock. A : $26.45 B : $20.00 C : $26.22 D : $20.18 Correct Answer : B 59 : Grabill Aerospace Company has just declared a 15% stock dividend. Immediately prior to the stock dividend, the stock was selling for $23 and had a P/E ratio of 14. Calculate the poststock dividend price of Grabills stock. A : $65,500,000 B : $118,500,000 C : $66,000,000 D : $97,500,000 Correct Answer : A 60 : Sorsi has declared a 15% stock dividend. If the stock was selling for $34 before the exdividend date, what should its price be on the ex-dividend date? A : $34.00 Browsegrades.net

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B : $29.57 C : $28.90 D : $30.91 Correct Answer : B 61 : Haulsee Inc. paid a quarterly dividend of $0.12 and has announced both a 10% stock dividend and an increase in the quarterly dividend to $0.14. What is the effective rate of the dividend increase? A : 26.7% B : 18.3% C : 28.3% D : 15.7% Correct Answer : C 62 : Badger Tool and Die Company has 100,000 shares outstanding and plans to pay $1.00 per share in dividends each quarter next year. Badger has a capital budget of $700,000 for next year and plans to maintain its present debt ratio of 0.30. If earnings are expected to be $7.20 per share, how much external equity must Badger raise? A : $210,000 B : $490,000 C : $170,000 D : None Correct Answer : C 63 : Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycles stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares? A : $65.52 B : $65.68 C : $75.72 D : Cannot be determined from the information provided Correct Answer : B 64 : Cafe de Oro earns $4.25 per share and has a dividend payout ratio of 0.40. If Cafe de Oro has a capital budget of $200,000 and 70,000 shares outstanding, what are the annual dividends per share? A : $1.70 B : $1.39 C : $2.55 D : $4.00 Correct Answer : A 65 : The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all its funds internally and follows the passive residual policy, what are the annual dividends per share? A : $1.70 B : $1.39 C : $2.55 Browsegrades.net

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D : $2.81 Correct Answer : B 66 : The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding, and a capital budget of $200,000. If Altern Music raises all its funds internally and follows the passive residual policy, what are the annual dividends per share? A : $3.20 B : $31.08 C : $34.28 D : $15.54 Correct Answer : B 67 : Nova earned $7.20 per share and maintains a stable payout ratio of 60%. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share? A : $4.32 B : $2.88 C : $2.20 D : Cannot be determined from the information provided Correct Answer : A 68 : Nova earned $7.20 per share and maintains a stable payout ratio of 60%. Nova has 1,000,000 shares outstanding and a capital budget of $5 million. If Nova maintains a debt ratio of 0.50, what were the dividends per share? A : $22,000,000; $17,000,000 B : $21,600,000; $17,000,000 C : $21,600,000; $23,000,000 D : $17,000,000; $21,600,000 Correct Answer : B 69 : Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50, respectively, next year. Peterson currently has 5,000,000 shares of common stock outstanding. The companys capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Petersons capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget. A : $15,000,000 B:0 C : $5,000,000 D : Cannot be determined Correct Answer : C 70 : Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50, respectively, next year. Peterson currently has 5,000,000 shares of common stock outstanding. The companys capital budget for next year is projected to be $25,000,000. Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year. (Assume that Petersons capital structure includes only common equity and debt and that these Browsegrades.net

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will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget. A : $140,100,000 B : $139,200,000 C : $182,100,000 D : $141,350,000 Correct Answer : C 71 : Kaneb Services Inc. has just declared a 3 for 2 stock split. If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur)? A : $31.50 B : $26.25 C : $25.15 D : $28.00 Correct Answer : D 72 : Kaneb Services Inc. has just declared a 3 for 2 stock split. If the pre-split price of common stock was $42 a share, what will be the post-split price per share (assuming no other changes occur)? A : $59.28 B : $51.20 C : $60.53 D : $8.08 Correct Answer : B 73 : Interim Systems has 1.5 million shares outstanding. This year Interim will have operating income (EBIT) of $18.2 million, interest expenses of $2.4 million, depreciation expenses of $3.1 million. What will the dividend per share be if Interims dividend payout ratio is 40%? Assume a marginal tax rate of 40%. A : $2.53 B : $3.39 C : $2.03 D : $6.32 Correct Answer : A 74 : Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds. A : $0.66 B : $0.16 C : $1.37 D : $0.90 Correct Answer : D Browsegrades.net

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75 : Zycad has operating earnings (EBIT) of $8.6 million and annual interest expenses are $1.5 million. Zycad wishes to maintain its annual dividend of $1.00 per share on the 1,900,000 shares outstanding. The firm has a bond issue outstanding that requires the retirement of $3 million (face value) of the issue each year through purchases of the bonds in the market. What is the maximum dividend per share that may be paid if the current market price of the bonds is $85? Assume the marginal tax rate is 40% and that earnings are the only source of funds that can be used to pay the dividend and retire the bonds. A : $21,060,000 B : $19,305,000 C : $25,335,000 D : $19,404,000 Correct Answer : B 76 : Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)? A : $30.00 B : $27,00 C : $28.80 D : $32.00 Correct Answer : C 77 : Leigh Fibers has 6 million shares outstanding. This year Leigh will have operating income (EBIT) of $36.4 million, interest expenses of $5.8 million, and depreciation expenses of $6.2 million. What will be Leighs dividend per share if the company has a payout ratio of 30%? Assume a marginal tax rate of 40%. A : $0.92 B : $0.73 C : $1.09 D : $0.61 Correct Answer : A 78 : If Sulzer has 10 million shares outstanding, operating income (EBIT) of $42.4 million, and interest expenses of $6.8 million, what is Sulzers dividend payout ratio, given that the dividend per share is $0.80? Assume a marginal tax rate of 40%. A : 56.3% B : 31.5% C : 50.4% D : 37.5% Correct Answer : D 79 : Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenns operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%. A : $15.89 million B : $25.73 million C : $21.33 million D : $29.43 million Browsegrades.net

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Correct Answer : B 80 : Wrenn Corp. has 5.6 million shares outstanding, interest expenses of $4.4 million, and depreciation expenses of $3.7 million. What is Wrenns operating income if the dividend per share is $0.80 and the dividend payout ratio is 35%? Assume a marginal tax rate of 40%. A : decreases $2.56 million B : increases $5.04 million C : increases $5.76 million D : does not change Correct Answer : B 81 : Sadaplast has just declared a 25% stock dividend. The annual dividend, before the stock dividend was declared, was $1.00. Sadaplast intends to pay a dividend of $1.05 per share after the stock dividend is paid. What is the percentage increase in the cash dividend that will accompany the stock dividend? A : 6.25% B : 26.25% C : 31.25% D : 5.00% Correct Answer : C 82 : Urguhart has just declared a 4 for 3 stock split. If the pre-split price of common stock was $54 a share, what do you expect the post-split price will be? A : $72.00 B : $36.18 C : $42.23 D : $40.50 Correct Answer : D 83 : Urguhart has just declared a 4 for 3 stock split. If the pre-split price of common stock was $54 a share, what do you expect the post-split price will be? A : No change B : Increase of $225,000 C : Increase of $54,000 D : Increase of $21,600,000 Correct Answer : B 84 : determines the ultimate distribution of the firms earnings between reinvestment and cash dividend payment to shareholders. A : Board of Directors agreements B : Dividend policy C : Financial expertise D : Management efficiency Correct Answer : B 85 : Which of the following would be considered an alternative dividend policy? I. Passive residual approachII. Increasing dollar dividend approach A : I only Browsegrades.net

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B : II only C : Both I and II D : Neither I nor II Correct Answer : A 86 : A dividend method that many tech companies favor in order to have more tax efficiency, boost earnings per share and signal that the company has more productive uses for its cash than paying dividends is . A : stock splits B : reverse stock splits C : dividend payout D : stock buybacks Correct Answer : D 87 : Which of the following influences the value of the firm? I. Investment decisionsII. Dividend decisions A : I only B : II only C : Both I and II D : Neither I nor II Correct Answer : C 88 : In recent years, has (have) been a major source of equity financing for private industry. A : DRIPs B : common stock sales C : retention of earnings D : preferred stock sales Correct Answer : C 89 : Several regulations limit dividend payments. Which of the following do not limit dividend payments? A : Capital impairment restriction B : Restrictive covenants C : Net earnings restriction D : Liability restriction Correct Answer : D

ESSAY 90 : What is the signaling effect of dividend payments? Correct Answer : Changes in dividend payments represent a signal to investors concerning management’s assessment of the future earnings and cash flows of the company. Since management is an “insider” of the company, it is perceived that managers know more about the company than outside resources. Dividend changes are thought to provide unambiguous Browsegrades.net

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signals about the company’s future prospects. These signals may not be conveyed fully by any other method. 91 : What are the factors that determine the dividend policy of a firm? Correct Answer : 1. Legal constraints: Many states have laws that regulate the dividend payments that a firm chartered in that state can make.2.Restrictive covenants: Lenders have payout restrictions placed on the borrowing firm with regard to dividends as an assurance that funds will be available to repay the loan.3.Tax considerations: If a firm excessively retains too much of its earnings, the IRS may impose penalties on the earnings of the firm.4.Liquidity and cash flow considerations: Many firms find it difficult to pay dividends while maintaining an acceptable level of liquidity.5.Access to capital markets and borrowing capacity: A firm may want to invest earnings in a more favorable investment rather than pay dividends. If liquidity is diminished, the firm may have difficulty borrowing funds.6.Earnings stability: Companies want to have a consistent payout schedule for dividends even in times of financial stress. A firm with stable cash flows can be fairly confident about its future and this confidence is frequently reflected in higher dividend payments.7.Inflation: Replacement of used assets becomes more expensive in inflationary environments. Inflation can force a firm to retain more earnings as it attempts to maintain its working capital position.8.Shareholder preferences: Management in closely held companies may be better able to set dividends according to the preferences of the stockholders. In larger firms, it becomes impossible for a firm to cater to the desires of the stockholders regarding dividend payouts.9.Protection against dilution: To prevent the issuance of new stock to raise capital, a firm may retain more earnings. This manner permits existing stockholders to retain their proportionate share of ownership in the company which could be diluted if new stock is issued. 92 : What is a DRIP and how does it work? Correct Answer : A DRIP is a dividend reinvestment plan. Under these plans, shareholders can have their dividends automatically reinvested in additional shares of the company’s common stock. There are two types of DRIPS. One type involves the purchase of existing stock, and the other type involves the purchase of newly issued stock. The first type of plan is executed through a bank that, acting as a trustee, purchases the stock on the open market and then allocates it on a pro rata basis to the participating shareholders. In the second type of plan, the cash dividends of the participants are used to purchase, often at a small discount (up to 5%) from the market price, newly issued shares of stock. 93 : What effect does a stock split have on outstanding shares of stock and what is its purpose? Correct Answer : A stock split has the effect of increasing the number of shares of stock outstanding and reducing the price of each outstanding share. From an accounting standpoint, stock splits are accomplished by reducing the par value of existing shares of stock and increasing the number of shares outstanding. Although stock splits have an impact similar to stock dividends, they normally are not considered an element of a firm’s dividend policy. 94 : What are the procedures for repurchasing stock? Correct Answer : Firms carry out share repurchase programs in a number of ways.1. A company may buy directly from its stockholders in a tender offer.2. A company may purchase the stock in the open market.3. A company may privately negotiate purchases from large holders. 95 : Why do firms feel that liquidity is desirable even though it may mean that the firm does not Browsegrades.net

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utilize the investment capability of cash? What other means does a firm use to take advantage of investment opportunities since cash must be kept on hand? Correct Answer : Liquidity is desirable for a number of reasons. It provides protection in the event of a financial crisis. It can provide the flexibility needed to take advantage of unusual financial and investment needs. However, with liquidity the firm must find other ways to take advantage of financial and investment opportunities. Companies can establish lines of credit and revolving credit agreements with banks, allowing them to borrow on short notice. Some large, well-established companies can go directly to credit markets with either a bond issue or a sale of commercial paper. 96 : Explain the clientele effect. Correct Answer : Firms develop their own clientele of investors. As articulated by Miller and Modigliani, investors will tend to be attracted to companies that have dividend policies consistent with the investors’ objectives. Some companies that pay out a large percentage of their earnings as dividends have traditionally attracted investors who desire a high dividend yield. In contrast, growth-oriented companies, which pay no (or very low) dividends, tend to attract investors who prefer earnings retention and greater price appreciation. These investors prefer capital gains over dividend payouts.

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Chapter 19. Lease and Intermediate-Term Financing 1 : Which of the following is equal to the length of the operating cycle? I. Inventory conversion period.II. Receivables conversion period. A : Only statement I is correct. B : Only statement II is correct. C : Statements I and II together. D : Neither statement I nor II is correct. Correct Answer : C 2 : The length of the operating cycle for a firm is equal to the length of the deferral period.II. cash conversion cycle. A : Only statement I is correct. B : Only statement II is correct. C : Statements I and II together. D : Neither statement I nor II is correct.

. I. payables

Correct Answer : C 3 : The shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firms activities. A : inventory conversion period B : cash conversion cycle C : payables deferral period D : receivables conversion period Correct Answer : B 4 : Which of the accounts listed is not part of a firms working capital? A : Plant and equipment B : Marketable securities C : Cash D : Accounts receivable Correct Answer : A 5 : Which of the following factors does not directly affect the firms level of investment in working capital? A : the firms inventory and credit policies B : the age of the firms plant and equipment C : the firms sales level D : the length of the firms operating cycle Correct Answer : B 6 : Under a conservative approach to working capital management, a firm tends to hold a relatively proportion of its total assets in the form of current assets. A : small B : constant C : stable D : large Browsegrades.net

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Correct Answer : D 7 : The rate of return on fixed assets is normally assumed to be current assets (especially cash and marketable securities). A : less than B : greater than C : equal to D : half

the rate of return on

Correct Answer : B 8 : All other things being equal, a policy of holding a relatively proportion of the firms total assets in the form of current assets will tend to result in a expected profitability or rate of return on the total assets of the firm. A : large; higher B : small; higher C : constant; higher D : constant; lower Correct Answer : B 9 : All other things being equal, a policy of holding a relatively proportion of the firms total assets in the form of current assets will tend to result in a risk of the firm encountering financial difficulties. A : large; higher B : small; higher C : constant; higher D : constant; lower Correct Answer : B 10 : The relationship among interest rates of debt securities that differ in their length of time to maturity is referred to as . A : term structure of interest rates B : investment opportunity curve C : risk-return tradeoff function D : both the term structure of interest rates and the investment opportunity curve Correct Answer : A 11 : Historically, the yield curve generally had a slope, which indicates that long-term interest rates usually have been short-term interest rates. A : upward sloping; lower than B : downward sloping; higher than C : upward sloping; higher than D : level; about equal to Correct Answer : C 12 : Lenders normally feel that the relative risk associated with short-term debt is associated with long-term debt. A : lower than Browsegrades.net

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B : equal to C : higher than D : twice Correct Answer : A 13 : Borrowers (e.g., business firms) feel that there is more risk associated with short-term debt (as compared with long-term debt) because of theI. uncertainty arising from interest rate fluctuationsII. risk of being unable to refund the debtIII. relatively high cost of short-term debt A : I and II B : I and III C : II and III D : I, II, and III Correct Answer : A 14 : All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt will tend to result in expected after-tax earnings for the firm. A : large; lower B : constant; higher C : constant; lower D : large; higher Correct Answer : D 15 : All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt will tend to the variability (or risk) of the after-tax earnings of the firm. A : large; decrease B : small; increase C : constant; lower D : large; increase Correct Answer : D 16 : Which of the following working capital financing policies subjects the firm to the greatest risk? A : financing fluctuating current assets with long-term debt B : financing permanent current assets with long-term debt C : financing permanent current assets with short-term debt D : financing fluctuating current assets with short-term debt Correct Answer : C 17 : With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with . A : long-term debt but not equity funds B : equity funds but not long-term debt C : both long-term debt and equity funds D : neither long-term debt nor equity funds Correct Answer : C 18 : When the level of working capital is increased, which of the following is not expected to Browsegrades.net

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occur? A : profitability decrease B : profitability increase C : risk decrease D : None of these choices are correct. Correct Answer : B 19 : Which of the following factors affect the firms level of investment in working capital? A : the length of the firms operating cycle B : the firms sales level C : the firms inventory and credit policies D : All of these choices are correct. Correct Answer : D 20 : The relationship between the maturity of debt and its associated cost (interest rate) is referred to as . A : term structure of interest rates B : risk-return trade-off function C : seniority structure of interest rates D : term structure of interest rates and risk-return trade-off function Correct Answer : D 21 : The optimal level of working capital investment is the level that is expected to A : maximize return on total assets B : maximize earnings per share C : maximize shareholder wealth D : minimize interest expenses

Correct Answer : C 22 : The aggressive approach to the financing of a firms current assets uses a of short-term debt and a proportion of long-term debt. A : relatively low; relatively high B : relatively high; relatively low C : relatively high; relatively high D : relatively low; relatively low

proportion

Correct Answer : B 23 : If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the approach to asset financing. A : aggressive B : moderate C : matching D : conservative Correct Answer : C 24 : Basically, the overall working capital policy decision involves a A : profitability-risk trade-off Browsegrades.net

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B : financial choice C : risk decision D : None of these are correct Correct Answer : A 25 : The is the optimal working capital investment and financing policy. A : aggressive policy B : moderate policy C : conservative policy D : None of these are correct Correct Answer : D 26 : The operating cycle begins with the and ends with the A : purchase of resources; selling of the product on credit B : payment for purchases; liquidation of receivables C : purchase of resources; receipt of cash D : payment for purchases; receipt of cash

Correct Answer : C 27 : Net working capital is defined as A : total current assets B : current assets minus current liabilities C : total assets minus total liabilities D : current assets plus current liabilities

Correct Answer : B 28 : The size and nature of a firms investment in current assets is a function of a number of several different factors, including all except which of the following? A : how efficiently the firm manages its fixed assets B : the length of the operating cycle C : the sales level D : credit policies Correct Answer : A 29 : The assets are those that are affected by the seasonal or cyclical nature of company sales. A : current B : permanent current C : fluctuating current D : None of these are correct Correct Answer : C 30 : Which of the following assets (if any) are not part of a firms working capital investment? A : cash B : accounts receivable C : inventory D : All these assets are part of a firms working capital investment. Browsegrades.net

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Correct Answer : D 31 : The firms inventory conversion period (measured in days) is equal to its average inventory divided by its . A : cost of sales B : sales C : cost of sales/365 D : None of these are correct Correct Answer : C 32 : A firms cash conversion cycle is equal to its operating cycle minus its A : inventory conversion period B : receivables conversion period C : payables deferral period D : None of these are correct

Correct Answer : C 33 : The firms receivables conversion period (measured in days) is equal to its accounts receivable divided by its . A : annual credit sales/365 B : annual credit sales C : annual sales/365 D : None of these are correct Correct Answer : A 34 : The size of a firms investment in current assets is a function of all except which of the following factors? A : sales level B : inventory policies C : credit policies D : stockholders equity Correct Answer : D 35 : A firms net working capital position is a widely used measure of its A : leverage B : profitability C : risk D : None of these are correct

Correct Answer : C 36 : Many contain provisions requiring firms to maintain a minimum net working capital provision. A : loan agreements with commercial banks B : bond indentures C : loan agreements with commercial banks and bond indentures D : None of these are correct Browsegrades.net

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Correct Answer : C 37 : A firms operating cycle is equal to its . I. inventory conversion period plus receivables conversion periodII. cash conversion cycle minus payables deferral period A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 38 : An anticipated need for short-term borrowed funds is best shown in a(n) A : operating budget B : capital budget C : production budget D : cash budget

Correct Answer : D 39 : Computerized financial planning models may be classified as any of the following EXCEPT . A : deterministic B : optimistic C : probabilistic D : None of these are correct Correct Answer : B 40 : If a firm shows a profit on the quarterly income statement, then A : there will be no need for additional financing B : the firm may need additional financing C : the firm will increase its cash balance D : All of these may be correct

Correct Answer : D 41 : If a firm shows a profit on the quarterly income statement, then A : -$8 million B : $36 million C : $92 million D : $172 million

Correct Answer : C 42 : What is the inventory conversion period for OBrians if it has sales of $320,000, an average inventory of $5,333, and a cash conversion cycle of 20 days? Assume the cost of sales is 55% of sales. A : 6 days B : 11 days C : 13.5 days D : 15 days Correct Answer : B Browsegrades.net

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43 : What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an inventory conversion period of 35 days, and a payables deferral period of 25 days? A : 0 days B : 25 days C : 10 days D : None of these are correct Correct Answer : C 44 : Tefft Industries has an average inventory of $170,000, sells on terms of 2/10, net 30, and its cost of sales is $540,000. What is Teffts inventory conversion period? A : 85 days B : 115 days C : 105 days D : cannot be determined from the data given Correct Answer : B 45 : If Swatchs inventory conversion period is 45 days, its payables deferral period is 35 days, and its receivables conversion period is 50 days, then its cash conversion cycle must be days. A : 60 B : 90 C : 30 D : cannot be determined from the information given Correct Answer : A 46 : Runners Ink, Inc. had sales last year of $700,000, and 35% of its sales are for cash, with the remainder buying on terms of net 30 days. If the receivables conversion period is actually 38 days, what is Runners Inks accounts receivable? A : $72,877 B : $25,507 C : $47,370 D : None of these are correct Correct Answer : C 47 : Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year. If Sherwoods inventory averaged $0.4 million last year, what was the length of the inventory conversion period? A : 130.4 days B : 70.2 days C : 195.5 days D : 45.6 days Correct Answer : B 48 : Last year, Bizmart had credit sales of $32 million and a net profit margin of 8%. If Bizmart had accounts receivable of $4.5 million, what was the length of the receivables conversion period? Browsegrades.net

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A : 51.3 days B : 56.3 days C : 54.9 days D : 47.2 days Correct Answer : A 49 : Linear Technology had sales (all on credit) of $36 million and a gross profit margin of 30% last year. If Linear Technologys inventory averaged $3.9 million, and its accounts receivable were $5.0 million, what was the length of its operating cycle? A : 90.2 days B : 128.9 days C : 111.9 days D : 107.2 days Correct Answer : D 50 : Crystal Oil has $9 million in accounts payable, $1.8 million in salaries and taxes payable, and $10.4 in other current liabilities. If Crystal Oil had a cost of sales of $54 million and selling, general, and administrative expense of $18 million, what is the length of its payables deferral period? A : 107.47 days B : 73.02 days C : 54.75 days D : 45.63 days Correct Answer : C 51 : Laserscope has an inventory conversion period of 45 days, a receivables conversion period of 42 days, and a payables deferral period of 51 days. What is the length of its cash conversion cycle? A : 54 days B : 36 days C : 48 days D : cannot be determined from the information given Correct Answer : B 52 : Great Skot expects to have cash receipts in June of $532,160. Skots cash disbursements in June are $581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of $40,000, how much will Skot need to borrow if it started the month with a cash balance of $52,000? A : Surplus of $2,440will not need to borrow B : Surplus of $34,440will not need to borrow C : Will need to borrow $5,560 D : Will need to borrow $37,560 Correct Answer : D 53 : Great Skot expects to have cash receipts in June of $532,160. Skots cash disbursements in June are $581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of $40,000, how much will Skot need to borrow if it started the month with a cash balance of $52,000? Browsegrades.net

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A : 102.2 days B : 29.2 days C : 39.6 days D : None of these are correct or it cannot be computed from the information given Correct Answer : C 54 : Great Skot expects to have cash receipts in June of $532,160. Skots cash disbursements in June are $581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of $40,000, how much will Skot need to borrow if it started the month with a cash balance of $52,000? A : $39; $2 B : $48; $0 C : $41; $7 D : None of these are correct or it cannot be computed from the information given Correct Answer : C 55 : Simmons Industries is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt). Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt). Forecasted sales for next year are $20 million. Earnings before interest and taxes are projected to be 20% of sales. The firms corporate income tax rate is 40%. Its fixed assets total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both longterm and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%, respectively.Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies. A : 26.9%; 30.4% B : 21%; 26.7% C : 8.1%; 9.1% D : 16.1%; 21.3% Correct Answer : D 56 : Simmons Industries is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt). Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt). Forecasted sales for next year are $20 million. Earnings before interest and taxes are projected to be 20% of sales. The firms corporate income tax rate is 40%. Its fixed assets total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both longterm and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%, respectively.Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies. A : aggressive = 12.70% and conservative = 12.22% B : aggressive = 8.47% and conservative = 8.14% C : aggressive = 4.23% and conservative = 4.07% D : aggressive = 7.67% and conservative = 8.81% Correct Answer : B Browsegrades.net

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57 : Simmons Industries is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt). Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt). Forecasted sales for next year are $20 million. Earnings before interest and taxes are projected to be 20% of sales. The firms corporate income tax rate is 40%. Its fixed assets total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both longterm and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%, respectively.Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies. A : 4.18%; 3.77% B : 11.62%; 10.48% C : 6.97%; 6.29% D : None of these are correct Correct Answer : C 58 : Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000. The firm has current assets of $1,000,000 and fixed assets of $1,500,000. Cryo-vac has current liabilities of $750,000, of which $300,000 are in notes payable. What additional financing will Cryo-vac need to support the expected sales increase if its profit margin is 8% and the firm expects to pay out $200,000 in dividends? An increase in net fixed assets of $300,000 will be required. A : $130,000 B : $70,000 C : Surplus of $70,000 D : $270,000 Correct Answer : A 59 : Commercial paper is . A : long-term with maturities greater than one year B : short-term with maturities under six months C : short-term with maturities that do not exceed nine months D : long-term with maturities of greater than five years Correct Answer : C 60 : When pledging accounts receivables, which of the following statements is/are correct? I. Pledging requires permission of the SEC.II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 61 : Factoring accounts receivable is usually done on a(n) A : default B : consignment Browsegrades.net

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C : interest-only D : non-recourse Correct Answer : D 62 : When factoring accounts receivables, the factor is the . A : negotiated accounts receivable account. B : the percent deduction in payment to the firm. C : the financial institution that buys the accounts receivable. D : the method of determining how much money is lent to the firm. Correct Answer : C 63 : In considering factoring accounts receivable, which of the following statements is (are) correct? I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts.II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 64 : Working capital policy involves day-to-day decisions that determine all except which of the following? A : firms level of long-term assets B : proportions of short-term and long-term debt used to finance assets C : level of investment in each type of current asset D : specific sources and mix of short-term credit the firm should employ Correct Answer : A 65 : A firms working capital position is important since it . A : is a measure of risk. B : is a measure of efficiency. C : is much more in demand due to its scarcity. D : reflects the amount of short-term liabilities that the firm must consider. Correct Answer : A 66 : A firms working capital position is important from an internal and external standpoint. Which of the following is not true? A : It measures a firms risk. B : Provisions for a minimum working capital position are often included in restrictive covenants. C : A firms policy often affects its ability to obtain debt. D : A working capital position determines its level of common stock sales. Correct Answer : D 67 : Efficient current assets management refers to the firms ability to economize on which of the following? I. InventoryII. Marketable securities A : Only I Browsegrades.net

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B : Only II C : Both I and II D : Neither I nor II Correct Answer : C 68 : Sources of debt financing are classified according to their A : maturities B : interest paid C : par D : yield

Correct Answer : A 69 : In examining the term structure of interest rates, the interest rates of short-term rates. A : commercial paper B : notes payable C : corporate bonds D : marketable securities

have exceeded

Correct Answer : C 70 : Fluctuating current assets are those assets that are affected by A : the consumers demand for the product B : the seasonal nature of the company C : management preferences D : IRS regulations

Correct Answer : B 71 : Negotiated short-term credit sources are all except which of the following? A : commercial paper B : inventory loans C : trade credit D : bank credit Correct Answer : C 72 : Net working capital is the . A : difference between the companys current assets and current liabilities B : difference between the companys current assets and fixed assets C : sum of the firms current assets plus the firms current liabilities D : firms fixed assets plus the firms long-term liabilities Correct Answer : A

ESSAY 73 : What is the purpose of forecasting finances?

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Correct Answer : Financial forecasting allows a firm to estimate the amount of additional financing it will require in an upcoming period. The proportions of short-term and long-term debt that make up the additional financing requirements can be determined by analyzing the profitability-risk trade-offs of alternative working capital investment and financing policies. 74 : Name some factors that affect the firms investment decision to invest in current assets. Correct Answer : The firm must consider:1.the type of products manufactured2.the length of the operating cycle3.the sales level (higher sales require more investment in inventories and receivables)4.inventory policies (amount of inventory required to meet higher than expected demand or unanticipated delays in obtaining new inventories)5.credit policies6.how efficiently the firm manages current assets 75 : Why is working capital so important to a firms continued profitability? Correct Answer : A firm must have working capital to operate and survive. It is used by firms to maintain liquidity (their ability to meet their cash obligations as they come due). Liquidity is necessary to maintain the firm’s credit rating and avoid the forced liquidation of assets and potential bankruptcy.?Working capital is also important as a measure of the firm’s risk. The firm’s working capital position affects its ability to obtain debt financing. Many loan agreements with banks and other lending institutions contain a provision requiring the firm to maintain a minimum net working capital position. Many bond indentures contain these provisions as well. 76 : Explain trade credit. Correct Answer : Trade credit is an important source of short-term financing for business firms. Trade credit occurs when a firm is permitted to delay payment for merchandise received. Most trade credit is on an open account basis whereby a firm sends a purchase order to a supplier, receives the goods, and then pays per the terms on the invoice. Once established, trade credit is almost automatic. Open account trade credit appears on the balance sheet as accounts payable.?Promissory notes are sometimes used in place of open accounts. A promissory note is a formal obligation to repay the credit. The amount to be paid and the due date are specified on the note and is generally used when the creditworthiness of a firm is questioned. Promissory notes appear on the balance sheet as notes payable. 77 : What are accrued expenses and how are they handled as unsecured short-term credit? Correct Answer : Accrued expenses are: accrued wages, taxes, and interest. These are expenses not yet paid by the firm but are owed. As such, they represent an interest-free source of financing.?Accrued wages represent the money owed to employees between paydays. Once the employees receive their paychecks, the accrued wages account goes to zero. Accrued taxes and interest would accumulate based on the frequency with which theses expenses must be paid. A firm can use accrued taxes between payment dates. A firm has no control over when these amounts are owed, so the amount of financing provided by these sources depends solely on the amounts of the payments themselves. 78 : Explain how a firm uses commercial paper as a short-term financing source and explain the disadvantage of using this form of financing. Correct Answer : Commercial paper is a short-term unsecured promissory note issued by major corporations. Only companies with good credit ratings can borrow funds through the sale of commercial paper. Purchasers of commercial paper include corporations with excess funds to invest, banks, insurance companies, pension funds, money market mutual funds, and other Browsegrades.net

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types of financial institutions. Maturities on commercial paper range from several days to a maximum of nine months. Commercial paper is attractive as a source of financing because interest rates tend to be below the prime lending rate.?The primary disadvantage of this type of financing is that it is not always a reliable source of funds. The commercial paper market is impersonal. It may be difficult to find investors willing to purchase new issues of commercial paper to replace maturing issues. Also, the amount of loanable funds available in the commercial paper market is limited to the amount of excess liquidity of the various purchasers of commercial paper. During tight money periods, enough funds may not be available.?Commercial paper is sold on a discount basis; the firm receives less than the face amount but the investor receives the full-face amount at maturity. The annual financing cost of commercial paper depends on the maturity date of the issue and the prevailing short-term rates. In addition to the interest costs, borrowers also must pay a placement fee to the commercial paper dealer for arranging the sale of the issue. 79 : A firm can meet its financing needs by using a matching approach for financing. What is the matching approach? Correct Answer : Matching approach is one in which the maturity structure of a firm’s liabilities is made to correspond exactly to the life of its assets. Fixed and permanent current assets are financed with long-term debt and equity funds, whereas fluctuating current assets are financed with short-term debt. 80 : What are the classifications for short-term lenders and how do they differ? Correct Answer : The classifications are:1.Cash-flow lenders look upon the borrower’s future cash flows as the primary source of loan repayment and the borrower’s assets as a secondary source of repayment.2.Asset-based lenders tend to make riskier loans than cash-flow lenders, and as a result, they place much greater emphasis on the value of the borrower’s collateral. 81 : What is stretching accounts payable, and what are the advantages and disadvantages of doing it? Correct Answer : Stretching accounts payable is a method of working capital of management whereby the firm can postpone payment of the amount due beyond the end of the credit period. Stretching payments in this manner generates additional short-term financing for the firm. However, there are costs associated with doing this. The firm incurs the costs of forgoing any cash discounts, and it may negatively impact its credit rating, making it harder to obtain future credit. Late payment penalties and interest charges may also be incurred. Stretching is advantageous for seasonal needs, but firms that do this regularly may lose its trade credit by suppliers who will offer cash sales when dealing with the firm in the future.

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Chapter 20. Financing with Derivatives 1 : Which of the following methods is (are) used to transfer surplus funds from local (collection) bank accounts to concentration (disbursement) bank accounts? A : wire transfers B : electronic depository transfer checks C : (mail) depository transfer checks D : All of these are correct Correct Answer : D 2: are processed through the automated clearing house (ACH) system. A : Drafts B : Wire transfers C : Check-like electronic images D : Floats Correct Answer : C 3: consist(s) of short-term unsecured promissory notes issued by large, well-known corporations and finance companies. A : Negotiable certificates of deposit B : Commercial paper C : Repurchase agreements D : Bankers acceptances Correct Answer : B 4:A is a short-term debt instrument issued as part of a commercial transaction, with payment guaranteed by a commercial bank. A : negotiable certificate of deposit B : commercial paper C : repurchase agreement D : bankers acceptance Correct Answer : D 5 : Which of the following statements concerning auction rate securities is true? A : The price of the stock stays near par. B : Fifty percent of the dividends are exempt from corporate income taxes. C : The dividend yield on these securities is adjusted every 20 days through an auction process, where investors can exchange their stock for cash. D : The price of the stock stays well above par. Correct Answer : A 6 : The primary reason(s) why firms hold liquid asset balances is (are) A : for transactions purposes only B : for precautionary purposes only C : to compensate its broker for various services rendered to the firm D : for transaction and precautionary purposes Browsegrades.net

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Correct Answer : D 7 : The shortage costs associated with inadequate liquid asset balances include A : higher cash discounts B : possible financial insolvency C : lower interest expense D : possible financial insolvency and lower interest expense

Correct Answer : B 8 : Liquid asset balances include all except which of the following? A : Accounts receivable B : Checking account balances C : Marketable securities D : Currency on hand Correct Answer : A 9 : The firms optimal liquid asset balance occurs where the sum of the opportunity holding and costs are minimized. A : borrowing B : compensating balance C : shortage D : capital Correct Answer : C 10 : The difference between the firms checking account balance shown on the books of the bank and the account balance shown on its own books is known as . A : overdraft B : compensating balances C : surplus balances D : float Correct Answer : D 11 : All except which of the following are methods used in expediting the collection of cash? A : Wire transfers B : Lockboxes C : Drafts D : Decentralized collection centers and concentration banks Correct Answer : C 12 : The costs of a lockbox collection system include . A : foregone returns on the required offset balances B : service fees charged by the post office C : increased bad-debt expenses D : foregone returns on the required compensating balances and service fees charged by the bank Correct Answer : D Browsegrades.net

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13 : The fastest method for moving funds between banks is A : special courier services B : wire transfers C : drafts D : float

Correct Answer : B 14 : Which of the following statements concerning zero balance systems is (are) correct? A : Zero balance systems help utilize disbursement float more effectively. B : Exactly enough funds are transferred into the zero balance accounts each day to cover the checks that have cleared. C : The function of the concentration account is to receive all deposits coming into the zero balance system. D : All of these are correct. Correct Answer : D 15 : Which of the following statements concerning drafts is (are) correct?I. Drafts require the firm to keep larger balances in its disbursement account.II. When a draft is transmitted to the firms bank for collection, the bank must present the draft to the firm for acceptance before payment is made. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : B 16 : The optimal amount of the firms liquid asset balance to be invested in marketable securities is a function of the . A : interest earned over the expected holding period B : transaction cost involved in buying and selling the securities C : spread between long-term and short-term interest rates D : interest earned over the expected holding period and the transaction cost involved in buying and selling the securities Correct Answer : D 17 : Which of the following criteria is generally least important in selecting marketable securities for inclusion in the firms portfolio? A : Length of maturity B : Yield C : Marketability D : Default risk Correct Answer : B 18 : Which of the following types of marketable securities is considered to have the lowest default risk? A : Bankers acceptances B : U.S. Treasury issues C : Repurchase agreements Browsegrades.net

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D : Commercial paper Correct Answer : B 19 : Which of the following types of marketable securities normally has the lowest yields? A : Federal agency issues B : Treasury bills C : Repurchase agreements D : Commercial paper Correct Answer : B 20 : Which of the following types of marketable securities is most suitable for a smaller firm with only a few thousand dollars to invest at any given time? A : Money market mutual funds B : Treasury bills C : Federal agency issues D : Commercial paper Correct Answer : A 21 : Which of the following types of marketable securities has a relatively weak secondary market? A : Bankers acceptances B : Federal agency issues C : Negotiable certificates of deposit D : Commercial paper Correct Answer : D 22 : The primary reason(s) that firms do not hold long-term U.S. Treasury securities in their marketable securities portfolio is because . A : the interest-rate risk associated with these securities is too high B : the transactions costs associated with these securities is too high C : the default risk associated with these securities is too high D : these securities are not readily marketable Correct Answer : A 23 : All except which of the following would be viable securities to purchase with temporary excess cash? A : A recently issued 30-year Baa corporate bond B : U.S. Treasury bill C : The commercial paper of General Motors Acceptance Corporation D : A repurchase agreement Correct Answer : A 24 : The shortage costs associated with inadequate liquid asset balances include all except which of the following? A : Deterioration of the firms credit rating B : Foregone cash discounts C : Lost sales Browsegrades.net

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D : Possible financial insolvency Correct Answer : C 25 : All except which of the following are cash management strategies to expedite collections? A : A lockbox collection system B : Wire transfers C : Decentralized collection system D : The use of drafts instead of checks Correct Answer : D 26 : The cash management function is concerned with determining the . A : optimal size of a firms liquid asset balance B : appropriate types and amounts of short-term investments the firm should make C : most efficient methods of controlling the collection and disbursement of cash D : All of these are correct Correct Answer : D 27 : In addition to providing their commercial customers with lines of credit and/or term loans, banks provide all except which of the following tangible services? A : Handling of dividend payments B : Registration and transfer of a firms stock C : Establishment of credit terms D : Cash management Correct Answer : C 28 : The objective of cash collection and disbursement policies is to A : minimize storage costs B : speed up collections and slow down disbursements C : maximize the return on near cash equivalents D : avoid using float

Correct Answer : B 29 : The primary components or sources of float include all except which of the following? A : Check clearing float B : Collection float C : Processing float D : Mail float Correct Answer : B 30 : In general, the the number of checks being handled and the each check, the greater the benefit of a lockbox arrangement to a firm. A : smaller; greater B : greater; smaller C : greater; greater D : smaller; smaller

the dollar amount of

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31 : , which are similar to a check except they are not payable on demand, are used primarily to provide for centralized control over payments authorized in field offices. A : Preauthorized checks B : Drafts C : Mail depository transfer checks D : Electronic depository transfer checks Correct Answer : B 32 : All except which of the following are criteria that a firm should consider when deciding where to invest excess cash reserves among the different types of securities? A : Rate of return B : Maturity date C : Issue date D : Marketability Correct Answer : C 33 : To minimize the cost associated with misdirected funds between subsidiaries, many multinational companies have instituted a process called . A : multinational cash consolidation B : multilateral netting C : unilateral netting D : cash restriction Correct Answer : B 34 : The first step in efficient cash management is the development of a A : liquid asset balance B : cash budget C : proforma cash flow statement D : compensating spreadsheet

Correct Answer : B 35 : There is A : a direct B : no C : an inverse D : a very small

relationship between a firms liquid asset balance and shortage costs.

Correct Answer : C 36 : A is an unsigned, nonnegotiable check drawn on the local collection bank and payable to the concentration bank. A : pre-authorized check B : bankers acceptance check C : special remittance D : mail depository transfer check Correct Answer : D Browsegrades.net

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37 : A is a security issued by a commercial bank that entitles the holder to receive the amount deposited plus accrued interest on a specified date. A : negotiable certificate of deposit B : commercial paper C : bankers acceptance D : repurchase agreement Correct Answer : A 38 : The Essex Company found that an average of 10 days elapses between the time a customers payments are received and the deposited funds clear the customers bank and become usable by the firm. Essexs annual sales are $240 million. (Assume 365 days per year when converting from annual data to daily data or vice versa.) What is the increase in Essexs average cash balance, assuming it can reduce the time required to process customer payments by 3 days through more efficient payment processing methods? A : $666,667 B : $120,000,000 C : $1,972,603 D : $270,000 Correct Answer : C 39 : The Essex Company found that an average of 10 days elapses between the time a customers payments are received and the deposited funds clear the customers bank and become usable by the firm. Essexs annual sales are $240 million. (Assume 365 days per year when converting from annual data to daily data or vice versa.) Suppose Essex can reduce the time required to process customer payments by 4 days through more efficient payment processing methods. Given these additional funds can be used to reduce the firms outstanding bank loans (10% interest rate), what is the annual pretax savings in interest expense? A : $263,014 B : $96,000,000 C : $66,667 D : $2,630,149 Correct Answer : A 40 : Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its customers in New York and California. If the firm deposits these checks in its local bank, two business days are required for the checks to clear and the funds to become usable by the firm. However, if Osborne sends an employee to New York or California and presents the check for payment at the bank upon which it is drawn, the funds are available immediately to the firm. The firm can earn 8% per annum on short-term investments, and the cost of sending an employee to New York or California to present the check for payment is $500. What is the net benefit to the firm of employing this special handling technique for a $5 million check received on Tuesday? (Assume 365 days per year.) A : $2,192.00 B : $1,692.00 C : $2,000.00 D : $1,095.50 Correct Answer : B 41 : Zycad has sales of $110 million a year. If Zycad reduces its processing float by 3 days, Browsegrades.net

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what is the increase in the firms average cash balance? (Assume 365 days per year.) A : $916,667 B : $904,110 C : $872,180 D : $30,137 Correct Answer : B 42 : MLX has annual sales of $320 million per year and has calculated the collection float to be 12 days. If MLX is currently paying 9.35% on its line of credit, what amount of interest expense could be saved if the collection float is reduced by 3 days? (Assume 365 days per year.) A : $249,333 B : $573,808 C : $299,200 D : $245,918 Correct Answer : D 43 : Pronet has annual sales of $724 million from its 600 retail stores. Pronet can reduce its mail float by 2 days using wire transfers. The annual cost of the wire transfers is expected to be $105,610. If Pronets cost of short-term funds is 9.75%, should the change to wire transfers be made? Why or why not? (Assume 365 days per year.) A : No; loss of $247,340 B : Yes; savings of $281,185 C : Yes; savings of $474,582 D : No; loss of $105,610 Correct Answer : B 44 : Tocor is considering the implementation of a lockbox collection system for its mid-western and western sales regions. Sales in those two regions are 30% of Tocors annual sales of $560 million. The lockbox system will cost $187,000 a year and reduce collection time by 3 days. If Tocor could invest any released funds at 10.85%, should it use the lockbox system? Why or why not? (Assume 365 days per year.) A : Yes; savings of $149,819 B : Yes; savings of $312,397 C : No; loss of $37,181 D : No; loss of $35,100 Correct Answer : C 45 : Average daily sales for Sierra are $140,000. The financial manager can reduce the float by 4 days using a lockbox system that will cost $33,000. If the opportunity cost of any funds released is 11%, what is the annual savings from this system? A : $28,600 B : $14,520 C : $61,600 D : $35,000 Correct Answer : A 46 : Lexicon has a daily average check collections of $180,000, and it takes the firm 5 days before it can completely process those checks. An automated lockbox system that costs Browsegrades.net

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$33,000 a year would reduce the processing time by 2 days. Should Lexicon invest in this system if the opportunity cost of short-term funds is 12.3%? Why or why not? A : Yes; savings of $44,280 B : Yes; savings of $33,420 C : Yes; savings of $11,280 D : No; loss of $10,860 Correct Answer : C 47 : Marcos Company annual sales are $730 million. Suppose Marcos can reduce the time required to process customer payments by 3 days through more efficient payment processing techniques. Given that any funds released by these methods can be invested elsewhere in the company to yield a 15% pretax rate of return, determine the annual increase in pretax returns. (Assume 365 days per year in all calculations.) A : $900,000 B : $300,000 C : $6,000,000 D : Cannot be determined from the information provided Correct Answer : A 48 : Jester Inc. has annual sales of $434 million. An average of 12 days elapses between the time a customer mails its payment and the funds are available to Jester. What would be the increase in the average cash balance if the use of a lockbox system would reduce the collection time by 4 days? A : $4.76 million B : $49.6 million C : $633,640 D : $9.5 million Correct Answer : A 49 : Galways sales average $12 million per day. If Galway could reduce the time between a customers mailing date and when these payments are available to Galway by 3 days, what would be the resulting annual increase in earnings if the opportunity cost of funds is 9.25%? A : $1.11 million B : $98,630 C : $3.33 million D : $9,123 Correct Answer : C 50 : Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to process payments from its customers in 10 western states. With the lockbox system, average mailing time for customers from this region would be reduced from 3 days to 1.5 days. Check-clearing time would also be reduced from 4 days to 2.5 days. Annual collections from the western region are $150 million. Establishment of this lockbox system would reduce the compensating balance requirement at the firms St. Louis bank by $600,000 and reduce annual payment processing costs at the St. Louis office by $30,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 12% before taxes. The Los Angeles bank has agreed to process Fagins customer payments for an annual fee of $100,000. What are the annual net pretax benefits to Fagins of establishing a Browsegrades.net

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lockbox system with the Los Angeles bank? (Assume 365 days per year.) A : $222,000 B : $130,000 C : $1,832,877 D : $149,945 Correct Answer : D 51 : Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to process payments from its customers in 10 western states. Average mailing time for customers from this region would be reduced from 3 days to 1.5 days. In addition, check processing and clearing time would be reduced from 4 days to 2.5 days. Annual collections from the western region are $150 million. Establishment of this lockbox system would reduce the compensating balance requirement at the firms St. Louis bank by $600,000 and reduce annual payment processing costs at the St. Louis office by $30,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 12%. The Los Angeles bank has agreed to process Fagins customer payments free of charge, provided the firm maintains a minimum compensating balance of $1,500,000 in its account at the bank. What are the annual net benefits to Fagins of establishing a lockbox system with the Los Angeles bank? (Assume 365 days per year.) A : $630,000 B : $332,877 C : $69,945 D : $41,096 Correct Answer : C 52 : A Delaware bank has offered to set up a lock-box arrangement to process Union Oil Company of Californias (UNOCAL) credit card payments from customers in 8 mid-Atlantic states for an annual fee of $150,000 plus $0.05 per payment. Total collections from this area are $547.5 million annually, consisting of an average of 10 payments per year from 1,100,000 credit card customers. Average mailing time for customers from this region would be reduced from 3.5 days currently to 2 days with the lock-box system. Check processing and clearing time also would be reduced from the current 5 days to 1.5 days with the lock-box arrangement. Establishment of the lock-box system would reduce annual payment processing costs at its Los Angeles headquarters by $250,000 and reduce the compensating balance at its Los Angeles bank by $500,000. The Delaware bank will not require UNOCAL to maintain a compensating balance if it establishes a lock-box system. Funds released by the lock-box arrangement can be invested elsewhere in the firm to earn 15% per annum pretax. Determine the net pretax benefits to UNOCAL of establishing the lock-box system with the Delaware bank. (Assume 365 days per year in all calculations.) A : $675,000 B : $750,000 C : $500,000 D : $450,000 Correct Answer : B 53 : Lone Star Technologies has annual sales of $336 million. Management has determined that an average of 8 days elapses between the time customers mail their payments and when the funds are available to the firm. The cost of reducing the float 3 days will be $60,000. Should Lone Star work to reduce the float if the increase in cash can be invested to earn 7.5% per Browsegrades.net

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annum? Why or why not? A : Yes; savings of $9,041 B : Yes; savings of $147,123 C : Yes; savings of $78,080 D : No; loss of $18,080 Correct Answer : B 54 : Currently Nemonix is using a decentralized collection system whereby customers mail their checks to one of the firms eight regional locations. Its annual sales are $95 million. Checks are deposited each business day in a local bank, and the amount of the deposit is sent to the firms concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by 4 days, but the transfer will cost $7.50. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Why or why not? Assume that Nemonix can earn 8% on the funds released through this more efficient transfer. A : Yes; savings of $106,600 B : Yes; savings of $61,388 C : Yes; savings of $68,288 D : No; loss of $6,671 Correct Answer : C 55 : Tritonic is considering switching from depository transfer checks to using wire transfers for sending funds from its local banks to its bank in Chicago. The cost of the wire transfer is $5.25 more than the cost of depository transfer checks. The change would reduce the total float by 3 days. Tritonic can earn 8.5% on the funds released through the more efficient transfer. If Tritonic has 30 local banks, what annual sales level would the firm require before the change to wire transfers would be profitable? (Assume there are 250 business days each year.) A : $391,544,118 B : $56,360,294 C : $84,286,029 D : $1,149,750 Correct Answer : B 56 : Tritonic is considering switching from depository transfer checks to using wire transfers for sending funds from its local banks to its bank in Chicago. The cost of the wire transfer is $5.25 more than the cost of depository transfer checks. The change would reduce the total float by 3 days. Tritonic can earn 8.5% on the funds released through the more efficient transfer. If Tritonic has 30 local banks, what annual sales level would the firm require before the change to wire transfers would be profitable? (Assume there are 250 business days each year.) A : $10,385 B : $199.72 C : $24,601 D : $17,488 Correct Answer : A 57 : Amazons CFO is considering the fees charged by two banks in trying to determine which is best for her firm. First American (FA) charges a flat $0.11 per payment and First Western (FW) requires a minimum compensating balance of $500,000 plus $0.05 per payment. If Amazons Browsegrades.net

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cost of funds is 8.50% and the expected number of payments per year is 900,000, which bank should be chosen and why? A : FW; savings = $54,000 B : FA; savings = $23,000 C : FW; savings = $11,500 D : FW; savings = $18,500 Correct Answer : C 58 : Dupree Funds is considering the fees charges by two banks. First America charges a flat rate of $0.11 per payment, and First Western requires a minimum compensating balance of $500,000, plus $0.05 per payment. What is the number of payments per year where the costs of the two banks will be equal? Assume Duprees costs of funds is 9%. A : 281,250 B : 750,000 C : 900,000 D : 409,091 Correct Answer : B 59 : Cash management involves the determination of the A : minimal size of a firms asset balance B : maximum amount of dividends that should be paid C : optimal size of a firms liquid asset balance D : range of long-term financial alternatives

Correct Answer : C 60 : Cash management involves the .I. determination of the best locations for lockboxesII. setting up of decentralized collection centers A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 61 : Concentration banking involves . A : using decentralized collection centers B : having a large balance at a large commercial bank C : having multiple accounts with a brokerage firm D : utilizing an investment banker when trying to market both stocks and bonds Correct Answer : A 62 : Firms that have large multi-million-dollar remittances use A : the Federal Reserve System B : couriers C : lockboxes D : wire transfers

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63 : An ordinary check that does not require the signature of the person or firm on whose account it is being drawn is a . A : cashiers check B : preauthorized check C : depository check D : float Correct Answer : B 64 : Drafts . A : are payable on demand B : are legally paid on the third business day C : require the firm to keep large balances in its disbursement accounts D : are more expensive than checks Correct Answer : D 65 : The Check 21 act allows banks to . A : use substitute checks to reduce check-clearing time B : delay paying the check without proper identification C : choose when checks are processed D : fingerprint people who are cashing checks Correct Answer : A 66 : All except which of the following portfolio criteria are concerned with risk? A : Rate of return B : Default risk C : Marketability D : Maturity date Correct Answer : A 67 : Which of the following is (are) the most liquid of a companys assets? I. Inventory is the most liquid.II. Accounts receivable is the most liquid. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 68 : Cash management involves much more than simply paying bills and receiving payments for goods and services. The cash management function is concerned with all except which of the following? A : Determining the optimal size of a firms liquid asset balance B : The appropriate types of long-term debt the firm should have C : The most efficient methods of controlling the collection and disbursement of cash D : The appropriate types and amounts of short-term investments a firm should make Correct Answer : B 69 : Cash flows differ with respect to their degree of certainty. Which of the following can be Browsegrades.net

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most easily forecasted? A : Cash outflows B : Current cash inflows C : Seasonal cash requirements D : Future cash inflows Correct Answer : A 70 : Tangible services provided by a firms bank include all except which of the following? A : Cash management B : Supplying credit information C : Collection of deposits D : Handling of dividend payments Correct Answer : B 71 : Which of the following is (are) considered an intangible banking service? I. Providing lines of credit is an intangible banking service.II. Providing consultation on such matters as economic conditions and mergers is an intangible banking service. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : B 72 : A reason a firm would maintain a bank balance exceeding the compensating balance requirements is because it . A : reduces the opportunity cost B : improves the firms credit rating C : alters the requirements imposed by the bank D : reduces shortage costs Correct Answer : D 73 : A(n) relationship exists between a firms liquid asset balance and shortage costs. A : unified B : positively correlated C : inverse D : linear Correct Answer : C 74 : The level of liquid assets that should be invested in marketable securities depends on several factors. This includes all except which of the following? A : Seasonal cash requirements B : Interest to be earned over the expected holding period C : Transaction costs involved in buying and selling the securities D : The variability of the firms cash flows Correct Answer : A

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ESSAY 75 : Explain how companies can slow disbursements to keep funds in the bank for longer periods of time. Correct Answer : Firms can:1. Schedule and centralize payments: Firms should pay bills on time; there is no benefit to paying bills early unless there is a cash discount for early payment. Centralizing payments from disbursement accounts helps minimize the amount of idle funds a firm must keep in local field offices and divisional bank accounts.?2. Drafts: By issuing drafts instead of checks, the bank must present the draft to the firm for acceptance before making payment. Checks are payable on demand.?3. Minimize check-clearing float: By making payments from a checking account located a long distance from the supplier, the firm increases the time required for the check to clear through the banking system. 76 : Name the three primary components (or sources) of float. Correct Answer : 1. Mail float is the delay between the time a payment is sent to the payee through the mail and the time that payment arrives at the payee’s office.2. Processing float is the delay between receipt of payment from a payer and the deposit of that receipt in the payee’s account.3. Check-clearing float is the delay between the time a check is deposited in the payee’s account and the time the funds are available to be spent. 77 : When and why is it best to use lockboxes? Explain when alternative methods should be used. Correct Answer : Lockboxes are best used when the number of checks handled is small and the dollar amount of each check is large. Under these conditions, the bank’s workload is light and the associated service fees, compensating balance, or both, are small. When large numbers of checks with small dollar amounts are involved, a lockbox system may not be profitable. The opportunity costs on the required compensating balances, the service fees, or both, may exceed the earnings the firm realizes from having the funds available a few days earlier. 78 : Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank account or accounts. Explain how this is done. Correct Answer : There are two types of depository transfer checks. A mail depository transfer check is an unsigned, nonnegotiable check drawn on the local collection bank and payable to the concentration bank. As it deposits customer checks in the local bank each day, the collection center mails a depository transfer check to the concentration bank authorizing it to withdraw the deposited funds from the local bank. Upon receipt of the depository transfer check, the firm’s account at the concentration bank is credited for the designated amount. Depository transfer checks are processed through the usual check-clearing process. Although the use of depository transfer checks does not eliminate mailing and check-clearing time, it does ensure the movement of funds from the local collection center banks to the concentration bank in a timely manner.?An electronic depository transfer check can also be used to move funds from a local bank to a concentration bank. The process of transmitting deposit information to a concentration bank is similar to that for mail DTCs except that the information is sent electronically through an automated clearinghouse, such as the automated clearinghouse system of the Federal Reserve or Clearing House Interbank payments System. These systems eliminate the mail float in moving funds from the local bank to the concentration bank. Funds transferred this way are available for use by the firm in one day or less.

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79 : Why do firms hold liquid asset balances? Correct Answer : Firms hold liquid asset balances for several reasons:1. Liquid asset balances serve as a buffer between the inflows and outflows of day-to-day operations. They also help a firm handle seasonal fluctuations in cash flows.2. Liquid asset balances are necessary to meet unexpected requirements for cash.3. They are held to meet future requirements such as fixed outlays, quarterly tax and dividend payments, capital expenditures, and loan repayments.4. They are held for speculative reasons, such as having the timing flexibility in pursuing acquisitions.5. They are held to compensate the bank for services provided, called compensating balances. 80 : Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements. Correct Answer : By maintaining a bank balance exceeding the compensating balance requirements, a firm can avoid the “shortage” costs associated with inadequate liquid asset balances. These costs can be:1. Forgone cash discounts2. Deterioration of the firm’s credit rating3. Higher interest expenses4. Possible financial insolvency

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Chapter 21. Risk Management 1 : The credit policy variables a firm can use to exercise control over its level of receivables investment include . A : credit standards B : credit terms C : collection effort D : credit standards, credit terms, and collection effort Correct Answer : D 2 : Possible sources of relevant information about a credit applicant include A : financial statements submitted by the applicant B : credit reporting organizations C : The U.S. Department of Commerce D : the applicants financial statements and credit reporting agencies

Correct Answer : D 3: are useful in monitoring the status and composition of a firms accounts receivable. A : Numerical credit scoring systems B : Aging of accounts schedules C : Seasonal datings D : Aging of accounts schedules and seasonal datings Correct Answer : B 4 : The measures the promptness with which customers repay their credit obligations. A : bad-debt loss ratio B : average collection period C : credit term D : cash discount Correct Answer : B 5 : Which of the following is(are) not related to the extension of credit to customers? A : Compensating balances B : Cash discounts C : Quantity discounts D : Compensating balances and quantity discounts Correct Answer : D 6 : The average collection period measures the number of days . A : between when a typical credit sale is made and when the firm receives the payment B : it takes a typical check to clear through the banking system C : beyond the end of the credit period before a typical customer payment is received D : before a typical account becomes delinquent Correct Answer : A 7 : Relaxing (i.e., lowering) the firms credit standards is likely to result in Browsegrades.net

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A : lower sales B : smaller bad-debt losses C : a shorter average collection period D : possible higher pre-tax profits Correct Answer : D 8 : Which of the following is not a cost related to the extension of credit to customers? A : Bad-debt losses B : Cash discounts C : Quantity discounts D : Collection costs Correct Answer : C 9 : The primary objective of offering a cash discount is to . A : reduce the firms level of receivables investment B : reduce the number of bad checks received from customers C : encourage customers to place their orders prior to the peak selling period D : avoid just-in-time orders Correct Answer : A 10 : Lengthening the credit period is likely to result in all except which of the following? A : Higher sales B : More cash sales C : Larger investment in receivables D : Longer average collection period Correct Answer : B 11 : The objective of offering seasonal datings to customers is to . A : encourage customers to place their orders prior to the peak selling period B : speed up the collection of accounts receivable C : increase the firms inventory storage costs D : reduce the number of bad checks received from customers Correct Answer : A 12 : For the firm with a seasonal sales pattern, offering seasonal datings to its customers is likely to result in . A : increased sales B : higher inventory investment and warehousing costs C : lower receivables investment cost D : an offer of a cash discount Correct Answer : A 13 : refers to the applicants financial strength, particularly with respect to net worth. A : Character B : Capacity C : Capital D : Collateral Browsegrades.net

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Correct Answer : C 14 : Capacity, which is one of the traditional five Cs of credit analysis, refers to the A : general economic climate and its effect on the applicants ability to pay B : willingness of the applicant to meet its financial obligations C : financial strength of the applicant (i.e., net worth) D : ability of an applicant to meet its financial obligations

Correct Answer : D 15 : Character, which is one of the traditional five Cs of credit analysis, refers to the A : ability of the applicant to meet its financial obligations (i.e., liquidity and cash flow) B : general economic climate and its effect on the applicants ability to pay C : financial strength of the applicant (i.e., net worth) D : willingness of the applicant to meet its financial obligations

Correct Answer : D 16 : Potential losses can occur in the credit evaluation process when . A : credit is denied to a creditworthy customer B : the credit decision is delayed too long C : credit is denied to a customer who is not credit worthy D : credit is denied to a creditworthy customer and the credit decision is delayed too long Correct Answer : D 17 : The effect of a change in a firms credit terms from net 30 to 2/10, net 30 on its customers balance sheets is likely to be . A : decreased accounts receivable B : increased accounts receivable C : decreased accounts payable D : increased accounts payable Correct Answer : C 18 : The effect of a change in a firms credit terms from net 30 to 2/10, net 30 on its own balance sheet is likely to be . A : decreased accounts receivable B : increased accounts receivable C : decreased accounts payable D : increased accounts payable Correct Answer : A 19 : The primary goal of accounts receivable management should be A : minimizing lost sales B : maximizing shareholder wealth C : increasing market share D : minimizing receivables investment

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20 : Traditional discussion of guidelines for examining credit worthiness include the five Cs of credit. Which of the following is not one of the five Cs? A : Capacity B : Cooperation C : Character D : Conditions Correct Answer : B 21 : Each of the firms listed applied seasonal datings to the terms of credit they offer. This would be expected to generate additional sales for all except which of the firms? A : A Christmas novelty manufacturer B : An agricultural implements manufacturer C : A wholesale frozen food supplier D : A swimsuit manufacturer Correct Answer : C 22 : Increasing collection expenditures is likely to result in . A : a shorter average collection period B : reduced bad-debt losses C : higher accounts receivable balances D : a shorter average collection period and reduced bad-debt losses Correct Answer : D 23 : are the criteria the firm uses to screen credit applicants to determine which of its customers should be offered credit and how much. A : Credit terms B : Credit standards C : Seasonal datings D : Credit extension policies Correct Answer : B 24 : All except which of the following are assumptions of the basic EOQ model? A : Annual demand is known with certainty B : Ordering costs fluctuate C : Demand is uniform throughout the year D : Orders are filled instantaneously Correct Answer : B 25 : The is the inventory level at which an order should be placed for replenishment of an item. A : nonzero inventory level B : safety stock C : reorder point D : inventory quantity Correct Answer : C 26 : The types of inventories that manufacturing firms generally hold include all except which of Browsegrades.net

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the following? A : Raw materials B : Working stock C : Finished goods D : Work-in-process Correct Answer : B 27 : In general, the a firms production cycle, the its work-in-process inventory. A : longer; larger B : longer; smaller C : shorter; larger D : None of these; length of cycle is not related to amount of work-in-process. Correct Answer : A 28 : When an order is placed for an item that is manufactured internally within a company, ordering costs consist primarily of . A : storage and handling costs B : deterioration costs C : production setup costs D : carrying costs Correct Answer : C 29 : All except which of the following are components of carrying costs? A : Insurance B : Storage costs C : Handling costs D : Set-up costs Correct Answer : D 30 : The cost of funds invested in inventories is measured by the A : cost of insuring the inventory B : stockout costs C : required rate of return D : rate of interest on borrowed funds

Correct Answer : C 31 : To minimize the possibility of running out of inventory, most companies add a inventory. A : safety stock B : lead time stock level C : few days D : replenishment factor

to their

Correct Answer : A 32 : Safety stock is needed to absorb A : changes in accounts receivables B : cyclical changes

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C : random fluctuations in sales D : annual model changes Correct Answer : C 33 : The reorder point is . A : the lead time multiplied by the daily usage plus safety stock B : the EOQ plus safety stock C : the lead time multiplied by the annual usage D : a product of daily usage and the lead time Correct Answer : A 34 : Mace Auto Parts Company sells to retail auto supply stores on credit terms of net 60. Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firms variable cost ratio is 0.75 (i.e., variable costs are 75% of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Maces average collection period. A : 88 days B : 44 days C : 74 days D : 60 days Correct Answer : A 35 : Mace Auto Parts Company sells to retail auto supply stores on credit terms of net 60. Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firms variable cost ratio is 0.75 (i.e., variable costs are 75% of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Maces average investment in receivables. A : $821,918 B : $3,409,091 C : $72,328,767 D : $82,192 Correct Answer : C 36 : Mace Auto Parts Company sells to retail auto supply stores on credit terms of net 60. Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firms variable cost ratio is 0.75 (i.e., variable costs are 75% of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Suppose that Maces sales are expected to increase by 20% next year and, through more effective collection methods, the firm can reduce its average collection period by 20 days. Determine the firms average investment in receivables for next year under these conditions. A : $67,068,493 B : $56,666,667 C : $5,294,118 D : $98,630 Correct Answer : A 37 : Warren Motor Company sells $30 million of its products to wholesalers on terms of net 30. Currently, the firms average collection period is 48 days. To speed up the collection of Browsegrades.net

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receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firms required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine the cost of the cash discounts to Warren. A : $300,000 B : $60,000 C : $40,000 D : $48,000 Correct Answer : A 38 : Warren Motor Company sells $30 million of its products to wholesalers on terms of net 30. Currently, the firms average collection period is 48 days. To speed up the collection of receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firms required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine Warrens pretax earnings on the funds released from the reduction in receivables. (Assume a 365-day year.) A : $1,479,452 B : $236,712 C : $266,667 D : $1,082,191 Correct Answer : B 39 : Warren Motor Company sells $30 million of its products to wholesalers on terms of net 30. Currently, the firms average collection period is 48 days. To speed up the collection of receivables, Warren is considering offering a cash discount of 2% if customers pay their bills within 10 days. The firm expects 50% of its customers to take the discount and its average collection period to decline to 30 days. The firms required pretax return (i.e., opportunity cost) on receivables investment is 16%. Determine the net effect on Warrens pretax profits of offering a 2% cash discount. A : $300,000 B : $236,712 C : $63,288 D : $236,712 Correct Answer : C 40 : Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firms variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily or vice versa, assume there are 365 days per year. If Bluegrass Distilleries extends credit to these (previously delinquent) customers, determine the increase in the investment in receivables. A : $27,397 B : $2,465,753 C : $111,111 D : $125,000 Browsegrades.net

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Correct Answer : B 41 : Whirlwind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are $182,500,000 spread evenly throughout the year, and its accounts average 20 days overdue. The firms variable cost ratio is 0.70. Determine Whirlwinds average investment in receivables. (Assume 365 days per year in all calculations.) A : $17,500,000 B : $25,000,000 C : $15,000,000 D : Cannot be determined from the information provided Correct Answer : B 42 : If a lawn mower assembly plant orders 25,000 frames per year at a price of $27 each, what is the EOQ if the ordering cost per order is $35 and the annual inventory carrying cost is 12%? A : 735 B : 255 C : 567 D : 520 Correct Answer : A 43 : What is the optimal length of one inventory cycle for a firm that has an economic order quantity of 750 units, average daily demand of 68 units, and a price of $30 per unit? A : 25 days B : 11 days C : 2.7 days D : 331 days Correct Answer : B 44 : Tool Mart sells 1,400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the firms EOQ? A : 139 B : 122 C : 197 D : 148 Correct Answer : C 45 : Tool Mart sells 1,400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the optimal ordering frequency? A : 37 days B : 32 days C : 40 days D : 51 days Correct Answer : D 46 : Tool Mart sells 1,400 electronic water pumps every year. These pumps cost $54.30 each. If annual inventory carrying costs are 12% and the cost of placing an order is $90, what is the Browsegrades.net

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total annual inventory costs? A : $1,923 B : $1,281 C : $3,406 D : $3,762 Correct Answer : B 47 : Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsees inventory carrying costs average 14% of the inventory value. What is the EOQ for Haulsee? A : 4,084 B : 1,528 C : 2,890 D : 572 Correct Answer : A 48 : Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsees inventory carrying costs average 14% of the inventory value. What is the total inventory costs? A : $565,445 B : $224,331 C : $211,554 D : $21,155,120 Correct Answer : C 49 : Haulsee Inc. builds 800,000 golf carts a year and purchases the electronic motors for these carts for $370 each. Ordering costs are $540, and Haulsees inventory carrying costs average 14% of the inventory value. What is the optimal ordering frequency? A : 0.70 days B : 1.86 days C : 5.18 days D : 8.64 days Correct Answer : B 50 : Technico manufactures about 800,000 solar calculators per year. The computer chips used in the calculator cost $4.80 each, and the cost of placing an order is $65. If the carrying costs are 16%, what is the EOQ for the chips? A : 25,495 B : 3,162 C : 8, 229 D : 11,637 Correct Answer : D 51 : Willoughby Industries, Inc. is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are $10 million on credit terms of net 30. Such a change in policy is expected to reduce sales by 10%, cut the firms bad-debt losses from 5% to 3%, and reduce its average collection period from 72 days to 45 days. The firms variable cost ratio is 0.70 (profit Browsegrades.net

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contribution ratio is 0.30), and its required pretax return (i.e., opportunity cost) on receivables investments is 25%. Determine the net effect of this credit tightening policy on the pretax profits of Willoughby. When converting from annual to daily data or vice versa, assume that there are 365 days per year. A : $863,014 B : $145,753 C : $70,000 D : $300,000 Correct Answer : B 52 : Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firms variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Assuming Bluegrass extends full credit to these (previously delinquent) customers, determine the total increase in credit-related costs. A : $1,000,000 B : $1,093,151 C : $400,000 D : $600,000 Correct Answer : B 53 : Bluegrass Distilleries, Inc. refuses to extend credit to any wholesale distributors who have a history of being delinquent in repaying credit extended to them. This policy results in lost sales of $10 million annually. Based on experience with these types of customers, the firm estimates that the average collection period would be 90 days and that the bad-debt loss ratio would be 6%. The firms variable cost ratio is 0.80, making its profit contribution ratio 0.20. Bluegrass Distilleries required pretax return (i.e., opportunity cost) on receivables investments is 20%. When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine the net effect on Bluegrass Distilleries pretax profits of extending credit to these (previously delinquent) customers A : $906,849 B : $2,000,000 C : $306,849 D : $1,500,000 Correct Answer : A 54 : The United Shoe Company (USC) does not extend credit to any retail shoe store with a Fair or Limited Dun and Bradstreet credit rating. Because of this policy, the company loses $36,500,000 in sales each year. Based on prior experience with these types of customers, USC estimates that the average collection period would be 120 days and the bad-debt loss ratio would be 10%. The firms variable cost ratio is 0.75. USCs required pretax return on receivables investments is 18%. Determine the net change in pretax profits of extending credit to these retail shoe stores. (Assume 365 days per year in any calculations.) A : $9,125,000 B : $3,315,000 C : $1,095,000 Browsegrades.net

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D : $2,160,000 Correct Answer : B 55 : Wallace Company sells $73 million of its products to retailers on credit terms of net 30. Its average collection period is 55 days. To speed up the collection of receivables, the company is considering changing its credit terms to 2/10, net 30. The company expects 40% of its customers to take the cash discount and its average collection period to decline to 35 days. Wallaces required pretax rate of return on receivables investments is 15%. Determine the net effect on Wallaces pretax profits of the change in credit terms. (Assume 365 days per year in any calculations.) A : $860,000 B : $600,000 C : $16,000 D : $584,000 Correct Answer : C 56 : RCMP has annual credit sales of $37 million. The credit terms are net 30, and the current average collection period is 45 days. RCMP is considering changing its terms to 1/10, net 30 in an effort to reduce the average collection period. RCMP believes that 35% of its customers will take the discount, reducing the average collection period to 33 days. Should RCMP offer the discount? Why or why not? Assume the firms required rate of return on its receivables investment is 14%. A : No; pretax profits decrease $88,700 B : Yes; pretax profits increase $53,600 C : Yes; pretax profits increase $40,801 D : No; pretax profits decrease $40,801 Correct Answer : C 57 : Covers, Inc. (CI) sells its stainless steel products on terms of 2/10, net 40. CI is considering granting credit to retailers with total assets as low as $500,000. Currently the lowest asset limit is $750,000. CI believes sales will increase $7 million from the new credit group but the average collection period for this new group will be 60 days versus the current average collection period of 35 days. If management estimates that 20% of the new customers will take the cash discount but 4% of the new business will be written off as a bad-debt loss, should CI lower its credit standards? Why or why not? Assume CIs variable cost ratio is 0.7 and its required pretax rate of return on receivables investment is 15%. A : Yes; pretax profits increase $1,619,397 B : Yes; pretax profits increase $1,703,397 C : Yes; pretax profits increase $1,755,178 D : No; Pretax profits will decrease Correct Answer : A 58 : Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for $15.40 each. The order cost is $84, and Cycles estimates its inventory carrying costs are 15%. What is its total ordering cost per year? A : $7,968 B : $3,412 C : $4,118 D : $6,437 Browsegrades.net

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Correct Answer : B 59 : Accounts receivable consists of the credit of the business. It can take the form of which of the following? I. Trade creditII. Consumer credit A : I only B : II only C : Both I and II D : Neither I nor II Correct Answer : C 60 : When a company measures its marginal costs and marginal returns, it is developing a(n) . A : target capital structure B : optimal credit extension policy C : required rate of return D : financing decision Correct Answer : B 61 : The proportion of the total receivables volume a company never collects is the A : bad-debt loss ratio B : mismanaged accounts payable C : uncollectable bills D : recorded debts

Correct Answer : A 62 : All except which of the following are possible solutions to a large bad-debt loss ratio? A : Loosening credit B : Offering cash discounts for prompt payment C : Seasonal datings D : Determining creditworthiness of customers Correct Answer : A 63 : All except which of the following are reliable sources of the creditworthiness of a customer? A : Credit- reporting organizations B : The companys own experience with the customer C : Banks D : A general credit application Correct Answer : D 64 : A numerical credit scoring system may rate all except which of the following? A : D&B credit rating B : Location of the business C : Financial characteristics of the applicant D : Current ratio of the applicant Correct Answer : B Browsegrades.net

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65 : serves as a buffer between the various phases in the procurement-production-sales cycle of a manufacturing firm. A : Cash B : Accounts receivable C : Notes payable D : Inventories Correct Answer : D 66 : Maximizing shareholder wealth by investing in accounts receivables is considered when . I. marginal costs are exceeded by marginal returns.II. the cost of the funds invested are exceeded by expected marginal returns. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 67 : All except which of the following are examples of credit-related marginal costs? A : Advertising costs associated with promoting the companys credit policy B : Opportunity costs associated with supporting a higher level of receivables C : Labor costs associated with checking new credit accounts and collecting receivables D : Bad-debt expenses Correct Answer : A 68 : The likelihood that a customer will fail to repay credit extended to it is referred to as A : default risk B : maturity risk C : bad-debt loss ratio D : opportunity cost

Correct Answer : A 69 : Cash discounts are offered for which of the following reasons? I. To speed up collection of accounts receivable.II. To reduce a companys level of receivables investment and associated costs. A : I only B : II only C : Both I and II D : Neither I nor II Correct Answer : C 70 : Seasonal datings are offered to specific retailers. These retailers . A : do not have the capacity to make sales without seasonal dating B : do not have the ability to finance a buildup of inventory in advance of the peak selling period C : are known to be credit-risky D : are considered a distributive subsidiary of the parent company Correct Answer : B Browsegrades.net

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71 : Which of the following is the most widely known credit-reporting organization? A : Phelps Credit Services B : Dun & Bradstreet Credit Services C : Equitable Credit Services D : Creditreport.com Correct Answer : B 72 : In determining the creditworthiness of a customer from financial statements, the statements can indicate all except which of the following? A : Financial strength B : Ability to repay credit obligations C : Length of time needed to repay on credit D : Proposed budgetary expenses for the near future Correct Answer : C 73 : Which of the following is not an inventory-related cost? A : Ordering costs B : Product advertising costs C : Carrying costs D : Stockout costs Correct Answer : B

ESSAY 74 : How does an optimal credit extension policy impact a companys accounts receivables? Correct Answer : An optimal credit extension policy requires the company to examine and measure the marginal costs and marginal benefits associated with alternative policies. A more liberal extension of credit to a company’s customers stimulates sales and leads to increased profits, assuming all other factors remain constant. There may also be increased investment in inventory. These profits are offset by credit-related marginal costs including opportunity costs of the funds needed to support the higher level of receivables and increased bad-debt expenses. 75 : What information could be used to judge the credit worthiness of a customer? Correct Answer : Information is available from a variety of sources:1. Financial statements submitted by the customer.2. Credit-reporting organizations3. Banks4. A company’s own experience with the customer 76 : What are the five Cs of credit and how are they used? Correct Answer : 1. Character2. Capacity3. Capital4. Collateral5. Conditions?A credit manager must be able to sort through a great deal of information to determine the creditworthiness of the customer. He or she must be able to extract key elements and make a reliable overall assessment. The “five Cs of credit” facilitate credit decisions and serve as a framework for analysis. 77 : In trying to collect on past-due accounts, the firm may use several methods. List them. Browsegrades.net

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Correct Answer : A firm may:1. Send notices or letters informing the customer of the past-due status of the account and requesting payment?2. Telephone or visit the customer in an effort to obtain payment?3. Employ a collection agency?4. Take legal action against the customer 78 : Describe how an aging of accounts is a useful monitoring technique for accounts receivable. Correct Answer : In an aging analysis, a company’s accounts are classified into different categories based on the number of days they are past due. These classifications show both the aggregate amount of receivables and the percentage of the total receivables outstanding in each category. Aging of accounts receivable provides more information than summary ratios, as in the average collection period. Comparing aging schedules at successive points in time can help the credit manager monitor any changes in the quality of the company’s accounts. 79 : How can a company use its credit period to affect sales and inventory? Correct Answer : A company can extend its credit collection period to stimulate sales. If a product is in demand, the company can lengthen the credit period and allow for increased purchasing on easier terms. The variation in a company’s credit period is directly tied to its inventory turnover. Manufacturers of goods that have low inventory turnover can easily implement a longer credit period and could potentially increase sales. An extended credit period for companies with high-to-average inventory turnover may promote increased sales, but the increase in inventory demand for a particular product may also increase inventory investment forcing a larger inventory expense with the expectation of higher sales (which may or may not happen). 80 : What are seasonal datings as applied to credit terms? Correct Answer : Seasonal datings are sometimes offered to retailers when sales are highly concentrated in one or more periods during the year. Under a seasonal dating credit arrangement, the retailer is encouraged to order and accept delivery of the product well ahead of the peak sales period and then to remit payment shortly after the peak sales period. The primary objective of seasonal datings is to increase sales to retailers who are unable to finance the buildup of inventories during the peak selling period because of a weak working capital position, limited borrowing capacity, or both.

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Chapter 22. International Financial Management 1 : In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firms . A : weighted (marginal) cost of capital B : cost of internal equity capital C : pretax marginal cost of borrowing D : after-tax marginal cost of borrowing Correct Answer : D 2 : In the net advantage to leasing calculation, after-tax salvage value is discounted at the firms . A : weighted (marginal) cost of capital B : cost of internal equity capital C : cost of external equity capital D : after-tax marginal cost of borrowing Correct Answer : A 3 : In a lease arrangement, the owner of the property is called the A : lessee B : lessor C : equity trustee D : lender

Correct Answer : B 4 : All except which of the following are attributes of operating leases? A : The lease period normally equals the economic life of the asset. B : Lease payments under the initial lease contract are insufficient to recover the full cost of the asset for the lessor. C : Leases are cancelable. D : Maintenance and insurance normally are the responsibility of lessor. Correct Answer : A 5 : All except which of the following are true of financial leases? A : Financial leases are noncancelable. B : The lessee is normally responsible for maintenance and insurance. C : Lease payments are normally sufficient to amortize the original cost of the asset. D : All financial leases are also leveraged leases. Correct Answer : D 6 : A sale and leaseback agreement is . A : usually an operating lease B : rarely used in todays leasing agreements C : a method of providing liquidity for the lessee D : frequently used for machinery financing, but rarely used in real estate Correct Answer : C Browsegrades.net

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7 : A primary difference between leveraged leases and other financial leases is that A : leveraged leases must be capitalized and shown on the lessees balance sheet B : the lessor in a leveraged lease is invariably the manufacturer of the leased asset C : leveraged leases involve the use of nonrecourse debt D : unleveraged leases are usually tax-motivated

Correct Answer : C 8 : Which of the following leases is NOT likely to be viewed as a lease from the perspective of the Internal Revenue Service? A : A 20-year lease for an asset having an economic life estimated to be 40 years B : A lease offering a renewal option based on the assets remaining value at the time of the renewal C : A lease providing for a purchase option at the end of the lease period for a nominal sum D : A leveraged lease in which the lessor contributes 40% equity Correct Answer : C 9 : All except which of the following are advantages of leasing? A : Generally lower cost than ownership B : Leasing smoothes out expenses C : Leasing may increase a firms liquidity D : It provides 100% financing Correct Answer : A 10 : All except which of the following are disadvantages of leasing? A : Difficulty in making property improvements B : Financial leases are noncancelable C : Normally higher maintenance charges D : Generally higher cost than ownership Correct Answer : C 11 : Lease-buy analysis assumes that the alternative to leasing as the source of financing is . A : buying for cash B : borrowing to buy C : buying with all equity funds D : buying with before-tax dollars Correct Answer : B 12 : The contract period of an operating lease tends to . A : be somewhat less than the economic life of an asset B : be equal to the economic life of the asset C : be somewhat greater than the economic life of the asset D : recover the full cost of the asset Correct Answer : A 13 : Leasing offers several potential advantages. All except which of the following are Browsegrades.net

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advantages? A : Flexibility B : Effective depreciation of land C : Generally lower costs D : May be the only source of financing available to the marginally profitable firm Correct Answer : C 14 : The sale and leaseback is advantageous to the lessee because the lessee A : cannot continue using the asset B : receives cash from the sale of the asset C : receives title to property at the termination of the lease D : is never required to pay taxes and insurance

Correct Answer : B 15 : In a(n) , the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment. A : operating lease B : capital lease C : leveraged lease D : term lease Correct Answer : C 16 : Disadvantages of leasing include all except which of the following? A : Leasing usually decreases a firms liquidity B : Leasing is often more expensive than purchasing C : Loss of the assets salvage value D : Lessee may have difficulty getting approval to make property improvements on leased real estate Correct Answer : A 17 : Leasing accounts for more than A : 10 B : 25 C : 50 D : 90

percent of all business investment in equipment.

Correct Answer : B 18 : Lessees with are most likely to use leveraged leases for large transactions. A : low profit levels and low levels of tax-loss carryforwards B : high profit levels and large amounts of tax-exempt income C : low profits, large tax-loss carryforwards, and high amounts of tax-exempt income D : low tax-loss carryforwards and low amounts of tax-exempt income Correct Answer : C 19 : Normally, when a firm operates under the protection of a bankruptcy court, lease payments . A : may be suspended Browsegrades.net

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B : must continue to be paid by lessors C : must be paid to lessors if assets are secured D : may be suspended if they are true leases Correct Answer : B 20 : All except which of the following have been cited as advantages of leasing by small businesses? A : Less cash required up front B : Fewer restrictive covenants from lessors than lenders C : Lower effective interest costs relative to borrowing D : Quicker approvals from lessors than from lenders Correct Answer : C 21 : Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lessors amount to be amortized? Assume Wrenns marginal tax rate is 40%. A : $60,000 B : $38,725 C : $41,778 D : $36,690 Correct Answer : B 22 : Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax return on the lease, what is the lease payment that Wrenn will require from Contech? Assume a marginal tax rate of 40%. Under the terms of the lease, payments will be made at the beginning of each of the 4 years. A : $11,385 B : $28,463 C : $18,975 D : $21,252 Correct Answer : C 23 : T. Goho (lessee) wishes to lease a $25,000 car for 5 years. First Union Bank (lessor) has agreed to finance this lease and estimated the car will have a salvage value of $10,000 at the end of the lease. If First Union expects to depreciate the car on a straight-line basis to a salvage value of $0, what monthly lease payments must T. Goho make, given that First Union requires a 12% annual rate of return (assume a monthly interest rate of 1%)? Assume a marginal tax rate of 40% and payments at the beginning of each month. A : $528 B : $495 C : $317 D : $653 Correct Answer : A Browsegrades.net

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24 : Ajax Capital has determined that the amount to be amortized on an extruder is $540,000. What annual lease payment must Ajax (lessor) require from the lessee if the required rate of return is 16%? Assume that the lease payments will be made at the beginning of each of the 7 years of the lease agreement and that the marginal tax rate is 40%. A : $288,140 B : $222,827 C : $115,256 D : $192,093 Correct Answer : D 25 : Ajax Capital has determined the amount to be amortized on an extruder is $540,000. If the required rate of return is 14%, what will be the total interest received over the life of the lease given that lease payments will be made at the beginning of each of the 7 years of the lease agreement? Assume a marginal tax rate of 40%. A : $233,269 B : $748,784 C : $811,080 D : $110,467 Correct Answer : B 26 : Leigh Fibers wishes to lease an automated knitting machine valued at $420,000 from Ogden Capital for a period of 10 years. Ogden expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is also expected to be $0 at the end of the 10-year period. If Ogden requires a 15% after-tax rate of return on the lease, what is the lease payment required from Leigh Fibers? Assume that the lease payments will be made at the beginning of each year and that the marginal tax rate is 40%. A : $111,470 B : $145,395 C : $96,930 D : $58,158 Correct Answer : C 27 : Paragon Leasing has been approached by Mid-America Trucking Company (MATC) to provide lease financing for a fleet of new tractors. Each tractor will cost $140,000 and will be leased by MATC for 7 years with lease payments made at the beginning of each year. Paragon will depreciate the tractors on a straight-line basis to $0 but the actual market value at the end of 7 years is estimated to be $25,000. What are the required annual beginning-of-year lease payments if Paragon desires to earn a 14% after-tax rate of return? Assume a marginal tax rate of 40%. A : $36,037 B : $33,991 C : $38,750 D : $20,395 Correct Answer : B 28 : Sigma Tools will lease a computerized stamping machine from StarBanc. The machine costs $500,000 and will be depreciated on a straight-line basis to a zero book value over the next 5 years, which is also the term of the lease. The expected salvage value in 5 years is $25,000. StarBancs marginal tax rate is 30% and it requires an after-tax rate of return of 12% Browsegrades.net

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on investments of this type. What annual, beginning-of-the-year, pretax lease payment must StarBanc receive to earn the required 12% return? A : $135,133 B : $93,540 C : $94,593 D : $100,000 Correct Answer : A 29 : ANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANBs marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments. A : $45,609 B : $31,592 C : $52,653 D : $46,120 Correct Answer : C 30 : Unilog is considering leasing a computer from UniNet under a 6-year lease. The computer costs $200,000 and will be depreciated as a 5-year MACRS asset. The expected salvage value of the computer after 6 years is $20,000. UniNets marginal tax rate is 35% and its average tax rate is 30%. UniNet requires a 13% after-tax rate of return on leases of this type. What annual, pretax, beginning-of-the-year lease payment must Unilog make to UniNet? (Problem requires MACRS depreciation tables.) A : $48,786 B : $31,711 C : $50,500 D : $16,848 Correct Answer : A 31 : Lancit Media Productions wishes to lease a high-speed printer that costs $400,000 for a period of 4 years. The leasing company, GKN Leasing, expects to depreciate the entire value of the printer on a straight-line basis over the 4-year period. Actual salvage value is expected to be $50,000. If GKN requires a 12% after-tax rate of return on the lease, what annual lease payments will GKN require? Assume GKNs marginal tax rate is 35% and that all lease payments occur at the beginning of each year. A : $80,270 B : $123,493 C : $138,312 D : $36,172 Correct Answer : B 32 : Index Laboratories is considering leasing a thermoplastic molder. The lease would require 7 beginning-of-the-year payments of $122,000 each. If Index capitalizes this lease for financial reporting purposes at a 12% rate, what asset amount will be reported initially on its balance sheet? A : $623,625 Browsegrades.net

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B : $969,046 C : $556,808 D : $854,000 Correct Answer : A 33 : Uminum, the worlds largest producer of feldspar, is considering leasing a sifter that costs $450,000. The 5-year lease requires 5 beginning-of-the-year payments. The leasing company is depreciating the sifter on a straight-line basis of $90,000 per year to a salvage value of zero but assumes the actual salvage value at the end of 5 years is expected to be $25,000. If the leasing company desires to earn an 11% after-tax rate of return of the lease, what annual lease payment will they require? Assume a marginal tax rate of 40%. A : $125,145 B : $75,087 C : $148,517 D : $122,736 Correct Answer : A 34 : Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing. The period of the lease will be 6 years. The welder will be depreciated under MACRS rules for a 5-year class asset. Medarexs marginal tax rate is 40%. Annual beginning-of-the-year lease payments will be $50,000. Estimated salvage value is zero. Assuming Medarexs after-tax cost of borrowing is 15%, compute the net advantage to leasing. (Problem requires MACRS tables.) A : $8,527 B : $17,592 C : $67,174 D : $21,427 Correct Answer : D 35 : Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lessors amount to be amortized? Assume a marginal tax rate of 40%. A : $40,693 B : $38,725 C : $37,640 D : $35,613 Correct Answer : C 36 : Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. Under terms of the lease, payments will be made at the beginning of each of the 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lease payment that Wrenn will require from Daymark? Assume a marginal tax rate of 40%. A : $11,066 B : $18,443 C : $20,656 Browsegrades.net

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D : $12,393 Correct Answer : B 37 : Sandia Inc. wants to acquire a $360,000 computer-controlled printing press. If owned, the press would be depreciated on a straight-line basis over 10 years to a book salvage value of $0. The actual cash salvage value is expected to be $25,000 at the end of 10 years. If purchased, Sandia will incur annual maintenance expenses of $3,000. These expenses would not be incurred if the press is leased. If the press is purchased, Sandia could borrow the needed funds at an annual pre-tax interest rate of 10%. The lease rate would be $48,000 per year, payable at the beginning of each year. If Sandia has an after-tax cost of capital of 12% and a marginal tax rate of 40%, what is the net advantage to leasing? A : $60,713 B : $65,543 C : $57,173 D : $37,737 Correct Answer : D 38 : Prime Care has approached the leasing department of First City Bank to arrange lease financing for a $1.2 million CAT scanner. The economic life of the scanner is estimated to be 10 years. The estimated salvage value at the end of 10 years is $0. First City plans to depreciate the scanner on a straight-line basis over 10 years. If First City charges a beginning-of-the-year lease payment of $255,395, what after-tax rate of return will the bank earn on the lease? Assume a marginal tax rate of 40%. A : 4.7% B : 16.8% C : 13% D : 40% Correct Answer : C 39 : In a leveraged lease, how much of the assets full purchase price does the lessor supply? A : 010% B : 2040% C : 5070% D : 80100% Correct Answer : B 40 : In a direct lease, the user-lessee first determines all except which of the following? A : Which manufacturer will supply the equipment B : What equipment will be leased C : The terms of the lease D : What price will be paid for the asset Correct Answer : C 41 : In considering the advantages of leasing, which of the following statements is correct? A : Leasing provides approximately 50% of the necessary financing. B : Leasing can decrease the firms liquidity. C : Leasing provides approximately 50% of the necessary financing and can decrease the firms liquidity. Browsegrades.net

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D : Leasing is not capable of providing at least 50% of the necessary funding nor can it decrease the firms liquidity. Correct Answer : D 42 : All except which of the following are types of true leases? A : Operating lease B : Capital lease C : Financial lease D : Maturity lease Correct Answer : D 43 : An operating lease is often referred to as a: I. service leaseII. maintenance lease A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 44 : A capital lease is considered a A : negotiable B : maintenance C : noncancelable D : short-term

agreement.

Correct Answer : C 45 : All except which of the following are first determined by the lessee before a direct lease? A : Equipment that will be leased B : What taxes will be paid based on the lease C : Options, warranties service agreements that must be made D : What price will be paid for the asset Correct Answer : B 46 : The type of lease that is a three-sided agreement among the lessee, the lessor, and the lenders is a(n) . A : leaseback agreement B : direct lease C : leveraged lease D : operating lease Correct Answer : C

ESSAY 47 : What are the advantages of leasing? Correct Answer : 1. Leases offer flexible financing—there are fewer restrictive covenants.2. The Browsegrades.net

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firm can depreciate land when leasing real estate.3. Leasing may require lower payments due to tax benefits for the lessor.4. Leasing may be the only source of financing for some companies.5. Leasing smoothes out expenses for the lessee.6. Leasing does not require a down payment.7. Leasing increases a firm’s liquidity especially when transacting a sale and leaseback.8. Leasing offers flexibility in acquiring assets. 48 : What is a term loan? Correct Answer : Term loans include any debt obligation having an initial maturity between 1 and 10 years. Term loans are usually amortized by a series of installments. The interest rate normally ranges between 0.25 and 2.5% above the prime rate. Many term loan agreements require that some specific asset be pledged as security. The borrowing firm may have to agree to affirmative, negative and restrictive covenants governing its actions during the loan period. 49 : Explain a leveraged lease. Correct Answer : A leveraged lease is a three-sided agreement among the lessee, the lessor, and the lenders. The lessee selects the leased asset, receives all the income generated from its use, and makes periodic lease agreements. The lessor acts either for itself or as a trustee for an individual or a group of individuals to provide the equity funds needed to purchase the asset. The lenders lend the funds needed to make up the asset’s full purchase price. Specifically, the lessor normally supplies 20%–40% of the purchase price, and the lenders provide the remaining 60%–80%.?In a leveraged lease, the lender receives mortgage bonds secured by: a first lien on the asset, an assignment of the lease, an assignment of the lease rental payments, or occasionally, a direct guarantee from the lessee or third party. 50 : What are the disadvantages of leasing? Correct Answer : The primary disadvantage is cost. Leasing is often a more expensive alternative. The actual cost difference between leasing and ownership depends on many factors and varies from case to case.?Another disadvantage is the loss of the asset’s salvage value. In real estate, the loss can be substantial. A lessee may also have difficulty getting approval to make property improvements on leased real estate. If the improvements alter the property substantially or reduce its potential range of uses, the lessor may be reluctant to permit them.?In addition, if a leased asset becomes obsolete or if the capital project financed by the lease becomes uneconomical, the lessee may not cancel the lease without paying a substantial penalty.?In bankruptcy, lease payments must be made, whereas interest and principal payments are suspended. 51 : In a leveraged lease, what items secure the mortgage bonds of the lender? Correct Answer : The mortgage bonds are usually secured by:1. A first lien on the asset2. An assignment of the lease3. An assignment of the lease rental payments4. Occasionally a direct guarantee from the lessee or third party. 52 : The IRS has general rules pertaining to the tax status of true leases that allow the annual lease payments to be tax deductible. What are those rules? Correct Answer : The opinion of the IRS revolves around the following rules:1. The remaining useful life of the equipment at the end of the lease term must be the greater of 1 year or 20% of its originally estimated useful life.2. Leases in excess of 30 years are not considered to be leases for tax purposes.3. The lease payments must provide the lessor with a fair market rate of return on the investment. This profit must exist apart from the transaction’s tax benefit.4. Browsegrades.net

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Renewal options must be reasonable. The renewal rate must be closely related to the economic value of the asset for the renewal period.5. If the lease agreement specifies a purchase option at the end of the lease period, the purchase price must be based on the asset’s fair market value at that time.6. The schedule of lease payments should not be very high early in the lease and very low thereafter. Such a payment schedule suggests that the lease structure is being used merely to avoid taxes.7. In the case of a leveraged lease, the lessor must provide a minimum of 20% equity.8. Limited use property (valuable only to the lessee) may not be leased.

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Chapter 23. Corporate Restructuring 1: are forms of options. A : Warrants B : Convertible securities C : Leases D : Warrants and convertible securities Correct Answer : D 2 : A(n) is a call option issued by a company on its securities, usually common stock. A : debenture B : warrant C : futures contract D : extendible note Correct Answer : B 3:A is a fixed income security with a call option on common stock. A : convertible security B : warrant C : futures contract D : derivative security Correct Answer : A 4 : Which of the following are factors affecting the value of a call option? A : Time remaining until expiration date B : Interest rates C : Expected stock price volatility D : All of these factors affect the value of a call option Correct Answer : D 5 : The is the price that the call option buyer pays the writer of the option if the buyer decides to exercise the option. A : option premium B : option discount C : conversion price D : exercise price Correct Answer : D 6 : When a company issues convertible securities, its usual intention is future A : issuance of common stock B : reduction of outstanding common stock C : issuance of nonconvertible debt and preferred stock D : issuance of preferred stock

Correct Answer : A 7 : A warrant has an exercise price of $15. The underlying common stock has a market price of Browsegrades.net

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$10. The formula value of a warrant would be . A : $5 B : $0 C : $5 D : Cannot be determined from the information given Correct Answer : B 8 : The conversion value (i.e., stock value) of a convertible bond is defined as the multiplied by the . A : conversion ratio; conversion price B : conversion premium; exercise price C : conversion ratio; common stock market price D : conversion ratio; exercise price Correct Answer : C 9 : The difference between the market value of a convertible bond and the higher of its conversion or straight-bond value is the premium. A : exercise B : investment C : conversion D : liquidation Correct Answer : C 10 : The conversion premium of a convertible bond tends to be is the straight-bond value. A : smallest; nearly equal to B : largest; less than C : largest; greater than D : largest; nearly equal to

when the conversion value

Correct Answer : D 11 : All other things being equal, the the call option value. A : higher; higher B : higher; lower C : lower; lower D : lower; higher

the exercise price, given the stock price, the

Correct Answer : B 12 : The the time remaining before an option expires, the A : longer; lower B : shorter; higher C : longer; higher D : shorter; lower

the option value.

Correct Answer : C 13 : The

the expected stock price volatility, the Browsegrades.net

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A : greater; higher B : lower; higher C : greater; lower D : lower; lower Correct Answer : A 14 : The price at which convertible securities are exchangeable for common stock is the A : conversion value B : par value C : put price D : conversion price

Correct Answer : D 15 : During the life of conversion options, the conversion ratio is most likely to A : increase B : decrease C : stay the same D : fluctuate

Correct Answer : C 16 : All except which of the following are reasons why companies issue convertible securities? A : Cheaper total cost than nonconvertible securities B : Lower interest payments than nonconvertible securities C : Sell common stock at a price above current market price D : Deferred issuance of common stock Correct Answer : A 17 : The market value of a convertible debt issue is usually above the A : conversion ratio B : conversion value C : straight-bond value D : higher of either the conversion value or the straight-bond value

Correct Answer : D 18 : Conversion of a convertible security may be forced by the issuing company by A : raising the interest rate B : calling the securities for redemption C : lowering the dividend on common stock D : None of these are correct

Correct Answer : B 19 : As a financing device, warrants have been used in connection with A : bond swaps only B : equity offerings only C : debt restructurings and bond swaps only D : bond swaps, equity offerings, and debt restructurings Browsegrades.net

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Correct Answer : D 20 : Which of the following is NOT a common feature of financing with warrants? A : An exercise price that is below the market price of common stock at the time the warrant is issued B : Typical life of a warrant is between 5 and 10 years C : Warrant is usually detachable from a debenture or preferred stock D : If a warrant is issued as part of a unit, it is usually detachable from a debenture or preferred stock Correct Answer : A 21 : All of the following are reasons why firms issue warrants EXCEPT . A : to lower agency costs B : to increase leverage at time of issue C : to permit a company to sell common stock at a price above the price prevailing at the time of warrant issue D : to allow a firm to sell common stock in the future without incurring underwriting costs at the time of sale Correct Answer : B 22 : Prior to a warrants expiration, its market price will be A : equal to B : less than C : greater than D : negative as compared to

the formula value.

Correct Answer : C 23 : Craig Supermarkets, Inc. has convertible debentures ($1,000 par value) that are callable at 108% of par value. The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share. The company . A : could not get the convertible holders to convert if it called the debt B : has no intention of calling the convertibles C : could force conversion by calling the issue D : could realize a gain of $15 a share if it called the convertibles Correct Answer : C 24 : A firm that issues warrants . A : can expect to receive additional funds if the formula value of the warrant is zero at the expiration date B : must pay the same per share dividend to the warrant holders as it pays to its stockholders C : cannot issue convertible securities while the warrants are outstanding D : can expect to receive additional funds if the formula value of the warrant is positive at the expiration date Correct Answer : D 25 : Which of the following securities is not an example of an option? A : Warrant B : Convertible security Browsegrades.net

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C : Right D : Futures contract Correct Answer : D 26 : A(n) is a fixed-income security issued by a company with a call option on its common stock. A : warrant B : convertible debenture C : lease D : extendible note Correct Answer : B 27 : A security whose payoffs (returns) depend on the value of another security is known as a(n) . A : interest rate swap B : master limited partnership C : contingent claim D : extendible note Correct Answer : C 28 : are examples of contingent claims. A : Convertible bonds and warrants B : Warrants and extendible notes C : Options and extendible notes D : Convertible bonds, options, and warrants Correct Answer : D 29 : The preemptive right allows shareholders the . A : opportunity to maintain their original ownership percentage B : right to purchase shares in the secondary markets C : right to vote for members of the board of directors D : All of these are correct Correct Answer : A 30 : In general, the market price of a right is than the theoretical value and this difference in values as the rights expiration date approaches. A : less; decreases B : less; increases C : greater; decreases D : greater; increases Correct Answer : C 31 : earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares. A : Primary B : Full primary C : Fully diluted Browsegrades.net

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D : First class Correct Answer : C 32 : If the exercise price of an M-tel warrant is $48 and the stock splits 2 for 1, what will be the post-split exercise price of the warrant? Assume the warrant was selling for $20 before the stock split. A : $24 B : $20 C : $10 D : $48 Correct Answer : A 33 : Which of the following is not a similarity between convertible securities and warrants? A : Both tend to reduce agency costs. B : The purpose of both is the deferred issuance of common stock. C : Both give the company full control over when the common stock is issued. D : All of these are correct. Correct Answer : C 34 : Bonds may have a , which gives the holder of the bond the right to sell it back to the issuer under certain conditions. A : warrant B : put option C : rights offering D : call option Correct Answer : B 35 : A type of financial derivative that would allow a firm to hedge against changes in interest rates over a 5-year period is a(n) . A : interest rate futures contract B : commodity soup C : interest rate swap D : interest rate put option Correct Answer : C 36 : The most basic type of interest rate swap is the A : fixed for floating rate swap B : exchange-rated swap C : LIBOR for prime rate swap D : interest rate rights offering

Correct Answer : A 37 : The conversion price of CRXs convertible ($1,000 par) subordinated debentures is $40, and the present market price of CRX common stock is $48. Determine the present conversion value of the convertible issue. A : $1,000 B : $1,200 Browsegrades.net

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C : $833 D : $1,680 Correct Answer : B 38 : Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the companys common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The companys common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the conversion value of the issue. A : $1,000 B : $880 C : $1,136 D : $1,120 Correct Answer : B 39 : Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the companys common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The companys common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the straight-bond value of the issue. A : $1,000 B : $496 C : $880 D : $753 Correct Answer : D 40 : Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the companys common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The companys common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the straight-bond value of the issue. A : LTD $150, CE $250 B : LTD $150, CE $300 C : LTD $200, CE $300 D : LTD $200, CE $250 Correct Answer : B 41 : People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the formula value of PSW warrants. A : $0 B : $2 C : $5 D : $11 Browsegrades.net

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Correct Answer : B 42 : People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrants premium over the formula value. A : $0 B : $2 C : $3 D : $5 Correct Answer : C 43 : People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrants premium over the formula value. A : $50 million B : $54 million C : $56 million D : $35 million Correct Answer : B 44 : People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrants premium over the formula value. A : $250 million B : $330 million C : $254 million D : $326 million Correct Answer : D 45 : People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrants premium over the formula value. A : $100 million B : $80 million C : $180 million D : $20 million Correct Answer : C 46 : Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share. If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants? A : $1 B : $5 C : $8 Browsegrades.net

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D : $2 Correct Answer : A 47 : Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2% (each bond produced $980 for the firm). What is the conversion price if the conversion ratio is 22? A : $44.55 B : $45.45 C : $50.00 D : $4.45 Correct Answer : B 48 : To raise capital funds, Twixt Inc. issued $2 million worth of debentures with warrants attached. The warrants had an exercise price of $15, and each warrant entitled the holder to two shares of common stock. If the current market price per share of Twixt is $20, what is the formula value of a Twixt warrant? A : $10 B : $5 C : $20 D : $0 Correct Answer : A 49 : JDH Inc. presently has warrants outstanding that expire 5 years from today. Each warrant entitles the holder to purchase 2 shares of the companys common stock at an exercise price of $30 a share. The warrants currently are trading at $4 each, and the JDH common stock currently is trading at $28 a share. Calculate the warrants formula value. A : $4.00 B : $2.00 C : $0.00 D : $2.00 Correct Answer : C 50 : The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the companys common stock at a price of $50. The convertibles have a coupon interest rate of 9% and mature 20 years from today. Straight debt of equivalent risk is yielding 12% today. The companys common stock today is selling at $60 a share. Calculate the conversion value of the issue. A : $1,000 B : $1,200 C : $800 D : $300 Correct Answer : B 51 : Mills Trucking Inc. has debentures ($1,000 par value) outstanding that are convertible into the companys common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature 20 years from today. Straight debt of equivalent risk is yielding 10% today. The companys common stock today is selling at $23 a share. Calculate the straight-bond value of the issue. Browsegrades.net

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A : about $830 B : about $1,000 C : about $950 D : about $1,500 Correct Answer : A 52 : The Ogden Company has warrants outstanding that entitle the holder to purchase 4 shares of the companys common stock at an exercise price of $20 per share. The market price of the warrants is $30, and the common stock price is $25. Determine the premium over the formula value that the warrants are selling for. A : $20 B : $25 C : $10 D : $30 Correct Answer : C 53 : The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the right for the rights on case. A : $0.556 B : $0.455 C : $0.50 D : $0.625 Correct Answer : A 54 : The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the rights for the ex rights case. A : $0.455 B : $0.50 C : $0.625 D : $0.556 Correct Answer : D 55 : What is the value of a CKS Foods option prior to expiration if the exercise price is $20 and the current stock price is $20? A : Greater than $0 B : $0 C : Less than $0 D : Cannot be valued Correct Answer : A Browsegrades.net

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56 : A Sorsi bond has a par value of $1,000 but is currently selling for $920. If the bond has a conversion ratio of 23, what is the conversion price? Current stock price is $30. A : $40.00 B : $43.48 C : $33.33 D : $30.67 Correct Answer : B 57 : Lear Holdings plans to sell 60,000 units, each unit consisting of a $1,000 debenture and 15, 7-year warrants. Each warrant allows the holder to purchase one common-share at $30. If the stock price goes to $38 and all warrants were exercised, what is the total capital raised by Lear? A : $94.2 million B : $90.6 million C : $87 million D : $77 million Correct Answer : C 58 : Jackson Electronics (40% marginal tax rate) is considering issuing convertible debentures. Its investment banker tentatively has agreed to issue a 9.0%, 20-year convertible debenture ($1,000 par value). The conversion price will be $50 a share. Jacksons financial managers only want to issue the convertible if its after-tax component cost of capital is less than or equal to 8.0%. Otherwise, they plan to issue non-convertible debt. Jacksons current common stock price is $43 a share. The company expects to call the convertible issue 5 years from now when the common stock price is expected to be $60 a share. Under the conditions given in this problem, what is the minimum price per debenture that Jackson can receive and keep the after-tax cost of capital for the debentures at 8.0%? A : About $1,033 B : About $946 C : About $897 D : $1,200 Correct Answer : A 59 : A debenture of the Allegro Company (par value $1,000) is convertible into the companys common stock at a price of $50 per share. The convertible bond has a coupon interest rate of 7% and matures in 10 years. Straight debt of equivalent risk and maturity is yielding 8%. The companys common stock is currently selling for $60 per share. Determine the conversion value and straight-bond value of Allegro Companys convertible bonds. A : $1,200; $1,000 B : $1,000; $933 C : $1,200; $933 D : $1,000; $1,000 Correct Answer : C 60 : Mercury Inc. issued bonds with warrants attached that had an exercise price of $22. Each warrant allows the holder to purchase two shares. Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30. How much is the warrant selling above its formula value? A : 84.6% B : 130.8% Browsegrades.net

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C : 15.4% D : 269% Correct Answer : C 61 : Which of the following is (are) a feature of convertible securities? I. Conversion priceII. Conversion stock A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 62 : Firms issue warrants for which of the following reasons? I. Allows the company to sell stock at a price above what other company stock is selling for.II. Allows the company to choose which investors can buy the companys stock. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 63 : In a comparison of warrants and rights, it is found the two are . A : similar in that the company can discriminate as to who buys new company stock B : similar in that they allow the purchase of existing stock only C : different in that both allow the firm to receive additional funds at the time they are exercised D : different in that rights allow the holder of the right to vote in corporate elections based on the number of shares the right can purchase Correct Answer : C 64 : The value of the right can be calculated under which one of the following circumstances? A : Using the Gordon model B : Trading ex-rights C : Market order D : Based on a margin account Correct Answer : B 65 : An option has a A : fixed B : contingent C : subordinated D : superior

claim.

Correct Answer : B 66 : The conversion ratio of a convertible security is the A : number of shares that can be obtained B : value of the shares obtained C : price at which the security is exchangeable Browsegrades.net

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D : loss in the securitys value once it is exchanged Correct Answer : A 67 : Conversion of a convertible security can occur in two ways. Which of the following is (are) correct? I. It can be a voluntary conversion at specific times prior to the expiration date.II. It can be a forced conversion at any time prior to the expiration date. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 68 : Sam owns a $1,000 par value, convertible bond that can be converted now. The conversion ratio is 20, and each share of stock is currently selling for $40 per share. What would be the conversion value of the bond, and should Sam convert the bond or hold it to maturity? A : The conversion value is $2,000, and Sam should convert. B : The conversion value is $1,200, and Sam should convert. C : The conversion value is $975, and Sam should hold the bond to maturity. D : The conversion value is $800, and Sam should hold the bond to maturity. Correct Answer : A 69 : Jana owns preferred stock from High Brow Cow Dairy Farms, makers of the finest dairy products. The stock has a par value of $1,250 and a conversion ratio of 25. The stock is currently convertible. The firms common stock is selling for $57 per share. If Jana converts the preferred stock, what would be the conversion value? A : $1,250 B : $31,250 C : $2,850 D : $1,425 Correct Answer : C 70 : Conversion price is the . A : number of common stock shares owned after the conversion B : effective price of the common stock per share obtained by converting C : market price of the common stock per share D : difference between the market price of the common stock and the exercise price of the stock Correct Answer : B 71 : Conversion premium is the amount by which the market value of a convertible security is higher than the . I. conversion value of the securityII. combined interest or dividend payments of the security A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C Browsegrades.net

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72 : In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? I. Stock shares will decrease.II. Earnings per share will decrease. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Nether statement I nor II is correct. Correct Answer : B 73 : In calculating fully diluted earnings per share, earnings must be adjusted for A : interest saved B : the number of convertible securities in the marketplace C : the number of executive bonus packages that could impact the firms earnings D : the companys credit rating

Correct Answer : A

ESSAY 74 : What is an interest rate swap? Describe how it is used. Correct Answer : A swap is a type of financial derivative that is used to protect financial institutions and businesses against interest rate fluctuations. It is a contractual agreement between two parties (financial institutions or businesses) to make periodic payments to each other. One party borrows at fixed interest rates and lends money at floating rates. The other party has a variable rate debt and fixed rate loans. To protect against detrimental changes in interest rates, they agree to a swap contract. The fixed rate debtor is protecting itself from declining interest rates. Should rates fall, this company would normally receive declining payments from its lenders. With a swap, the interest payments would continue at a fixed rate. The floating rate used in computing the payments between the parties to the swap is tied to the London Interbank Offer Rate (LIBOR). At the same time, the floating rate debtor agrees to pay the interest costs in excess of a specified rate for a given period of time. Should interest rates increase in the future, it will receive increased payments from the other swap party to cover its losses. 75 : Why would a company issue convertible securities instead of straight bonds? Correct Answer : Convertibles are generally offered by relatively small, risky companies. These companies need funds to finance growth, but investors are reluctant to lend money to risky companies without promises of high interest payments and assurances from the company to properly manage the debt. Some reasons to issue convertible bonds are:1.To avoid restrictive covenants associated with creditors, as it is usually easier and cheaper to offer bondholders an equity stake in the company by offering convertible bonds.2.Convertibles can offer lower interest payments or dividends because investors are willing to accept the conversion privilege as part of their overall return.3.Firms that issue convertibles can sell their common stock at a higher price than the prevailing market price at the time of the issue.4.Earnings from projects may not begin until sometime after financing occurs. At the beginning of a project the company may prefer debt or preferred stock financing. After startup, the company may prefer common stock financing. Convertibles resolve this problem by allowing the deferred issue of common stock, which minimizes the dilution in earnings per share resulting from the immediate issuance of common stock.? Browsegrades.net

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76 : List some securities that have option features. Correct Answer : There are many securities that contain option features:1.Common stock—they have short-term options. They may also contain a rights offering, which occurs when common stockholders are given an option to purchase additional shares of the company’s common stock in proportion to the fraction they currently own.2.30-Year Treasury Bonds3.Stock market indexes4. Foreign currency options5.Convertible fixed income securities—such as debentures and preferred stock, which may be exchanged for the company’s common stock at the holder’s discretion.6.Warrants—these are issued by the company and allow the holder to purchase shares of the company’s common stock at a specific price during a specific time period. 77 : What variables affect the call option valuation? Correct Answer : Variables affecting the call option valuation are items such as the:1. option’s exercise price2. price of the underlying stock3. length of time before the option’s expiration date4. level of interest rates5. expected volatility of the underlying stock’s price 78 : Explain how conversion of a convertible security affects earnings and how a firm handles this on its financial statements. Correct Answer : If a convertible security is ultimately exchanged for common stock, the number of shares will increase and the earnings per share will decrease. Companies are required to disclose this potential dilution by reporting both primary and fully diluted earnings per share. Primary earnings per share are calculated based on the number of common shares outstanding plus common stock equivalents. A common stock equivalent must meet certain tests, but it basically includes any convertible security that derives its value primarily from the common stock into which it can be converted. Fully diluted earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares. In calculating primary or fully diluted earnings per share, earnings must be adjusted for the interest or preferred dividends saved as the result of conversion. 79 : What is the difference between a conversion price and a conversion ratio? Correct Answer : The conversion price is the stated dollar amount at which the new stock may be bought upon conversion. The conversion ratio is determined by dividing the conversion price of the stock into the convertible security’s par value. 80 : Which companies are the primary issuers of convertible securities and why do they do it? Correct Answer : In general, small risky companies whose common stock is publicly traded are the principal issuers of convertibles. These companies are rapidly growing and in need of funds to finance their growth. Investors, on the other hand, are frequently reluctant to lend money to small, risky companies without promises of high interest payments and assurances from the company that it will properly manage the debt. Due to the potential conflicts between shareholders/bondholders and the associated agency costs to properly implement and monitor protective covenants, it is usually easier and cheaper to offer the bondholders an equity stake in the company by way of a convertible security.?Other reasons for issuing convertible securities include:1.The cash flow benefits accrue to the issuing company in the form of lower interest payments or dividends because investors are willing to accept the conversion privilege as part of their overall return.2.Firms can sell common stock at a higher price than the prevailing market price at the time of issue. If the company feels that the market price of its common stock is temporarily depressed, on alternative is to issue convertible securities. The conversion price is Browsegrades.net

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typically set to about 15%-30% above the market price at the time of issue.3.The earnings resulting from a project funded by an external funding issue may not begin for some time after financing occurs. During this “startup” time, the firm may prefer debt or preferred stock initially. After the project is fully operational and producing income, the company may want to now achieve its original goal of common stock financing. The deferred issue of common stock minimizes the dilution in earnings per share that results from the immediate issuance of common stock.

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MULTIPLE CHOICE 1 : In a bond refunding analysis, the principal benefit, or cash inflow, is the present value of the . A : pre-tax interest savings over the life of the issue B : after-tax flotation cost savings C : after-tax interest savings over the life of the issue D : after-tax call premium Correct Answer : C 2 : In a bond refunding analysis, the net investment calculation includes A : after-tax call premium B : flotation cost of new debt C : overlapping interest D : All of these are correct

Correct Answer : D 3 : Bond refunding occurs when a company redeems a callable issue and sells a(n) A : equity issue, thereby reducing outstanding debt B : lower-cost issue C : preferred issue with a low dividend rate D : None of these are correct

Correct Answer : B 4 : In bond refunding analysis the A : after-tax cost of new debt B : firms marginal cost of capital C : weighted average cost of capital D : All of these are correct

is believed to be the most appropriate discount rate.

Correct Answer : A 5 : Bond occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue. A : redemption B : retirement C : recall D : refunding Correct Answer : D 6 : If Alliant can issue a $110 million 20-year refunding bond at 7.45% and call an older $110 million issue with 20 years to maturity that had a coupon of 8.80%, what is the present value of the interest savings? Assume a 40% tax rate. A : $11,620,259 B : $17,820,000 C : $ 9,117,935 D : $29,561,100

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Correct Answer : A 7 : Demetres is refunding an outstanding $75 million, 9.35% debenture with a $75 million 7.80% debenture. Both issues will be outstanding for a 3-week period. If Demetres marginal tax rate is 40%, what is the overlapping interest? A : $337,500 B : $242,740 C : $404,567 D : $202,500 Correct Answer : B 8 : Wood River Power Company is considering refunding a $100 million 12% coupon debenture issue with a 9% coupon, 20-year debenture. The 12% issue also matures in 20 years and is now callable at 109% of par. The unamortized flotation cost on the old issue is $360,000, and the flotation cost of the new issue is 0.775%. Wood River estimated that there would be a 4-week period where both bonds would be outstanding. The company has a weighted cost of capital of 11% and a 40% marginal tax rate. Should Wood River sell the refunding issue? Why or why not? (Note: PVIFA0.054,20 = 12.050) A : Yes; NPV is approximately $15.21 million B : Yes; NPV is approximately $9.86 C : Yes; NPV is approximately 6.485 million D : No; NPV is negative $0.554 million Correct Answer : A 9 : Clinch River Power is considering refunding a $150 million 12% coupon bond with a 10% coupon bond, 20-year bond. The current bond also matures in 20 years and is now callable at 110% of par. The unamortized flotation cost on the old issue is $540,000, and the flotation cost of the new issue is 0.925%. Clinch River estimates that there would be a 4-week period where both bonds would be outstanding. The company has a weighted cost of capital of 11% and a 40% marginal tax rate. Clinch River has decided to sell the refunding issue. What is their reasoning? A : NPV is approximately $9.838 million B : NPV is approximately $9.930 million C : NPV is approximately $9.655 million D : NPV is approximately $10.808 million Correct Answer : A 10 : Cutech issued a $150 million of a 20-year, 10.5% debt 5 years ago. Since then, Cutechs financial condition has improved and management believes that it could refund the old issue with a new 15-year, 7.5% issue. The old debt is now callable at 104% of par, and issuance costs on the new issue would be 0.6%. The unamortized issuance costs on the old issue are $675,000. If Cutech calls the old issue and refunds it, both issues would be outstanding for a two-week period. If the companys marginal tax rate is 40%, should Cutech refund the old issue? Why or why not? A : Yes; NPV = $43,645,599 B : Yes; NPV = $43,798,975 C : Yes; NPV = $44,364,538 D : No; NPV is negative Correct Answer : B Browsegrades.net

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11 : In considering the bond refunding analysis, which of the following statements is (are) correct? I. The marginal rate of return is used as the discount rate.II. Bond refunding is most prevalent during a period of high inflation. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 12 : Waste Deep Disposal Services is considering refunding a $525,000,000 bond issue. The old bonds have a 7.25% coupon rate. The new bonds will have a 6% coupon rate. Both issues will be outstanding for about four weeks. What is the overlapping interest if the company is in the 38% tax bracket (rounded)? A : $1,517,465 B : $1,815,288 C : $1,357,642 D : $1,225,427 Correct Answer : B 13 : Midget Digit Toe Doctors is planning to refund a 30-year bond issue. It will replace $1,500,000 of 10.25% bonds with 6.25% bonds. The firm is in the 40% tax bracket. What is the savings on the refunding? A : $515,100 B : $646,310 C : $725,600 D : $815,170 Correct Answer : B 14 : If interest rates decline, a firm should consider rates. A : selling fixed assets B : stock sales C : bond refunding D : investing in marketable securities

to take advantage of the lower interest

Correct Answer : C 15 : When considering bond refunding, all except which of the following are important input items? A : Interest payments of old issue B : Weighted cost of capital C : Interest payments of new issue D : After-tax cost of debt Correct Answer : B 16 : When a bond is called, the old issue is retired and the bondholder receives A : new, lower interest rate bonds B : new corporate stock Browsegrades.net

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C : a cash payoff D : treasury stock Correct Answer : C

ESSAY 17 : Why would a corporation consider bond refunding? Correct Answer : Bond refunding occurs when a company exercises its option to redeem a callable issue and sells a lower-cost issue to take its place. The decision to refund is based on capital budgeting analysis. If the present value of the after-tax interest savings over the life of the issue exceeds the cash outflow at the time of refunding, principally consisting of the call premium and flotation costs, then the corporation generally decides in favor of refunding. Bond refunding becomes important when interest rates decline substantially from earlier levels. 18 : What is the principal inflow and what is the principal outflow from a bond refunding situation? Correct Answer : Bond refunding is usually considered based on capital budgeting analysis. Bond refunding has a principal inflow, which is the present value of the after-tax interest savings over the life of the issue. The principal outflow consists primarily of the call premium and the issuance or flotation costs of the new debt. 19 : Why is the after-tax cost of debt used in bond refunding analysis? Correct Answer : Bond refunding differs from other capital expenditure projects in one very important way. The cash inflows are known with considerably more certainty than the cash flows from a typical capital expenditure project, and therefore, it is less risky. Because of this, it is more appropriate to use the after-tax cost of debt as the discount rate for the bond refunding analysis.

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MULTIPLE CHOICE 1 : Which of the following statements about risk is (are) correct? I. Risk is the possibility that the actual cash flows will be different from the expected cash flows.II. Risk management is utilized by companies to provide a chance to make a quick profit. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 2 : Currency and commodity price volatility is a component of which of the following types of risk? A : Systematic risk B : Unsystematic risk C : Operational risk D : Nondiversifiable risk Correct Answer : B 3 : The most important reason to hedge business risk is to reduce A : the chance of a business takeover B : employee theft C : management inaccuracies D : the chance of financial distress

Correct Answer : D 4 : Which of the following is not a reason to reduce financial distress? A : Enhanced debt capacity B : Reduced WACC C : Better currency exchange ratio D : Ensure adequate cash flows Correct Answer : C 5 : Which of the following is (are) a companys largest risk? I. Exchange rate riskII. Future raw material price risk A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 6 : Which of the following is a related benefit of hedging external risks for a company? A : Management can determine international markets for their product. B : Management can forecast political events that may impact their sales. C : Management can focus on performance and compensation factors that are under their control. D : Management can determine the economic forces that will impact their earnings. Browsegrades.net

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Correct Answer : C 7 : Which of the following statements about hedging of business risks by investors is (are) correct? I. Operational information about companies is widely available and investors find it relatively simple to hedge business risk.II. Investors have the necessary capital required to implement hedging strategies and do so consistently. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 8 : All except which of the following are nonhedging strategies that can be used to manage business risk? A : Acquisition of additional information B : Forward contracts C : Diversification D : Insurance Correct Answer : B 9 : To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following? A : Manufacture the product overseas B : Develop more raw material suppliers C : Test-market a product D : Change advertising Correct Answer : C 10 : When a lack of information can result in business risk, which of the following can management not do to acquire additional information? A : Refer to the annual reports of competitors for needed information B : Purchase information from those that possess the knowledge needed C : Form a panel to evaluate the product D : Test market a product Correct Answer : A 11 : Firms work to diversify. Which of the following is not a diversification method that firms use? A : Firms seek to expand the customer base. B : Firms seek to obtain raw materials from several suppliers. C : Firms seek to isolate their product by selling to a single niche market. D : Firms seek to produce more than one product. Correct Answer : C 12 : Which of the following statements about diversification is (are) correct? I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.II. Diversification is always prudent and should be expanded to include new, unrelated products whenever possible. Browsegrades.net

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A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 13 : Which of the following is a motive for using insurance to manage risk? A : Premiums, no matter how high, are consistent and easy to budget. B : The firm intends to make money from the insurance company if a specified loss happens. C : The firm does not want to be concerned with small, inconsequential losses and chooses to have the insurance company handle them. D : Insurance can provide protection against events that can cause financial distress. Correct Answer : A 14 : Which of the following is not a loss generally insured by corporations? A : Death of key employees B : Executive bonuses C : Fraud D : Product liability Correct Answer : B 15 : Which of the following is a loss that companies would self-insure? A : Product breakage B : Fraud C : Unexpected business interruptions D : Officer liability Correct Answer : A 16 : A firm can reduce risk by gaining control over the operating environment. Which of the following is an example? A : Using general purpose assets. B : Hedging through a futures contract. C : Increasing the customer base. D : Using patents and copyrights. Correct Answer : A 17 : Which of the following is generally used to enforce rights under patents and copyrights? A : Legal action B : Takeover threats C : Diversification D : Retained earnings Correct Answer : A 18 : Which of the following is a firm-specific asset? A : Sewing machines designed for the manufacture of summer and winter clothes B : Fire-retardant paint in lime green C : Auto plant that can produce six styles of vehicles Browsegrades.net

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D : A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting Correct Answer : B 19 : Which of the following is not a method whereby a hedge is accomplished? A : Using derivative securities B : Owning several shares of a companys stock C : Buying or selling a forward contract D : Using an option in the cash market Correct Answer : B 20 : Forward contracts are most common in A : stock B : agricultural C : currency D : bond

markets.

Correct Answer : C 21 : Which of the following statements is (are) correct about a forward contract? I. Forward contracts require a good faith deposit before an agreement can be reached.II. Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : D 22 : Which of the following is the current price in a futures contract? A : Volatile price B : Spot price C : Short price D : Long price Correct Answer : B 23 : In the futures market, losers must pay winners each day. This is called A : paying up B : selling short C : taking a long position D : marking to market

Correct Answer : D 24 : Which of the following is a facilitator in all futures trades, since all contracts are purchased from or sold by this entity? A : The futures clearinghouse B : The futures trading floor C : The futures broker D : The futures exchange Browsegrades.net

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Correct Answer : A 25 : Which of the following statements is (are) true about futures contracts? I. The buyer of the contract must take delivery of the underlying commodity.II. To reverse a position, the buyer of a contract must sell an identical contract which is recognized as offsetting the other one. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : B 26 : Which of the following statements is (are) correct about the reasons why hedging is difficult to do perfectly? I. Available futures contract sizes may not match the hedging needs of the firm.II. There may be a change in the relationship between the futures price and the local spot price. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 27 : Which of the following describes basis risk? A : A natural disaster that affects the underlying commodity B : The risk that the commodity is not marketable C : The variance in the price of the commodity and the value of the American dollar D : A change in the relationship between the futures price and the local spot price Correct Answer : D 28 : Which of the following is the most important reason for firms to use risk management techniques? A : To make supernormal profits B : To reduce the chance of catastrophic financial distress C : To reduce managements liability D : To control inventory losses Correct Answer : B 29 : Financial derivatives can be used to manage all except which of the following risks? A : Earnings risks B : Currency risks C : Pricing risks D : Interest rate risks Correct Answer : A 30 : Which of the following statements about risk management strategy is (are) correct? I. It reduces the variability of a firms expected cash flows.II. It reduces the chance of catastrophic financial distress. A : Only statement I is correct. Browsegrades.net

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B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : C 31 : Forward contracts are said to possess A : business B : financial C : performance D : spot

risk.

Correct Answer : C 32 : A long hedge requires A : the creation of B : the selling of C : the buying of D : margining

a futures contract.

Correct Answer : C 33 : A short hedge requires A : margining B : creating C : the buying of D : the selling of

a futures contract.

Correct Answer : D 34 : A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is risk. A : dividend payout B : exchange rate C : research and development D : leasing Correct Answer : B 35 : Acquisition of additional information can be accomplished by all except which of the following? A : Employing individuals or firms with the needed expertise B : Test-marketing C : Paying to have new issues of bonds rated D : Changing the location of the distributorship Correct Answer : D 36 : An example of hedging to control risk would be . A : car makers reducing the number of models that will be manufactured this year B : toy stores placing orders in December for toys needed by Christmas C : airline companies attempting to lock in the price paid for fuel D : fashion designers offering showings of their new clothing line in several major cities Browsegrades.net

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Correct Answer : C 37 : An example of hedging to control currency exchange rate risk is a wine distributor A : currently importing wine made from the 2010 vintage B : paying for wine today that will be delivered in three years C : that visits the vineyard where wine is made before buying the vintage D : that settles all of its bills with euros

Correct Answer : B 38 : Reason(s) to manage risk by hedging include(s) which of the following? I. To be able to have needed cash flowsII. To reduce the chance of financial loss A : Only statement I is correct B : Only statement II is correct C : Both statements I and II are correct D : Neither statement I nor II is correct Correct Answer : C 39 : Which of the following is not a derivative security? A : Forwards B : Margins C : Futures D : Options Correct Answer : B 40 : Marking to market is a procedure for A : futures B : forwards C : margin D : implied

contracts.

Correct Answer : A 41 : A clearinghouse operated by the futures exchange handles the A : offices of the future contract buyers B : location of the future contract sellers C : payments between buyers and sellers D : actual products bought and sold

Correct Answer : C 42 : A futures contract is a(n) A : implied B : negotiated C : standardized D : variable

contract.

Correct Answer : C

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ESSAY 43 : List several reasons why a firm might choose to employ risk management techniques. Correct Answer : 1. To reduce the chance for financial distress2.To assure that the firm will have adequate cash flows to make investments in times of financial difficulty3.To help management focus on issues that are key to the performance of the firm that are under management’s control 44 : What is a hedge? Correct Answer : A hedge is a transaction that limits the risk associated with fluctuations in the price of a commodity, currency, or financial instrument. A hedge is accomplished by taking offsetting positions in the ownership of an asset or security using derivative securities. 45 : How does hedging reduce or eliminate business risks? Correct Answer : When a company hedges a transaction, it assumes offsetting risks that neutralize the original risk. The primary purpose of hedging is to reduce the chance of financial distress. Because financial distress is costly and may ultimately lead to forced liquidation, it is desirable to reduce the risk of financial distress. If a transaction is large enough—for example, raw materials—there are potential, but unanticipated, price swings that could lead to financial distress and/or bankruptcy of the firm. It is portably worthwhile for the firm to seek to hedge against this risk. A collateral benefit of reducing the probability of financial distress through hedging is the fact that firms engaging in effective risk management strategies will normally have an enhanced debt capacity in their capital structure, resulting in a reduced weighted cost of capital.?Hedging also helps a firm manage their risk to ensure that they will have adequate cash flows to make needed investments. If a firm needs capital, external capital suppliers may be reluctant to provide funds for intangible asset investments such as R&D or marketing activities at a time when the firm is having difficulty generating operating cash flows.?It also may be advantageous for a firm to hedge some of its largest risks so that the focus of management’s attention is properly placed on issues under management’s control. 46 : List some nonhedging risk management strategies. Correct Answer : Nonhedging strategies are:1. Acquisition of additional information through “test-marketing” or by employing consultants with the needed expertise.?2. Diversification?3. Insurance?4. Control over the operating environment by establishing distributorships, using patents and copyrights and enforcing rights under patents and copyrights through legal action.?5. Limited use of firm-specific assets 47 : List five hedging strategies for risk management Correct Answer : 1. Forward contracts?2. Futures contracts?3. Long hedges?4. Short hedges?5. Options hedging strategy 48 : What is marking to market and how is this process guaranteed? Correct Answer : Futures contracts require daily settlement between the buyer and seller for gains and losses. This is marking to market. Performance on a contract is guaranteed by both the requirement to mark to market and by the requirement that both parties maintain a margin account or performance bond with their broker. The funds placed in the margin account are Browsegrades.net

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used to ensure that losers have sufficient resources to pay the winners every day. 49 : What options does the buyer of a futures contract have at the time the futures contract matures? Correct Answer : The futures contract buyer can take delivery of the commodity underlying the contract or reverse its position by making an offsetting transaction. Rarely do contract buyers take delivery. It is much more common for them to reverse their positions just prior to expiration of the contract by selling an identical contract. By buying and then selling an identical contract, the clearinghouse recognizes these transactions as offsetting each other.

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MULTIPLE CHOICE 1 : Which of the following actions would not tend to increase the value of a countrys currency? A : Relatively low interest rates B : Government trade policies that limit imports C : Relatively low rate of inflation D : Restrictions on foreign exchange transactions Correct Answer : A 2 : When interest rate parity exists, the forward rate will differ from the spot rate by just enough to . A : offset the difference in the real rate of return B : permit the buyer of a covered option to make a profit C : offset the interest rate differential between the two currencies D : result in a perfect interest rate arbitrage Correct Answer : C 3 : The states that the differences in interest rates between two countries should be offset by equal, but opposite, changes in the future spot exchange rate. A : expectations theory B : interest rate parity C : purchasing power parity D : international Fisher effect Correct Answer : D 4 : Which of the following is not a primary category of foreign exchange risk that multinational firms must consider? A : Economic exposure B : Operating exposure C : Translation exposure D : Transaction exposure Correct Answer : B 5 : Motorola has a contract to deliver cellular telephones in Japan 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face? A : Economic exposure B : Operating exposure C : Transaction exposure D : Translation exposure Correct Answer : C 6 : When a multinational firm has one or more foreign subsidiaries with assets and liabilities denominated in a foreign currency, it faces exposure. A : economic B : operating C : translation Browsegrades.net

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transaction

Correct Answer : C 7 : Under current accounting procedures, all of the following except which balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet? A : Stockholders equity B : Fixed assets C : Current liabilities payable in a foreign currency D : Long-term liabilities payable in a foreign currency Correct Answer : A 8 : An increase in the value of a foreign currency relative to the U.S. dollar value of the foreign subsidiarys liabilities. A : decreases B : increases C : has no effect on D : is an average of

the conversion

Correct Answer : B 9 : To protect itself against transaction exchange rate risk, a U.S. company that purchases automobiles from a Japanese manufacturer may use all of the following techniques EXCEPT . A : borrow U.S. funds and invest them in interest-bearing Japanese securities B : execute a contract in the forward exchange market C : sell yen in the spot market at the time of each transaction D : execute a contract in the foreign exchange futures market Correct Answer : C 10 : Firms engaged in international transactions incur exchange rates among currencies. A : credit B : political C : market D : exchange rate

risk because of fluctuations in the

Correct Answer : D 11 : The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in rates prevailing in the two countries. A : inflation B : interest C : trade deficit D : GNP growth Correct Answer : B 12 : A euro is a . A : monetary unit used in transactions between European central banks Browsegrades.net

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B : monetary unit used in providing capital to the World Bank C : monetary unit used in transactions between Common Market countries D : composite currency whose value is based on the weighted value of several European currencies Correct Answer : D 13 : A parent companys foreign investment risk exposure depends on the foreign subsidiarys net position. A : cash B : equity C : present value D : working capital Correct Answer : B 14 : A U.S. company that purchases goods on credit from a German supplier can protect itself against transaction exchange risk by . A : executing a contract in the forward exchange market B : borrowing U.S. funds and investing in interest-bearing German securities C : borrowing German funds and investing in interest-bearing U.S. securities D : executing a contract in the forward exchange market, and by borrowing U.S. funds and investing in interest-bearing German securities Correct Answer : D 15 : Primary sources of demand for British pounds in the foreign exchange market include A : foreign buyers of British exports who must pay for their purchases in pounds B : foreign investors who desire to make investments in physical or financial assets in Great Britain C : speculators who expect British pounds to increase in value relative to other currencies D : All of these are correct

Correct Answer : D 16 : Primary sources of supply of British pounds in the foreign exchange market include . A : British importers who need to convert their pounds into foreign currency to pay for purchases B : foreign investors who desire to make investments in physical or financial assets in Great Britain C : speculators who expect British pounds to increase in value relative to other currencies D : U.S. importers who need to convert dollars to pounds to pay for purchases Correct Answer : A 17 : Government trade policies that restrict imports into a country tend to the supply of the countrys currency in the foreign exchange market and tend to the value of the countrys currency with respect to other currencies. A : increase; decrease B : increase; increase C : decrease; decrease D : decrease; increase Correct Answer : D Browsegrades.net

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18 : Which of the following trade policies will tend to decrease the supply of the countrys currency in the foreign exchange market? A : Imposition of tariffs B : Imposition of export quotas C : Financing exports with low interest loans D : Imposition of tariffs and export quotas Correct Answer : A 19 : When the Federal Reserve (acting through member commercial banks) sells U.S. dollars in the foreign exchange market, it the supply of U.S. dollars and hence tends to the value of the U.S. dollar relative to other currencies. A : increases; raise B : decreases; lower C : increases; lower D : decreases; raise Correct Answer : C 20 : A high rate of inflation within a country will tend to the value of its currency with respect to the currencies of other countries that are experiencing lower rates of inflation. A : increase B : decrease C : have no effect on D : Cannot be determined because of insufficient information Correct Answer : B 21 : The theory that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in interest rates in the two countries is known as . A : covered interest arbitrage B : inflation C : hedging D : interest rate parity Correct Answer : D 22 : Firms transacting business with foreign companies can lower exchange rate risk exposure by . A : limiting transaction exposure B : hedging C : purchasing LIBORs D : using the PPP to make exchange rate forecasts Correct Answer : B 23 : Which of the following is NOT one of the basic hedging techniques? A : Money market hedge B : Forward market hedge C : Primary market hedge D : All of these are basic hedging techniques. Browsegrades.net

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Correct Answer : C 24 : In general, when a foreign subsidiarys assets are than its liabilities, will occur when the exchange rate on the currency of the country in which the foreign subsidiary operates loses value. A : greater; currency exchange gains B : greater; currency exchange losses C : less; nothing D : greater; nothing Correct Answer : B 25 : What is the nominal interest rate in Canada if the real rate of return is 2.5% and the expected inflation rate was 4.5%? A : 7.00% B : 6.89% C : 7.11% D : 7.07% Correct Answer : C 26 : If U.S. prices are expected to rise by 3% over the coming year and prices in Switzerland are expected to rise by 7% during the same time, what is the expected spot rate in one year of the Swiss franc given that the current spot exchange rate is $0.168? A : $0.1612 B : $0.1613 C : $0.1617 D : $0.1745 Correct Answer : C 27 : If one-year U.S. nominal interest rates are 4%, one year Canadian nominal interest rates are 7.5%, and the current spot exchange rate, S0, is $0.587, then what will the expected spot rate be in one year? A : $0.568 B : $0.607 C : $0.564 D : $0.573 Correct Answer : A 28 : If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7% and the annual nominal interest rate on 5-year Canadian bonds is 7.75%, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.739? A : $0.734 B : $0.714 C : $0.765 D : $0.733 Correct Answer : B Browsegrades.net

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29 : If the annual nominal interest rate on 5-year U.S. Government Treasury bonds is 7%, and the annual nominal interest rate on 5-year Canadian bonds is 5.5%, what is the expected future spot rate in 5 years given that the current spot exchange rate between U.S. dollars and Canadian dollars is $0.587? A : $0.595 B : $0.547 C : $0.578 D : $0.630 Correct Answer : D 30 : Crown Honda purchased one of its most popular models for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealers gain or loss on the change in rates? A : Gain of $1,180 B : Loss of $1,427 C : Loss of $1,180 D : Gain of $1,427 Correct Answer : A 31 : Vroom Vroom Motors purchased several Mercedes Benz automobiles from its West German broker. The contract was for 10,000,000 euros, due in 180 days. The present exchange rate is $0.51 per euro, and the 180-day forward rate is $0.514. If the rate actually goes to $0.50 in 180 days, what is the dollar gain or loss incurred if no hedge is taken relative to a hedged position? A : $392,157 gain B : $40,000 loss C : $100,000 gain D : $140,000 gain Correct Answer : D 32 : If the annual nominal interest rate on 10-year U.S. Government Treasury bonds is 7.35% and the annual nominal interest rate on 10-year Japanese bonds is 5.75%, what is the expected future spot rate in 10 years given that the current spot exchange rate between U.S. dollars and Japanese yen is $0.00959? A : $0.00834 B : $0.01114 C : $0.00973 D : $0.00946 Correct Answer : B 33 : If the 182-day interest rate is 1.75% in the United States and 2.625% in Germany, and the current spot exchange rate between dollars and euros is $0.583, what will the 180-day forward rate be if IRP holds? A : $0.578 B : $0.588 C : $0.573 D : $0.581 Correct Answer : A Browsegrades.net

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34 : If U.S. prices are expected to rise by 3.5% over the coming year and prices in Great Britain are expected to rise by 5.25% during the same time, what is the expected spot rate in one year given that the current spot exchange rate is $1.497? A : $1.522 B : $1.470 C : $1.472 D : $1.499 Correct Answer : C 35 : What is the real rate of return if the risk-free rate is 3.25% and the expected rate of inflation is 2.75%? A : 0.50% B : 0.51% C : 0.487% D : 1.49% Correct Answer : C 36 : What is the real rate of return if the risk-free rate is 4% and the expected rate of inflation is 2.5%? A : 0.43% B : 1.50% C : 6.35% D : 1.46% Correct Answer : D 37 : The 6-month interest rate on 180-day U.S. Treasury bills is 7.64%. In the foreign exchange markets, the spot rate between U.S. dollars and British pounds is 1 pound = $1.5525. The 180-day (6-month) forward rate is 1 pound = $1.5188. Determine the expected rate of interest on 6-month British government debt securities, assuming interest rate parity between the dollar and pound exists. A : 13.52% B : 5.47% C : 7.31% D : 10.03% Correct Answer : D 38 : The 6-month interest rate on 180 day U.S. Treasury Bills is 7.5%. In the foreign exchange markets, the spot rate between U.S. dollars and Australian dollars is 1 Australian dollar = $0.452 and the 180-day (6-month) forward rate is 1 mark = $0.46. Determine the expected rate of interest on 6-month Australian government debt securities, assuming that the interest rate parity between the U.S. dollar and Australian dollar exists. A : 7.35% B : 1.77% C : 5.63% D : 3.82% Correct Answer : D Browsegrades.net

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39 : If the spot rate (in U.S. dollars) for the Australian dollar is $0.559 and the 180-day forward rate is trading at a premium of 2.86%, what is the 180-day forward rate? A : $0.551 B : $0.567 C : $0.575 D : $0.583 Correct Answer : B 40 : Today, short-term interest rates in Australia are 8.50% and the corresponding U.S. rate is 6.0%. The current discount on forward Australian dollars is 2.0%. Can a U.S. trader use covered interest arbitrage to take advantage of this situation? If so, what is the net effect? A : No; lose 1/2% B : No; lose 2 1/2% C : Yes; gain 1/2% D : Yes; gain 2 1/2% Correct Answer : C 41 : The law of one price, an economic principle, means that the price of a product in different markets should be the same if . A : the raw materials were obtained from a single source B : adjusted for inflation C : taxes are adjusted based on a single currency D : there are no significant costs associated with moving between markets Correct Answer : D 42 : In considering purchasing power parity, the relationship is tariffsII. applicable, despite trade barriers A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct.

. I. not applicable due to

Correct Answer : A 43 : A less restrictive form of purchasing power parity is A : omnipotent purchasing power parity B : relative purchasing power parity C : absolute purchasing power parity D : exchange parity

Correct Answer : B 44 : All of the following items are needed to compute relative purchasing power parity EXCEPT . A : spot price B : home country interest rate C : benchmark tax rate D : expected foreign country inflation rate Correct Answer : C Browsegrades.net

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45 : According to Fisher, in the absence of government interference and holding risk constant, real rates of return across countries will be equalized through a process of . A : margining accounts B : transaction transference C : arbitrage D : equalization of costs Correct Answer : C 46 : The international Fisher effect theory states that differences in interest rates between two countries will be offset by equal but opposite changes in the . A : future spot rate B : future interest rate C : American dollar D : euro Correct Answer : A

ESSAY 47 : Name the factors that affect exchange rates. Correct Answer : Exchange rates vary based on:1.The supply and demand for each currency, and2.The political and economic conditions that influence the supply of, or demand for, a country’s currency. These may include: a.inflation b.interest rates among countries c.a government’s trade policies d.a government’s political stability e.a country’s trade policies: tariffs, import quotas, and foreign exchange restrictions. f.government political stability, which may involve risk of expropriation of investments or restrictions on the amount of funds that may be taken out of a country 48 : How does a firm manage economic exposure due to changes in exchange rates? Correct Answer : To manage economic exposure, a firm may use any or all of the following strategies:1.Shift production from high-cost plants to lower-cost plants (such as moving production plants from the United States to Mexico).2.Increase productivity (such as adopt laborsaving techniques or reduce product cycles).3.Raw material and supply outsourcing to lowercost locations.4.Increase product differentiation to reduce the price sensitivity in the market.5.Enter markets with strong currencies and reduce involvement in competitive markets with weak currencies. 49 : What are two hedging techniques that a U.S. company might use to protect itself against foreign exchange risk regarding transaction exposure? Correct Answer : 1. Execute a contract in the forward exchange market or in the foreign exchange futures market.2. Execute a money market hedge. 50 : How do market forces support the relative purchasing power parity? Correct Answer : Market forces that support the relative PPP relationship operate in the following way. If one nation has a higher inflation rate than another, its goods and services will Browsegrades.net

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become relatively more expensive, making its exports less price competitive and imports more price competitive. The resulting deficit in foreign trade will place downward pressure on the currency value of the high inflation country until a new, lower equilibrium value is established. The opposite will be true for the country with the lower inflation rate. 51 : There are two methods used to forecast future exchange rates. What are they and how do companies use them to protect against risk? Correct Answer : Forecasting future exchange rates can be determined using:1. Forward rates. This is the simplest method. The corporation can look at the forward rate of exchange between two different currencies, project that estimate into the future, and convert dollar proceeds from the transaction into a preferred denomination.?2. Interest rates. Forward rates provide a direct and convenient forecast of future spot currency exchange rates, but they are not normally available beyond one year. In the case of a longer-term exchange rate forecast, the international Fisher effect can be used. Interest rates between two countries can be readily observable for almost any maturity, whereas future inflation differentials are not.

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MULTIPLE CHOICE 1 : Which of the following terms are NOT associated with mergers and acquisitions? A : White knight B : Tender offers C : Greenmail D : Declaration of bankruptcy Correct Answer : D 2 : Forms of business combinations include . A : mergers B : consolidations C : holding companies and consolidations D : mergers, consolidations, and holding companies Correct Answer : D 3 : When the net income of the combined companies after merger exceeds the sum of the net incomes prior to the merger, is said to exist. A : goodwill B : synergy C : leverage D : greenmail Correct Answer : B 4 : The reasons why a company may choose external growth by merger over internal growth include . A : economies of scale B : more rapid growth C : tax considerations and rapid growth D : economies of scale, tax considerations, and more rapid growth Correct Answer : D 5 : When the market value of a companys common stock is below the replacement value of the firms net assets, this company is frequently referred to as a possible . A : white knight B : leveraged buyout C : takeover candidate D : conglomerate Correct Answer : C 6 : The acquisition of a company in which the buyer borrows a large amount of the purchase price, using the purchased assets as collateral for a large portion of the borrowings, is known as a . A : pooling of interests B : leveraged buyout C : conglomerate merger D : tender offer Browsegrades.net

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Correct Answer : B 7 : In general, the greatest economies of scale are possible with A : conglomerate B : vertical C : horizontal D : integrated

mergers.

Correct Answer : C 8 : A combination of two or more companies in which neither competes directly with the other and no buyer-seller relationship exists is known as a . A : conglomerate merger B : vertical merger C : horizontal merger D : takeover Correct Answer : A 9 : A combination of two or more companies that have a buyer-seller relationship with each other is known as a . A : conglomerate merger B : vertical merger C : horizontal merger D : takeover Correct Answer : B 10 : What is a form of business combination in which a company purchases all or a controlling block of another companys common shares and the two companies become affiliated? A : Horizontal merger B : Vertical merger C : Conglomerate D : Holding company Correct Answer : D 11 : A combination of two or more companies that compete directly with each other is known as a . A : conglomerate merger B : vertical merger C : horizontal merger D : takeover Correct Answer : C 12 : The major methods typically used to value merger candidates include all except which of the following? A : Comparative price-earnings ratio method B : Adjusted book value method C : Discounted cash flow method D : Bottom line comparison method Browsegrades.net

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Correct Answer : D 13 : The basic methods used in combining financial accounts in a merger include all except which of the following? A : Goodwill consolidation method B : Purchase method C : Pooling of interests method D : Book value method Correct Answer : A 14 : In the method of combining financial accounts in a merger, the acquired companys assets are recorded on the acquiring companys books at their cost (net of depreciation) when originally acquired. A : goodwill consolidation B : purchase C : pooling of interests D : EVA Correct Answer : C 15 : In the method for combining financial accounts in a merger, the total value paid or exchanged for the acquired companys assets is recorded on the acquiring companys books. A : pooling of interests B : goodwill consolidation C : purchase D : book value Correct Answer : C 16 : In a form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies. A : leveraged buyout B : holding company C : consolidation D : leveraged buyout or consolidation Correct Answer : B 17 : A form of business combination in which two (unaffiliated) companies contribute financial and/or physical assets, as well as personnel, to a new company to engage in some economic activity is known as a . A : joint venture B : conglomerate merger C : merger D : consolidation Correct Answer : A 18 : Once an unfriendly takeover attempt has been initiated, the target companys management can employ various other antitakeover measures to deter a takeover, including when the takeover candidate can attempt to buy back its shares, at a premium over the shares market Browsegrades.net

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price, from the company or investor who initiated the unfriendly takeover attempt. The amount of this premium is called . A : blackmail B : greenmail C : white knight D : poison pills Correct Answer : B 19 : In a(n) common stock in a division or subsidiary is distributed to shareholders of the parent company on a pro rata basis. A : spin-off B : reverse LBO C : equity carve-out D : tender offer Correct Answer : A 20 : In the method of accounting for mergers, the total value paid or exchanged for the acquired firms assets is recorded on the acquiring companys books. A : purchase B : goodwill C : pooling of interests D : stockholders equity Correct Answer : A 21 : One anti-takeover measure is the for the stock of the bidder. A : poison put B : black knight defense C : pacman defense D : shark repellent

, where the target company makes a takeover bid

Correct Answer : C 22 : The accounting method used in most mergers is the A : pooling of interests B : purchase C : consolidation D : merger

method.

Correct Answer : B 23 : A reorganization plan is reviewed by the A : bankruptcy court B : Securities and Exchange Commission C : Federal Trade Commission D : bankruptcy court and the SEC

for fairness and feasibility.

Correct Answer : D 24 : Legal bankruptcy proceedings focus on the decision of whether the firms value as a going Browsegrades.net

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concern is greater than its A : liquidation B : market C : equity D : historical

value.

Correct Answer : A 25 : Under Chapter(s) of the bankruptcy laws, a companys assets are sold off and the proceeds are distributed to the creditors. A : 11 B:7 C:4 D : 7 and 11 Correct Answer : B 26 : Under Chapter(s) of the bankruptcy laws, a company continues to operate while it attempts to work out a reorganization plan. A : 11 B:7 C:4 D : 4 and 11 Correct Answer : A 27 : A(n) is a situation in which a failing business is permitted to discharge its debt obligations by paying less than the full amounts owed to creditors. A : assignment B : composition C : extension D : insolvency Correct Answer : B 28 : A(n) is a situation in which a failing business is permitted to lengthen the amount of time it has to meet its obligations with creditors. A : assignment B : composition C : extension D : insolvency Correct Answer : C 29 : Technical insolvency occurs when the . A : firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities B : recorded value of the firms assets is less than the recorded value of its liabilities C : firm files a bankruptcy petition in accordance with the Federal bankruptcy laws D : owners of the businesses lack experience Correct Answer : A Browsegrades.net

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30 : Legal insolvency occurs when the . A : firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities B : recorded value of the firms assets is less than the recorded value of its liabilities C : firm files a bankruptcy petition in accordance with the Federal bankruptcy laws D : owners of the businesses lack experience Correct Answer : B 31 : Bankruptcy occurs when the firm . A : is unable to pay its debts B : files a bankruptcy petition in accordance with the Federal bankruptcy laws C : is more than 6 months overdue to its creditors D : is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws Correct Answer : D 32 : equals the proceeds that would be received from the sale of the firms assets minus its liabilities. A : Market value B : Equity value C : Going-concern value D : Liquidation value Correct Answer : D 33 : equals the capitalized value of the companys operating earnings minus its liabilities. A : Market value B : Equity value C : Going-concern value D : Liquidation value Correct Answer : C 34 : The process of liquidating a business outside of the jurisdiction of the bankruptcy courts is called a(n) . A : assignment B : composition C : extension D : voluntary insolvency Correct Answer : A 35 : Chapter 11 bankruptcy proceedings may be initiated by creditors who have aggregate claims of at least . A : 2; $1,000 B : 2; $5,000 C : 3; $500 D : 3; $5,000

or more of its unsecured

Correct Answer : C Browsegrades.net

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36 : A combination in which all of the combining companies are dissolved and a new firm is formed is known as a . A : holding company B : leveraged buyout C : consolidation D : composition Correct Answer : C 37 : In a , the acquiring company effectively announces that it will pay a certain price above the current existing price for a merger candidates shares. A : leveraged buyout B : tender offer C : equity carve-out D : divestiture Correct Answer : B 38 : All of the following are anti-takeover measures EXCEPT A : black knight B : staggered board C : super major voting rules D : golden parachute

Correct Answer : A 39 : In analyzing a merger, the is the number of the acquiring company shares received per share of acquired company stock owned. A : assignment B : composition C : price-purchase ratio D : exchange ratio Correct Answer : D 40 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : pacman defense B : liability restructuring C : poison pill D : standstill option Correct Answer : C 41 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : $8.10 B : $7.33 C : $7.29 D : $7.42 Correct Answer : A Browsegrades.net

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42 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : $60.75 B : $54.98 C : $64.80 D : $30.42 Correct Answer : A 43 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : $130; $63 B : $130; $67 C : $132; $65 D : $132; $67 Correct Answer : C 44 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : $130; $63 B : $130; $67 C : $132; $65 D : $132; $67 Correct Answer : A 45 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : $170; $85 B : $177; $92 C : $170; $92 D : $85; $92 Correct Answer : B 46 : The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be $12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20 years. If the appropriate risk-adjusted discount rate for the merged firm is 15%, what is the maximum amount Pacific Care should pay to acquire Universal Health? A : $79,476,000 B : $70,164,000 C : $75,108,000 D : Cannot be determined from the information provided. Correct Answer : C 47 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : 16.8 B : 14.3 Browsegrades.net

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C : 20.2 D : 18.7 Correct Answer : D 48 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $2.85 B : $3.175 C : $3.13 D : $1.75 Correct Answer : C 49 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $1.47 B : $1.41 C : $1.50 D : $1.25 Correct Answer : A 50 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $1.65 million B : $3.71 million C : $4.60 million D : $2.55 million Correct Answer : B 51 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $5,000,000 B : $6,500,000 C : $8,000,000 D : $10,500,000 Correct Answer : B 52 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $57.60 B : $64.33 C : $52.23 D : $60.00 Browsegrades.net

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Correct Answer : B 53 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $4.38 B : $4.29 C : $3.42 D : $3.81 Correct Answer : C 54 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $3.04 B : $2.92 C : $3.29 D : $3.17 Correct Answer : A 55 : After a merger with Velo Blind, Sunlites earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlites post-merger P/E? A : $2.21 B : $2.25 C : $2.75 D : $2.23 Correct Answer : C 56 : The most correct method of valuing a merger candidate is A : adjusted book value method B : discounted cash flow method C : pooling of interests method D : comparative price-earnings ratio method

Correct Answer : B 57 : The is the number of acquiring company shares received per share of acquiring company stock owned. A : stock equity ratio B : exchange ratio C : dividend exchange ratio D : interest parity ratio Correct Answer : B 58 : A firm is technically insolvent when it is unable to meet it current obligations, and A : the value of its assets exceeds the value of its liabilities B : the value of its assets is less than the value of its liabilities C : it files a bankruptcy petition Browsegrades.net

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D : it merges with another firm Correct Answer : A 59 : A plan of reorganization must be all of the following EXCEPT . A : feasible B : fair C : a plan that allows the firm a chance to reestablish successful business operations D : a plan whereby the creditors that are due the most money are paid first Correct Answer : D 60 : Which of the following about an asset purchase merger transaction is (are) correct? I. Only the assets are purchased.II. The buying firm receives 100% of the assets and incurs only 50% of the liabilities. A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Correct Answer : A 61 : One reason for a company to spin-off a division is to A : consolidate expenses B : remove an underperforming unit C : create a better distribution unit D : achieve synergy

Correct Answer : B 62 : An alternative to a spin-off is a(n) , which allows a large company to capture the value of a high-growth business buried within the organization. A : equity carve-out B : holding company C : tracking stock D : stock synergy Correct Answer : C 63 : An example of a passive institutional investor is a A : pension fund B : private equity investor C : parent company D : third-party administrator

Correct Answer : A 64 : Which of the following would be considered a reason for corporate restructuring? I. Availability of creditII. Low cost of credit A : Only statement I is correct. B : Only statement II is correct. C : Both statements I and II are correct. D : Neither statement I nor II is correct. Browsegrades.net

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Correct Answer : C 65 : An anti-takeover measure that is inserted in the corporate charter stating that 80% of the stock shares must approve the takeover proposal is a(n) . A : golden parachute B : supermajority voting rules C : poison puts D : standstill agreement Correct Answer : B 66 : An antitakeover measure that is employed after the takeover has been initiated is A : golden parachute B : staggered board C : white knight D : poison put

Correct Answer : C 67 : An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or investor who initiated the unfriendly takeover is . A : pacman defense B : boardmail C : white squire D : greenmail Correct Answer : D

MULTIPLE ANSWER 68 : A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a . A : 0.375 B : 2.22 C : 0.45 D : 0.288 Correct Answer : D

ESSAY 69 : Explain the motivation for a company to divest through a spin-off or equity carve-out. Correct Answer : Spinoffs or equity carve-outs may be motivated by a need for cash. The subsidiary or division becomes a separate company, and stock in the separate company is distributed to shareholders of the parent company. Owners of the parent company who receive common stock can then keep the stock or sell them to other investors.?Spinoffs and equity carve-outs can be used to remove an underperforming unit that is hurting the overall firm.?Spinoffs and equity carve-outs can be used to develop or promote a company that is Browsegrades.net

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healthy but is buried among the underperforming units. 70 : What are some informal alternatives for salvaging a failing business? Correct Answer : 1. The company can stretch its payables.2.The company can go to its bankers and request additional working capital loans.3.Bankers may do some debt restructuring either through an extension (lengthening the time it has to meet its obligations) or composition (creditors agree to receive only a percentage of the total amount due).4.Large companies can sell off real estate and/or various operating divisions.5.The failing company can do a sale and leaseback of its land and buildings.6.The failing company may form a “creditor’s committee” whereby the company agrees to cut various expenditures and the creditors agree to accept deferred payments.7.The company can liquidate through the process of “assignment.” 71 : Explain the difference between a stock purchase and an asset purchase in a merger transaction. Which is preferred and why? Correct Answer : In a stock purchase the acquiring company buys the stock of the to-beacquired company and assumes its liabilities. In an asset purchase the acquiring company buys only the assets (some or all) of the to-be-acquired company and does not assume any of its liabilities. Most buyers of a business prefer an asset purchase because unknown liabilities are not incurred. An asset purchase frequently allows the acquiring company to depreciate its new assets from a higher basis than is possible in a stock purchase. Thus, many companies will only acquire small companies only on the asset purchase basis. 72 : In response to the merger and acquisitions boom of the late 1980s, many companies adopted various measures designed to discourage unfriendly takeover attempts. One of these antitakeover measures, sometimes referred to as shark repellents, is called a staggered board. Describe how this works. Correct Answer : The implementation of a staggered board means simply to stagger the terms of the board of directors over several years instead of having the entire board come up for election at one time. Thus, the acquiring firm will have difficulty electing its own board of directors to gain control. 73 : There are three methods for valuing merger candidates. Briefly explain each of them. Correct Answer : The methods for valuing merger candidates are:1.The comparative priceearnings ratio method examines the recent prices and P/E ratios paid for other merger candidates that are comparable to the company being valued. This method focuses on the current income statement and may not be useful if the P/E ratios of recent, similar mergers vary widely.2.The adjusted book value method involves determining the market value of the company’s underlying assets. However, it may be difficult to accurately determine the market value of the merger candidate’s assets.3.The discounted cash flow method calculates the present value of the company’s expected future free cash flows and compares this figure to the proposed purchase price to determine the proposed acquisition’s net present value. The discounted cash flow method is the most correct of the three methods because this method compares the present value of the cash flow benefits from the merger with the present value of the merger costs. 74 : Explain a form of business combination called a holding company and how the combination is achieved. Correct Answer : A holding company is one in which the acquiring company purchases all or a Browsegrades.net

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controlling block of another company’s common shares. The two companies then become affiliated, and the acquiring company becomes the holding company in this parent-subsidiary relationship. 75 : How does a joint venture differ from a holding company? Correct Answer : A holding company occurs when an acquiring company purchases all or a controlling block of another company’s common shares. The two companies become affiliated and the acquiring company becomes the holding company. In a joint venture two unaffiliated companies contribute financial or physical assets, as well as personnel, to a new company formed to engage in some economic activity, such as the production or marketing of a product. By joining in this fashion, joint venture companies can realize significant cost savings. Joint ventures are often international in scope.

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